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<SEC-DOCUMENT>0001125282-05-005962.txt : 20051114
<SEC-HEADER>0001125282-05-005962.hdr.sgml : 20051111
<ACCEPTANCE-DATETIME>20051114161351
ACCESSION NUMBER:		0001125282-05-005962
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20050930
FILED AS OF DATE:		20051114
DATE AS OF CHANGE:		20051114

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:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-32146
		FILM NUMBER:		051201697

	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>10-Q
<SEQUENCE>1
<FILENAME>b409780_10q.htm
<DESCRIPTION>QUARTERLY REPORT
<TEXT>
<html>
<head><title>
Prepared and filed by St Ives Financial
</title>
</head>
<body bgcolor="#FFFFFF">
<PAGE>
<a name="page_1"></a>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td height="4" valign="bottom" bgcolor="#000000"></td>
  </tr>
  <tr>
    <td height="2" valign="top"></td>
  </tr>
  <tr>
    <td height="1" valign="top" bgcolor="#000000"></td>
  </tr>
</table>
<p align="center">
<b><font size=4 face="serif">UNITED STATES SECURITIES AND EXCHANGE<br>
COMMISSION<br>
<font size="2"></font></font></b><font size="2"><b>Washington, D.C. 20549 </b>
</font></p>
<p align="center"><font size="2" face="serif">
<b>FORM 10-QSB </b>
</font></p>
<p align="center"><font face="serif">
<b><font size="2">QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF </font></b><font size="2">
<br>
<b>THE SECURITIES EXCHANGE ACT OF 1934<br>
<br>
For the quarterly period ended</b> <b>September
30, 2005</b></font></font></p>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td align="center"><font face="serif"><font size="2"><b>1-32146</b> </font></font></td>
  </tr>
  <tr>
    <td align="center"><hr align="center" width="20%" size="1" noshade>
    </td>
  </tr>
  <tr>
    <td align="center"><font size="2" face="serif">Commission file number </font></td>
  </tr>
  <tr>
    <td align="center">&nbsp;</td>
  </tr>
  <tr>
    <td align="center"><font face="serif"><img src="gssx1x1.jpg" border=0></font></td>
  </tr>
  <tr>
    <td align="center"><hr align="center" width="45%" size="1" noshade></td>
  </tr>
  <tr>
    <td align="center"><font face="serif"><font size="2">(Exact name of small
    business issuer as specified in its charter) </font></font></td>
  </tr>
</table>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td width="50%">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="center"><font size="2" face="serif"><b>New York</b> </font></td>
    <td align="center"><font size="2" face="serif"><b>16-1229730</b></font></td>
  </tr>
  <tr>
    <td><hr noshade size="1" width="30%">
    </td>
    <td><hr noshade size="1" width="48%">
    </td>
  </tr>
  <tr>
    <td align="center"><font size="2" face="serif">(State of incorporation)</font></td>
    <td align="center"><font size="2" face="serif">(IRS Employer Identification Number) </font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr align="center">
    <td colspan="2"><font size="2" face="serif"><b>28 Main Street East, Suite 1525<br>
Rochester,</b> <b>NY</b> <b>14614</b> </font></td>
  </tr>
  <tr>
    <td colspan="2"><hr noshade size="1" width="28%">
    </td>
  </tr>
  <tr>
    <td colspan="2" align="center"><p><font size="2" face="serif">(Address of principal executive office) </font></p>
    </td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td colspan="2" align="center"><font size="2" face="serif"><b>(585) 325-3610</b></font></td>
  </tr>
  <tr>
    <td colspan="2"><hr noshade size="1" width="20%">
    </td>
  </tr>
  <tr>
    <td colspan="2" align="center"><font size="2" face="serif">(Issuer&#146;s telephone number)</font></td>
  </tr>
</table>
<p align="left"><font size="2" face="serif">
<b>Check whether the issuer:</b>
</font></p>
<p align="left"><font size="2" face="serif">
(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)
</font></p>
<p align="center"><font size="2" face="serif">
and
</font></p>
<p align="left"><font size="2" face="serif">
(2) has been subject to such filing requirements for the past 90 days. </font><font size="2" face="serif"><b>Yes <img src="tickedbox.gif" width="12" height="12">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No </b><img src="emptybox.gif" width="12" height="12"></font></p>
<p align="left"><font size="2" face="serif">
<b>Applicable only to corporate issuers</b>
</font></p>
<p align="left"><font size="2" face="serif">
As of November 10, 2005 (the most recent practicable date), there were 12,401,811 shares of the issuer&#146;s Common Stock, $0.02 par value per share, outstanding.
</font></p>
<p><font size="2" face="serif">Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
<b>Yes <img src="emptybox.gif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No <img src="tickedbox.gif"></b></font></p>
<p><font size="2" face="serif">Transitional Small Business Disclosure Format (check one) </font><font size="2"><b>Yes <img src="emptybox.gif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No <img src="tickedbox.gif"></b> </font></p>
<p align="center">&nbsp;</p>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td height="1" valign="top" bgcolor="#000000"></td>
  </tr>
  <tr>
    <td height="2" valign="top" bgcolor="#FFFFFF"></td>
  </tr>
  <tr>
    <td height="4" valign="bottom" bgcolor="#000000"></td>
  </tr>
</table><div style="page-break-before:always"></div>
<page> <a name="pf2"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td colspan=3><font face="serif">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td colspan=3><hr noshade size=1></td>
   <td><hr noshade size=1></td>
   <td><hr noshade size=1></td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" width="85%"><font size="2" face="serif"><b>DOCUMENT SECURITY SYSTEMS, INC.</b></font></td>
   <td align="center" width="10%">&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size="2" face="serif"><b>FORM 10-QSB</b></font></td>
   <td align="center">&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size="2" face="serif"><b>TABLE OF CONTENTS</b></font></td>
   <td align="center">&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td>&nbsp;</td>
</tr>
</table>
<table width="100%" border=0 align="center" cellpadding=0 cellspacing=0>
<tr>
   <td align="left"><a href="#pf2"><font size="2" face="serif"><b>PART I</b></font></a></td>
   <td align="center">&nbsp;</td>
   <td align="left"><a href="#pf2"><font face="serif"><b><font size="2">FINANCIAL INFORMATION</font></b></font></a></td>
   <td align="right"><a href="#pf3"><font size="2" face="serif">F-3</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td width="9%" align="left"><a href="#pf2"><font size="2" face="serif">Item 1</font></a></td>
   <td width="3%" align="center"><font size="2">&nbsp;</font></td>
   <td align="left"><a href="#pf2"><font size="2" face="serif">Financial Statements (Unaudited)</font></a></td>
   <td width="6%" align="center">&nbsp;</td>
   <td width="3%">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="left"><div style="margin-left:6%; text-indent:-3%"><a href="#pf3"><font size="2" face="serif">Consolidated Balance Sheets</font></a></div></td>
   <td align="right"><a href="#pf3"><font size="2" face="serif">F-3</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="left"><div style="margin-left:6%; text-indent:-3%"><a href="#pf4"><font size="2" face="serif">Consolidated Statements of Operations</font></a></div></td>
   <td align="right"><a href="#pf4"><font size="2" face="serif">F-4</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="left"><div style="margin-left:6%; text-indent:-3%"><a href="#pf5"><font size="2" face="serif">Consolidated Statements of Cash Flows</font></a></div></td>
   <td align="right"><a href="#pf5"><font size="2" face="serif">F-5</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="left"><div style="margin-left:6%; text-indent:-3%"><a href="#pf6"><font size="2" face="serif">Notes to Financial Statements</font></a></div></td>
   <td align="right"><a href="#pf6"><font size="2" face="serif">F-6</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><a href="#pf11"><font size="2" face="serif">Item 2&nbsp;</font></a></td>
   <td>&nbsp;</td>
   <td align="left"><div style="margin-left:3%; text-indent:-3%"><a href="#pf11"><font size="2" face="serif">Management&#146;s
    Discussion and Analysis of Financial Condition and Results of Operations</font></a></div></td>
   <td align="right"><a href="#pf11"><font size="2" face="serif">F-11</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><a href="#pf11"><font size="2" face="serif">Item 3&nbsp;</font></a></td>
   <td>&nbsp;</td>
   <td align="left"><a href="#pf21"><font size="2" face="serif">Controls and Procedures</font></a></td>
   <td align="right"><a href="#pf21"><font size="2" face="serif">F-21</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><a href="#pf21"></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><a href="#pf21"><font face="serif"><b><font size="2">PART II</font></b></font></a></td>
   <td>&nbsp;</td>
   <td align="left"><a href="#pf21"><font face="serif"><b><font size="2">OTHER INFORMATION</font></b></font></a></td>
   <td align="right"><a href="#pf21"><font size="2" face="serif">F-21</font></a></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td><a href="#pf21"><font face="serif"><font size="2">Item 1</font></font></a></td>
  <td>&nbsp;</td>
  <td><a href="#pf21"><font face="serif"><font size="2">Legal Proceedings</font></font></a></td>
  <td align="right"><a href="#pf21"><font size="2" face="serif">F-21</font></a></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td><a href="#pf22"><font face="serif"><font size="2">Item 2</font></font></a></td>
  <td>&nbsp;</td>
  <td><a href="#pf22"><font size="2" face="serif">Unregistered Sales of Equity Securities
    and Use of Proceeds </font></a></td>
  <td align="right"><a href="#pf22"><font size="2" face="serif">F-22</font></a></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td><a href="#pf23"><font face="serif"><font size="2">Item 3</font></font></a></td>
  <td>&nbsp;</td>
  <td><a href="#pf23"><font size="2" face="serif">Defaults upon Senior Securities</font></a></td>
  <td align="right"><a href="#pf23"><font size="2" face="serif">F-23</font></a></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td><a href="#pf23"><font face="serif"><font size="2">Item 4</font></font></a></td>
  <td>&nbsp;</td>
  <td><a href="#pf23"><font size="2" face="serif">Submission of Matters to a Vote of Security
    Holders</font></a></td>
  <td align="right"><a href="#pf23"><font size="2" face="serif">F-23</font></a></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td><a href="#pf23"><font face="serif"><font size="2">Item 5</font></font></a></td>
  <td>&nbsp;</td>
  <td><a href="#pf23"><font size="2" face="serif">Other Information</font></a></td>
  <td align="right"><a href="#pf23"><font size="2" face="serif">F-23</font></a></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td><a href="#pf23"><font face="serif"><font size="2">Item 6</font></font></a></td>
  <td>&nbsp;</td>
  <td><a href="#pf23"><font size="2" face="serif">Exhibits</font></a></td>
  <td align="right"><a href="#pf23"><font size="2" face="serif">F-23</font></a></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td colspan="3"><a href="#pf24"><font size="2" face="serif"><b><u>SIGNATURES</u></b> </font></a></td>
  <td align="right"><a href="#pf24"><font size="2" face="serif">F-24</font></a></td>
  <td>&nbsp;</td>
</tr>
</table>
<p><font face="serif"></font></p>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-2</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page>
<a name="pf3"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font size="2" face="serif"><b>PART I<br>
FINANCIAL INFORMATION</b></font></p>
<p align="left"><font size="2" face="serif">ITEM 1 - FINANCIAL STATEMENTS</font></p>
<p align="center"><font face="serif"><b><font size=2>DOCUMENT SECURITY SYSTEMS,
INC. </font><font face="serif"><b><font size=2>AND SUBSIDIARIES<br>
</font><font face="serif"><b><font size=2>Consolidated Balance Sheets</font></b></font><font size=2></font></b></font></b></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td colspan=2 align="center" valign="bottom"><font face="serif"><b><font size=1>September 30,</font></b></font><font face="serif"><b><font size=1><br>
    2005</font></b></font></td>
   <td>&nbsp;</td>
   <td colspan="2" align="center" valign="bottom"><font size="1" face="serif"><b>December 31,<br>
    2004</b></font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center" colspan=2><font face="serif"><b><font size=1>(unaudited)</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>ASSETS</font></b></font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Current assets:</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Cash and cash equivalents</font></font></td>
   <td>&nbsp;</td>
   <td><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">3,719,806</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">2,657,865</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Accounts receivable, net</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">166,401</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">381,923</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Inventory</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">144,747</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">62,494</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Prepaid expenses</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">88,900</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">64,158</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Total current assets</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">4,119,854</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">3,166,440</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Restricted Cash</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">249,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">300,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Fixed assets, net</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">475,568</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">522,623</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Other assets</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">450,927</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font face="serif">-</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Goodwill</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">284,278</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">284,278</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Other intangible assets, net</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">4,770,820</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">343,624</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">10,350,447</font></td>
   <td>&nbsp;</td>
   <td><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">4,616,965</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size="2">
    </td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
   <td><hr noshade size="2">
    </td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Current liabilities:</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Accounts payable and accrued expenses</font></font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">519,333</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">461,173</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Current portion of long-term debt</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">50,124</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">47,894</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Current portion of capitalized lease obligations</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">32,674</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">30,663</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Total current liabilities</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">602,131</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">539,730</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Long-term debt</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">180,333</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">218,226</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Long-term capital
           lease obligations</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">93,542</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">118,267</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<b><font size=2>Stockholders&#146; equity</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Common stock, $.02 par value;</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>200,000,000 shares authorized, 12,395,444</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif"><font size=2>shares
    issued and outstanding (10,926,818 in</font></font> <font size=2>2004)</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">247,909</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">218,536</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font face="serif"><font size=2>Shares
    issuable (150,000 in 2005 and 0 in</font></font> <font size=2>2004)</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">500,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Additional paid-in capital</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">20,073,767</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">13,074,847</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Accumulated deficit</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(11,347,235</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(9,552,641</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Total stockholders&#146; equity</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">9,474,441</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">3,740,742</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">10,350,447</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">4,616,965</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
</table>

<p><font size="2" face="serif">See accompanying notes</font></p>
<p align="center"><font size="2" face="serif">F-3</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf4"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p>&nbsp;</p>
<font face="serif"></font>
<p><font face="serif">
</font></p>
<p align="center"><font face="serif"><b><font size=2>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES</font></b><font size="2">
  </font></font></p>
<p align="center"><font size="2" face="serif">
  <b>Consolidated Statements of Operations<br>
  (unaudited)</b>
</font></p>
<div align="center"><font size="2">
</font></div>
<font size="2"></font>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td colspan="5" align="center"><font face="serif"><b></b></font><font face="serif"><b><font size=1>Three Months Ended</font></b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=5><font face="serif"><b><font size=1>Nine Months Ended</font></b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td colspan="2" align="center" valign="bottom"><font face="serif"><b></b></font><font face="serif"><b><font size=1>September
    30<br>
   </font></b></font><font face="serif"><b></b></font><font face="serif"><b><font size=1>2005</font></b></font></td>
   <td align="center">&nbsp;</td>
   <td colspan="2" align="center" valign="bottom"><font face="serif"><b></b></font><font face="serif"><b><font size=1>September 30,<br>
   </font></b></font><font face="serif"><b><font size=1>2004</font></b></font></td>
   <td align="center">&nbsp;</td>
   <td colspan=2 align="center" valign="bottom"><font face="serif"><b><font size=1>September
    30<br>
   </font></b></font><font face="serif"><b><font size=1>2005</font></b></font></td>
   <td align="center">&nbsp;</td>
   <td colspan=2 align="center" valign="bottom"><font face="serif"><b><font size=1>September
    30<br>
   </font></b></font><font face="serif"><b><font size=1>2004</font></b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Sales, net</font></font></td>
   <td align="center" width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size=1 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">373,123</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">355,166</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">1,297,397</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">1,030,605</font></td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><font size="2">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Costs of sales</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">186,649</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">223,708</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">672,245</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">640,255</font></td>
   <td><font size="2">&nbsp;</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Gross profit</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">186,474</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">131,458</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">625,152</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">390,350</font></td>
   <td><font size="2">&nbsp;</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><font size="2">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><font size="2">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Selling, general and administrative expenses</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">674,018</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">407,793</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">1,951,453</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">1,230,901</font></td>
   <td><font size="2">&nbsp;</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Research and development</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">79,165</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">106,780</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">239,750</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">297,899</font></td>
   <td><font size="2">&nbsp;</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Amortization of intangibles</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">135,000</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">4,500</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">270,000</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">13,500</font></td>
   <td><font size="2">&nbsp;</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating expenses</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">888,183&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">519,073</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">2,461,203</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">1,542,300</font></td>
   <td><font size="2">&nbsp;</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Loss before other income (expense) and income taxes</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(701,709</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(387,615</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(1,836,051</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(1,151,950</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Other income (expense):</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;</font><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest
    income</font><font face="serif">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">29,797</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">13,395</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">67,222</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">44,479</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest
    expense</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(6,494</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(4,002</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(20,543</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(15,969</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Loss before income taxes</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(678,406</font></td>
   <td><font size=1 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(378,222</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,789,372</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(1,123,440</font></td>
   <td><font size=1 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Income taxes</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">3,599</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">5,222</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">5,799</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Net loss</font></td>
   <td align="center"><font size="2">&nbsp;</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(678,406</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(381,821</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(1,794,594</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(1,129,239</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="2">
  </td>
  <td align="right"><hr noshade size="2">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="2">
  </td>
  <td align="right"><hr noshade size="2">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="2">
  </td>
  <td align="right"><hr noshade size="2">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="2">
  </td>
  <td align="right"><hr noshade size="2">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Net loss per share, basic and diluted</font></td>
   <td align="center"><font size="2">&nbsp;</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(0.05</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(0.04</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(0.15</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td><font size="2">&nbsp;</font></td>
   <td align="right"><font size=2 face="serif">(0.10</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Weighted average common shares outstanding, basic</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;<font size="2">&nbsp;and diluted</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">12,285,029</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">10,908,607</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">11,856,511</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">10,885,137</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">See accompanying notes.</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font face="serif">
</font></p>

<p align="center"><font size="2" face="serif">F-4</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf5"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p align="center"><font face="serif"><b><font size=2>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES</font></b></font>
</p>
<p align="center"><font face="serif"><b><font size=2>Consolidated Statements
of Cash Flows</font></b></font><br>
<font face="serif"><b><font size=2>(unaudited)</font></b></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=6><font face="serif"><b><font size=1>Nine Months Ended</font></b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font face="serif"><b><font face="serif"><b><font size=1>September
    30,</font></b></font><font size="1"><br>
    2005</font></b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font face="serif"><b><font face="serif"><b><font size=1>September
    30,</font></b></font><font size="1"><br>
    2004</font></b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center"><hr noshade size="1">
    </td>
   <td align="center"><hr noshade size="1">
    </td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><hr noshade size="1">
    </td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Cash flows from operating activities:</font></font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Net loss</font></font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(1,794,594</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(1,129,239</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Adjustments to reconcile net loss to net</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>cash used by operating activities:</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Depreciation and amortization expense</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">404,960</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">57,141</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Stock issued for services</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">29,521</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">3,840</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>(Increase) decrease in assets:</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Accounts receivable</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">235,226</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(17,079</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Inventory</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(77,176</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">33,665</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Prepaid expenses and other assets</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(73,238</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(52,360</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Increase (decrease) in liabilities:</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Accounts payable and accrued expenses</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">58,179</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(113,627</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Net cash used by operating activities</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,217,122</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,217,659</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Cash flows from investing activities:</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Purchase of fixed assets</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(83,941</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(266,659</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Purchase of royalty rights</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(90,000</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Purchase of patents and contractual rights</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(185,283</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(69,695</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Net cash used by investing activities</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(269,224</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(426,354</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Cash flows from financing activities:</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Repayment of line of credit</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(11,259</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Repayment of long-term debt</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(35,663</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(21,383</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Decrease in restricted cash</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">51,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Repayment of capital lease obligations</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(22,714</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size=2>Issuance of common stock, net</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">2,555,664</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Net cash provided (used) by financing activities</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">2,548,287</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(32,642</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Net increase (decrease) in cash and cash</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>equivalents</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">1,061,941</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,676,655</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Cash and cash equivalents beginning of period</font></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">2,657,865</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">5,115,722</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td align="center"><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font face="serif">&nbsp;&nbsp;&nbsp;<font size=2>Cash and cash equivalents end of period</font></font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">3,719,806</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">3,439,067</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">See accompanying notes.</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-5</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf6"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>

<p><font face="serif"></font></p>
<font face="serif"></font>
<p><font face="serif">
</font></p>
<p align="center"><font face="serif"><b><font size="2">DOCUMENT SECURITY SYSTEMS, INC. </font></b>
</font><br>
<font size="2" face="serif"><b>NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS</b>
</font><br>
<font size="2" face="serif"><b>September 30, 2005<br>
(Unaudited)</b> </font></p>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>1.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Basis of Presentation</b></font></td>
</tr>
</table>
   <div style="text-indent: 3%"><p><font size="2" face="serif">The accompanying consolidated financial statements
       include the accounts of Document Security Systems, Inc and its wholly
       owned subsidiaries (collectively,
    the &#147;Company&#148;) after elimination of intercompany transactions, profits, and balances. The consolidated financial statements are unaudited and have been prepared in accordance
with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-QSB and Article 310 of Regulation S-B. Accordingly, they do not include all of the information and notes
required for complete annual financial statements and should be read in conjunction with the Company&#146;s audited consolidated financial statements and notes for the year ended December 31, 2004 included in the Company&#146;s
Annual Report on Form
10-KSB. </font></p>
<p><font size="2" face="serif"> In the opinion
    of management, all adjustments necessary for a fair presentation have been
    included. The
    results for interim periods are not necessarily indicative of trends or of
    results to be expected for a full year. Certain prior-year amounts have been
reclassified to conform to the current-year presentation. </font></p></div>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>2.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Other Intangible Assets</b></font></td>
</tr>
</table>
<div style="text-indent: 3%"><p><font size="2" face="serif">
The Company&#146;s intangible assets consists of costs associated with the application,
acquisition and defense of our patents and trade secrets. Our patents and trade
secrets are for document anti-counterfeiting and anti-scanning technologies and
processes that form the basis of our document security business
</font></p>
<p><font size="2" face="serif"> In February 2005, the Company purchased various
    legal ownership and economic interests in certain technology (patents and
    trade secrets) from 40 persons and entities. The technologies related to
    patent rights and trade secrets in certain document anti-fraud and anti-counterfeiting
    technology that the Company had partially owned prior to the transaction.
    The Company issued an aggregate of 541,460 shares of its common stock for
    the rights of the interest holders and
secured 100% of the ownership rights and approximately 88% of the economic rights
    to these technologies. The value of the shares of common stock was determined
    based upon the closing price of the shares of the Company&#146;s
common stock on the American Stock Exchange on February 15, 2005 of $7.25 per
share. The total aggregate fair value of the acquisition of the interests from
the interest holders was $3,925,585. </font></p>
<p><font size="2" face="serif">In September 2005, the Company acquired additional economic rights to the aforementioned patents and trade secrets from its acquisition of Secured Document Systems (Note 3). The Company estimated that the fair value of the rights purchased was
$421,000.
</font></p>
<p><font size="2" face="serif"> The Company amortizes
    its intangible assets over the estimated useful life of the patents up to
    the
    legal life of 20 years. Currently, the patents being amortized have a weighted
    average useful life of approximately 9 years. The Company also periodically
    reviews the carrying value of these assets for impairment. The Company recorded
    amortization expense for its patent assets during the three months and nine
    months ended September 30, 2005 of $135,000 and
$270,000, respectively, and $4,500 and $13,500, respectively, for those periods
in 2004. </font></p>
</div>
<p align="center"><font size="2" face="serif">F-6</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf7"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<div style="text-indent: 3%"><p><font size="2"><font face="serif">On an ongoing
    basis, the Company submits formal and provisional patent applications with
    the United States, Canada and countries included in the Patent Cooperation
    Treaty (PCT), which includes countries in Europe, and Australia, Japan, South
    Africa, China and approximately 120 additional foreign countries. The Company
    capitalizes these costs and amortizes them over the patents&#146; estimated
useful life.</font></font></p>
<p><font size="2">In addition, the Company has
    incurred costs associated with the defense of its right to use its patents.
    The Company has
  determined that in some cases it will need to use the court systems in the
  jurisdictions of its patents to protect the rights of its patents against infringers,
  and therefore, may incur substantial costs for these proceedings. The Company
  capitalizes these costs as an increase to the cost basis of its patent assets
  to be amortized over the
  remaining estimated useful life of the patent. The Company continuously evaluates
  whether the patent defense will be successful or unsuccessful. If it determines
  that its defense will likely not be successful, then the defense costs are
  expensed in that period and an impairment charge will likely be taken to write
down the associated patent asset to its fair value. </font></p>

<p><font size="2" face="serif"> On August 26, 2005, the Company agreed to issue
    150,000 of restricted shares to Strategic Resource Advisory Services, (&#147;SRAS&#148;) a subsidiary of IDT Corporation, in exchange for the payment of $500,000 of the Company&#146;s legal expenses
that it will incur during the Company&#146;s lawsuit with the European Central Bank. IDT Corporation is a related party to a member of the Company&#146;s
Board of Directors. Pursuant to this transaction, the Company recorded a $500,000
other asset that will be reclassified to patent assets as payments are made by
SRAS on behalf of the Company. The cash value of the contract of $500,000 was
deemed more readily determinable fair value than the common shares that will
be issued but not tradable
for two years. </font>
</p>
</div><table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>3.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Acquisition</b></font></td>
</tr>
</table>
<div style="text-indent: 3%"><p><font size="2" face="serif"> On September 9, 2005, the Company purchased 100%
    of the common stock of Secured Document Systems (&#147;SDS&#148;) for $566,000,
    which consisted of 62,654 shares of its common stock plus additional costs
    related to the transaction. The value of the shares of common stock was determined
    based upon the closing price of the shares
of the Company&#146;s common stock on the American Stock Exchange on September
9, 2005 of $8.26 per share. SDS is an entity that holds various economic rights
to several of the Company&#146;s patents which it had acquired from the Wicker
Family. In  addition, SDS operates the Internet website ProtectedPaper.Com which
sells secured document solutions, including the Company&#146;s safety paper.
Commencing on September 1, 2005, the results of SDS&#146;s operations are included
in the consolidated  financial statements of the Company. The Company accounted
for the acquisition as a business combination under FASB 141 &#147;Business Combinations&#148;.
The purchase price was preliminarily allocated based on the fair market value
of the assets acquired with a pro rata reduction to the long term assets for
the excess of fair market values of the assets acquired over the purchase price.
The purchase price was allocated as follows: </font></p>
</div><table width="80%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td><font size="2" face="serif">Accounts Receivable</font></td>
   <td width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size="2" face="serif">$</font></td>
   <td align="right" width="10%"><font size="2" face="serif">7,000</font></td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">Inventory</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">5,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">Fixed Assets</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">4,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">Related party royalty receivable</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">84,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">Identified intangible assets</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">466,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Total</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size="2" face="serif">$</font></td>
   <td align="right"><font size="2" face="serif">566,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=2></td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
</tr>
</table>
<p>&nbsp;</p>
<p align="center"><font size="2" face="serif">F-7</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf8"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a><font face="serif">
</font></p>
<div style="text-indent: 3%"><p><font face="serif" size="2">The acquisition would not have had a material
effect on pro forma and combined operating results for prior periods. </font></p>
</div>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>4.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Common Stock</b></font></td>
</tr>
</table>
<div style="text-indent: 3%"><p><font size="2" face="serif">
During the first three quarters of 2005, the Company received $1,324,000 in proceeds
    from the exercise of warrants originally issued during a private placement
    of its common stock in 2003 at exercise prices ranging from $2.00 to $5.00.
    In addition, the Company received $1,250,000 in proceeds from the exercise
    of warrants issued in 2003 for services at an exercise price of $2.50. As
    of September 30, 2005, a total of 861,395 shares have been issued from these
    warrants which includes 67,211 shares issued as the result of cashless exercises
    of warrants. Pursuant to these cashless
exercises, 81,874 warrants have been cancelled. In addition, 30,000 warrants
    expired during the three month ended September 30, 2005.
</font></p>
<p><font size="2" face="serif"> In addition, the following transactions involved
    the Company&#146;s
equity instruments: </font></p>
</div>
<div style="margin-left: 15%"><p><font size="2" face="serif">
- - issued 541,460 shares of its common stock to acquire various legal ownership and economic interests in certain technology, as described in Note 2 .
</font></p>
<p><font size="2" face="serif">
- - issued 62,654 shares of its common stock to acquire Secured Document Systems, as described in Note 3
</font></p>
<p><font size="2" face="serif"> - agreed to issue 150,000 shares of its common
    stock in exchange for prepaid legal costs associated with the Company&#146;s
    lawsuit
against the European Central Bank, as described in Note 2 </font></p>
</div>
<div style="text-indent: 3%"><p><font size="2" face="serif">The Company relied
    upon Section 4(2) of the Securities Act of 1933, as amended, for an exemption
from registration of the above described securities. </font></p>
</div><table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>5.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Stock Options</b></font></td>
</tr>
</table>
<div style="text-indent: 3%"><p><font size="2" face="serif"> The Company accounts for employee stock options
    using the intrinsic value method prescribed by APB 25. Accordingly, the &#147;disclosure
    only&#148; provisions
of SFAS No.123 and 148 for these options are presented. </font></p>
<p><font size="2" face="serif"> In the quarter ended March 31, 2005, the Company
    granted two employees and four non-executive directors&#146; options to acquire
    an aggregate of 72,500 shares of common stock. The options are exercisable
    at
    $7.14 per share and expire five years from the date of grant. Of the options
    granted, 12,500 vested immediately, with the remainder of the options vesting
pro-ratably over three years. </font></p>
<p><font size="2" face="serif"> In the quarter
    ended September 30, 2005, the Company granted 12 employees options to acquire
    an aggregate
    of 144,000 shares of common stock. The options are exercisable at $8.38 per
    share and expire five years from the date of grant. Of the options granted,
    48,000 vested immediately, with the remainder of the options vesting pro-ratably
over three years. </font></p>
<p><font size="2" face="serif"> No compensation expense for stock options was
    recorded in the three-month and nine-month periods ended September 30, 2005
    and 2004. SFAS No. 148, &#147;Accounting
for Stock Based Compensation - Transition and Disclosure&#148; 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. The impact
    on the
  net loss and net loss per share for the three months
  and nine months ended September 30, 2005 and 2004 is presented below. </font></p>
</div><p><font face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-8</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf9"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>

<p><font face="serif"><b></b></font></p>
<font face="serif"></font>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td colspan="11" align="center" valign="bottom"><font face="serif"><b><font size=1>September
    30, 2005</font></b></font></td>
  <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td colspan="5" align="center" valign="bottom"><font face="serif"><b><font size=1>Three
           months<br>
   ended</font></b></font></td>
   <td align="center">&nbsp;</td>
   <td colspan=5 align="center" valign="bottom"><font size="1" face="serif"><b>Nine months<br>
   <b>ended</b> </b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=1 face="serif">$ Amount</font></td>
   <td>&nbsp;</td>
   <td colspan="2" align="center"><font size=1 face="serif">$ Per share</font></td>
   <td>&nbsp;</td>
   <td colspan="2" align="center"><font size=1 face="serif">$ Amount</font></td>
   <td>&nbsp;</td>
   <td colspan="2" align="center"><font size=1 face="serif">$ Per share</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net loss, as reported</font></td>
   <td align="center" width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">(678,406</font></td>
   <td width="2%"><font size=2 face="serif">)</font></td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">(0.05</font></td>
   <td><font size=2 face="serif" width="2%">)</font></td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">(1,794,594</font></td>
   <td width="2%"><font size=2 face="serif">)</font></td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="10%"><font size=2 face="serif">(0.15</font></td>
   <td><font size=2 face="serif" width="2%">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Fair value method compensation</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">expense, net of tax</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(224,473</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(0.02</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(449,693</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(0.04</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="center"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net loss, pro-forma</font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(902,879</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(0.07</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(2,244,287</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(0.19</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
</table>
<p>&nbsp;</p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td colspan="11" align="center"><font face="serif"><b><font size=1>September 30, 2004</font></b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td colspan="5" align="center"><font face="serif"><b><font size=1>Three months<br>
  </font><font face="serif"><b><font size=1>ended</font></b></font><font size=1> </font></b></font></td>
  <td>&nbsp;</td>
  <td colspan="5" align="center"><font face="serif"><b><font size=1>Nine months<br>
  <font face="serif"><b>ended</b></font> </font></b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=1 face="serif">$ Amount</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=1 face="serif">$ Per share</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=1 face="serif">$ Amount</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=1 face="serif">$ Per share</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net Income</font></td>
   <td width="2%" align="center">&nbsp;</td>
   <td width="1%" align="center"><font size=2 face="serif">$</font></td>
   <td width="10%" align="right"><font size=2 face="serif">(381,821</font></td>
   <td width="2%"><font size=2 face="serif">)</font></td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td width="10%" align="right"><font size=2 face="serif">(0.04</font></td>
   <td width="2%"><font size=2 face="serif">)</font></td>
   <td width="1%"><font size=2 face="serif">$</font></td>
   <td width="10%" align="right"><font size=2 face="serif">(1,129,239</font></td>
   <td width="2%"><font size=2 face="serif">)</font></td>
   <td width="1%" align="center"><font size=2 face="serif">$</font></td>
   <td width="10%" align="right"><font size=2 face="serif">(0.10</font></td>
   <td width="2%"><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td><font size=2 face="serif">Fair value method compensation</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">expense, net of tax</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(145,513</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(0.01</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(173,838</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(0.02</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net loss, pro-forma</font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(527,334</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(0.05</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(1,303,077</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">(0.12</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
</table>
<p><font face="serif"> &nbsp;<font size="2">&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 nine
months ended September 30, 2005: </font></font></p>
<table width="80%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td><font size="2" face="serif">Expected dividend yield</font></td>
   <td align="right" width="5%"><font size="2" face="serif">0</font></td>
   <td width="20%"><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Expected stock price volatility</font></td>
   <td align="right"><font size="2" face="serif">55</font></td>
   <td><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Risk-free interest rate</font></td>
   <td align="right"><font size="2" face="serif">4.1</font></td>
   <td><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Expected life of options</font></td>
   <td align="right"><font size="2" face="serif">47 </font></td>
   <td><font size="2" face="serif">&nbsp;months</font></td>
</tr>
</table>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company intends to adopt SFAS 123(R) using the &#147;modified prospective&#148; transition method beginning with our first quarter of 2006. Under this method, awards that are granted, modified, or settled after
December 15, 2005, will be measured and accounted for in accordance with SFAS 123(R). In addition, beginning in our first quarter of 2006, expense must be recognized in the earnings statement for unvested awards that were granted prior to the
adoption of SFAS 123(R). The expense will be based on the fair value determined at grant date under SFAS 123, &#147;Accounting for Stock-Based Compensation.&#148; The
following table summarizes existing agreements and their expected pretax impact
on
earnings: </font></p>
<p><font size="2" face="serif">
  </font>
</p>
<p><font size="2" face="serif">
</font></p>

<p align="center"><font size="2" face="serif">F-9</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf10"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p>&nbsp;</p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><font face="serif"><b><font size="1" face="serif"></font></b></font></td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td></td>
  <td align="center">&nbsp;</td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><font face="serif"><b><font size=1>Pre FAS<br>
123
(R)<br>
Adoption</font></b></font></td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td colspan="6" align="center"><font face="serif"><b><font size=1>Post Effective Date (December<br>
15, 2005) Requisite Service<br>
Recognition by Year</font></b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td colspan="6" align="center"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td></td>
  <td align="center">&nbsp;</td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font face="serif"><b><font size=1>2005</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font face="serif"><b><font size=1>2006</font></b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font face="serif"><b><font size=1>2007</font></b></font></td>
   <td></td>
   <td align="center"><font face="serif"><b><font size=1>2008</font></b></font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Agreements containing service inception</font></td>
   <td width="2%">&nbsp;</td>
   <td width="10%" align="center">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%" align="center">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%" align="center">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%" align="center">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">dates within the year</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">15</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">15</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">14</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">0</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Shares expected to vest</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">134,500</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">73,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">24,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">0</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Expected pretax cost</font></td>
   <td align="right">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$523, 445</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$269,965</font></td>
   <td>&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$75,380</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$0</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Per share amounts</font></td>
   <td align="right">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$0.04</font></td>
   <td align="right">&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$0.02</font></td>
   <td>&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$0.01</font></td>
   <td></td>
   <td align="center"><font size=2 face="serif">Nil</font></td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<font size="2">The calculation of compensation
    cost for share-based payment transactions after the effective date of SFAS
    123(R) may be different from the calculation of compensation cost under SFAS
    123, but such differences have not
yet been quantified. </font></font></p>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>6.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Loss per Share</b></font></td>
</tr>
</table>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
Basic earnings per share is computed by dividing net income by the weighted-average
    number of common shares, including shares issuable to SRAS (see Note 2),
    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. As of September 30, 2005, there
    were 580,969 stock options
and warrants outstanding with exercise prices below the average share price for
    the period that would have been included in the calculation of diluted earnings
    per share had the Company generated net income.
</font></p>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>7.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Supplemental Cash Flow Information</b></font></td>
</tr>
</table>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the nine months ended September 30, 2005, the Company issued 541,460 shares
    of Common Stock valued at $3,925,585 to acquire certain patent rights. (See
    Note 2). The Company also issued 62,654 shares of Common Stock valued at
    $517,522 for an acquisition of a business. (See Note 3). In addition, the
    Company agreed to issue 150,000 shares of Common Stock for prepaid legal
    services. (See Note 2).
</font></p>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2" face="serif"><b>8.</b>&nbsp;&nbsp;</font></td>
   <td valign="top"><font size="2" face="serif"><b>Segment Information</b></font></td>
</tr>
</table>
<p><font size="2" face="serif">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;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. There are no material transactions between segments. The Company reduced
its number of segments from four to three by including  its motion picture film
licensing business which has minimal ongoing activity with its document security
segment. A summary of the three segments is as follows:
</font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td><font size="2" face="serif"><b>Document<br>
    Security   </b></font></td>
   <td align="left" width="85%"><font size="2" face="serif">License, manufacture
         and sale of document security technologies and safety paper products
         and license of motion picture films.</font></td>
  </tr>
<tr>
   <td><font size="2" face="serif">&nbsp;</font></td>
   <td align="center"><font size="2" face="serif">&nbsp;</font></td>
  </tr>
<tr>
   <td><font size="2" face="serif"><b>Printing</b></font></td>
   <td><font size="2" face="serif">Provide commercial printing and copying services
       to the metropolitan Rochester, NY area as Patrick Printing.</font></td>
  </tr>
<tr>
   <td><font size="2" face="serif">&nbsp;</font></td>
   <td>&nbsp;</td>
  </tr>
<tr>
   <td><font size="2" face="serif"><b>Legal</b></font></td>
   <td><font size="2" face="serif">Sale of specialty legal supplies via the Internet
       to lawyers and law firms located </font><font size="2">throughout the
       United States as Legalstore.com. </font></td>
  </tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
  </tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
  </tr>
</table>

<p>&nbsp;</p>
<p align="center"><font size="2" face="serif">F-10</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf11"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<font face="serif">
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Approximate information concerning
    the operations by reportable segment for the three months and nine months
    ended September
  30, 2005 and 2004 is as follows. The Company relies on intersegment cooperation
  and management does not represent that these segments, if operated independently,
would report these results. </font></p>
</font>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=3>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>Document</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;<b>3 months ended September 30, 2005:</b></font></td>
   <td align="center" colspan=3><font size="1" face="serif"><b>Printing</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>Legal</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>Security</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>Administrative</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>Total</b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td><hr noshade size=1></td>
   <td></td>
   <td colspan=2><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Revenues from external customers</font></td>
   <td align="center" width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="8%"><font size=2 face="serif">114,000</font></td>
   <td width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="8%"><font size=2 face="serif">122,000</font></td>
   <td width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="8%"><font size=2 face="serif">137,000</font></td>
   <td width="2%">&nbsp;</td>
   <td align="center" width="1%"><font size=2 face="serif">$</font></td>
   <td align="right" width="8%"><font size="2" face="serif">&#151;</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td align="right" width="8%"><font size=2 face="serif">373,000</font></td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Depreciation and amortization</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">21,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">1,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">136,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">22,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">180,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net segment profit or (loss)</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(44,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">12,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(350,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(296,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(678,000</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif"><b>3 months ended September 30, 2004:</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Revenues from external customers</font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">176,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">120,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">59,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">355,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Depreciation and amortization</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">12,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">3,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">&#151;</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">5,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">20,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net segment profit or (loss)</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(21,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(9,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(187,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(165,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(382,000</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>Document</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;<b>9 months ended September 30, 2005:</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>Printing</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>Legal</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>Security</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>Administrative</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>Total</b></font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Revenues from external customers</font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">364,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">380,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">553,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size="2" face="serif">-</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">1,297,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Depreciation and amortization</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">58,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">4,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">276,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">66,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">404,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net segment profit or (loss)</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(104,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">50,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(685,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,056,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,795,000</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif"><b>9 months ended September 30, 2004:</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
   <td><hr noshade size="1">
    </td>
   <td><hr noshade size="1">
    </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Revenues from external customers</font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">483,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">358,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">190,000</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size="2" face="serif">-</font></td>
   <td>&nbsp;</td>
   <td align="center"><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">1,031,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Depreciation and amortization</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">37,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">7,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">-</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">13,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">57,000</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size=2 face="serif">Net segment profit or (loss)</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(61,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(5,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(497,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(566,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,129,000</font></td>
   <td><font size=2 face="serif">)</font></td>
</tr>
</table>
<p><font size="2" face="serif">
<b>ITEM 2 - MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</b>
</font></p>
<p><font size="2" face="serif">
<b><i>FORWARD-LOOKING STATEMENTS</i></b>
</font></p>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain statements contained herein constitute &#147;forward-looking statements&#148; within the meaning of the Private Securities Litigation Reform Act of 1995 (the &#147;1995 Reform Act&#148;). Document Security
Systems, Inc. desires to avail itself of certain &#147;safe harbor&#148; provisions of the 1995 Reform Act and is therefore including this special note to enable us to do so. Except for the historical information contained herein, this report
contains forward-looking statements (identified by the words &#147;estimate,&#148; &#147;project,&#148; &#147;anticipate,&#148; &#147;plan,&#148; &#147;expect,&#148; &#147;intend,&#148; &#147;believe,&#148; &#147;hope,&#148; &#147;strategy&#148; 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 </font><font face="serif"><font size="2">limitation,
those contained in our Form 10-KSB for the year ended December 31, 2004 and those
described herein that could cause actual results to differ materially from the
results anticipated in the forward-looking statements. </font></font></p>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-11</font></p>
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<p><a href="#contents"><font size="2">Back to Contents</font></a><font face="serif">
</font></p>
<font face="serif"><p><font size="2">
  <b>Overview</b>
</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are a supplier and printer of security documents containing patented technology that is designed to prevent the counterfeiting of documents and or to authenticate originals. We license or print security documents that utilize our patented technologies  to security printers, corporations and governments worldwide.  Our technology has been used in securing sensitive and critical documents such as currency, automobile titles, spare parts forms for the aerospace industry, psychological examinations, gift certificates, permits, checks, licenses, receipts, prescription and medical forms, engineering schematics, ID cards, labels, original music, coupons, homeland security manuals
tickets, and school transcripts.  We believe our technology will also be used for consumer product and pharmaceutical packaging.  In addition, we sell legal supplies on the Internet, and commercial printing and copying services at two non-core divisions.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We entered the document security business as the result of the acquisitions of Thomas Wicker Enterprises, Inc. and Document Security Consultants, Inc. in 2002.  Beginning in the second half of 2002, we identified document security as our core business and began to concentrate our efforts and resources primarily toward that business.   At that time, we determined that prior to our full entry into the document security business we would need to consolidate our ownership rights to a portfolio of patents and trade secrets that would be the basis of our business. Since 2002, we had been in the process of acquiring and consolidating the rights to these patents primarily in exchange for ownership interests in our Company.
During the first three quarters of 2005, we substantially completed this process by issuing shares of our Common Stock to acquire and consolidate legal ownership or economic interests in some of our core patents and trade secrets.  We believe we now have the appropriate level of technology ownership rights to take full advantage of the worldwide need for our products and technologies and can now concentrate more of our resources on the marketing and sales of our technology.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Generally, we generate revenue from our document security business in three ways.  We produce a security paper containing our patent pending technologies for the wholesale paper industry.  We also license our patented technologies to security printers so that they can provide their customers with products containing our anti-counterfeiting technologies.  Finally, we design and print, customized secure documents  for various end users such as governments and corporations.  </font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our
    primary product for the paper market is AuthentiGuard Safety Paper. AuthentiGuard
    Safety Paper is a paper which reveals hidden warning words, logos or images
    when a clear plastic viewer is placed over the paper or when the paper is
    faxed, copied, scanned or re-imaged in any form. The hidden words appear
    on the duplicate copy or the computer digital scan and essentially prevent
    important documents from ever being counterfeited. During the past year,
    we have concentrated on the wholesale portion of the Safety Paper business.
    Due to our limited size, we determined that we did not have the resources
    to develop an international retail market in Safety Paper. To achieve this
    goal, we have sought distributors who could more effectively meet the demands
    of world-wide retail customers. Beginning in the first quarter of 2005, Boise
    White Paper LLC (&#147;Boise&#148;) obtained the rights to distribute <b></b>a
    branded version of this safety paper called &#147;Boise Beware&#148; on an
    exclusive basis throughout North America to paper distributors and printers.
    We retained the right to sell our &#147;AuthentiGuard&#148; brand of safety
    paper directly to all end users including North America, and printers and
    paper distributors outside of North America. We are also in discussions with
    a large international paper distributor for the rights to distribute our
    Safety Paper outside of North America, including Europe, Asia, South America,
    Australia and Africa.</font></p>
</font><font face="serif">
<p><font size="2">
</font></p>
</font>
<p align="center"><font size="2" face="serif">F-12</font></p>
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<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Much of our efforts in the first half of 2005 were spent on working with Boise to launch Boise Beware.   We educated and trained the Boise employees about our technology, and developed, in cooperation with Boise personnel, a purchase order and manufacturing process including outlining the distribution and warehouse functions. We also used a third-party printer to meet initial demand and to build our inventories of the paper which Boise has arranged to sell at OfficeMax and CopyMax stores throughout the United States as well as to its corporate clients.    </font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Currently, our Safety Paper is manufactured and stored for us by a third-party printer which has sufficient capacity to meet our foreseeable demand for Safety Paper.    During the third quarter of 2005, sales of Safety Paper slowed as compared to the second quarter of 2005 primarily due to a seasonality factor and that our paper distributor, Boise, was still in an initial set-up mode.  During the quarter, their inventories were sufficient to supply direct retail paper sales.  We believe that the &#147;Boise Beware&#148; product line will experience continued growth due to the continued sales efforts of Boise in North America.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We intend to further increase our revenues by expanding the market for our &#147;AuthentiGuard&#148; safety paper internationally and expect to benefit from new distribution agreements outside of North America.   In addition, we are seeking to increase revenues and increase gross profit margins by developing manufacturing capabilities through strategic mergers and acquisitions that will allow us to service larger and a wider range of potential customers while eliminating a layer of costs by reducing our reliance on third party printers. </font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Concurrent with the completion of the patent consolidation phase of our business, we are concentrating more of our efforts and resources towards growing our technology licensing business.   We continue to reinforce our existing industry relationships and we are active in introducing our organization and technologies to various industries and government agencies in the United States and internationally.  In addition, we expanded our service personnel to assure our current and future customers of our ability to provide future support for their post sale service requirements.   Our sales initiative is focused on major national and international corporations that have a long-term need for our anti-counterfeiting
technologies.  </font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During 2005, we have also begun to expand our marketing efforts to the end-user of custom secure documents.  Whereas in the past, we typically sought to license our technology to the printer of the end-user, we have determined that significant advantages exist in the market if we are able to own the end-user relationship from the design phase through the production phase.  By utilizing our patented technologies, the company has the ability to create, design and manufacture one of a kind unique, proprietary secure documents.  Therefore, we have shifted our focus to utilize more of our internal printing capabilities towards the custom security document market.  In addition, we are actively seeking strategic acquisition
candidates in the various printing manufacturing categories.  We are in merger and acquisition discussions with several interested companies in the packaging, ID card, digital printing and checks and forms industries.  We are also in discussions with one of the world&#146;s largest media electronics companies for a technology cross licensing agreement or a possible merger and or acquisition with one of their subsidiary operations.  All of these discussions are at preliminary stages and there is no guarantee that any transactions will be concluded.   </font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are also developing a new line of security which employs new technology for use with documents requiring a very high level of security such as vital records to be considered for distribution by Boise or other strategic partners in the paper distribution industry.  These efforts continued during the first nine months of 2005 and included the processing of several new US and International patent applications.  During 2005, we have invested over 18% of our revenue towards research and development.    These advanced technologies protect, as well as identify, documents as originals or counterfeits.  Large security printers and packaging companies are testing our technology and we anticipate that our technologies will
be embedded on pharmaceutical packaging, consumer product packaging, checks and currencies.</font></p>
<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We also believe that some of our technologies are being used on an un-authorized basis.  By aggressively defending our intellectual property rights, we believe that we will be able to secure a potentially significant amount of additional and ongoing revenue by securing licensing agreements with those persons, companies or governments that we believe are infringing our patents.    We also anticipate that we may be required to commence litigation in some cases and that we will need to spend a significant amount of money and time on these matters.   During the first nine months of 2005, we have incurred approximately $250,000 in legal fees, paid for by shares of our common stock, related to a
case we filed against the European Central Bank for infringement of our European Patent 455750B1. We capitalize these costs into the cost of our patents and expense them if it is determined that the defense will be unsuccessful.   We anticipate that we will continue to incur significant legal costs associated with this case, of which the majority will be paid for by shares of our common stock. </font></p>
<p align="center"><font size="2" face="serif">F-13</font></p>
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<p align="left"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As mentioned above, our company also generates revenue from our commercial printing operations and our Internet company, Legalstore.com, which supplies legal supplies and customized legal documents to the legal profession. The principal purpose of these non-core operations is to provide a testing ground for our products and to offset research and development costs associated with the development of our technologies.  We intend to continue to pursue profitable growth for these businesses.  </font></p>
<p><font size="2">
  <b><i>Results of Operations for the Three and Nine Months Ended</i></b> <b><i>September 30, 2005 </i></b>
</font></p>
<p><font size="2"> &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, 2004. </font><font size="1" face="serif"></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
  <td><font size="2" face="serif"><b>Summary</b></font></td>
  <td align="right">&nbsp;</td>
  <td colspan="4" align="center"><font size="2" face="serif"><b><font size="1">Three
    Months Ended <br>
    September 30,2005</font></b></font><font size="1">&nbsp;</font><font size="1">&nbsp; </font></td>
  <td>&nbsp;</td>
  <td colspan="4" align="center"><font size="1" face="serif"><b>Nine Months Ended
        <br>
    September 30,2005</b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right" valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
    months ended <br>
 Sept. 30, 2004  </b></font></td>
  <td>&nbsp;</td>
  <td align="right" valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
months ended <br>
 Sept. 30, 2004</b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td align="right"><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td align="right"><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Sales, net</font></td>
   <td width="2%" align="right">&nbsp;</td>
   <td width="1%" align="right">&nbsp;</td>
   <td width="10%" align="right"><font size=2 face="serif">373,000</font></td>
   <td width="2%">&nbsp;</td>
   <td width="10%" align="right"><font size=2 face="serif">5</font></td>
   <td width="2%"><font size=2 face="serif">%</font></td>
   <td width="1%" align="right">&nbsp;</td>
   <td width="10%" align="right"><font size=2 face="serif">1,297,000</font></td>
   <td width="2%">&nbsp;</td>
   <td width="10%" align="right"><font size=2 face="serif">26</font></td>
   <td width="2%"><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Costs of sales</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">187,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-17</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">672,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">5</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross
    profit</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">186,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">42</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">625,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">60</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
    operating expenses</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">888,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">71</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">2,461,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">59</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Loss before other income
    (expense)</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;and income taxes</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(702,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">81</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,836,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">58</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Other income (expense):</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest
    income</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">30,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">131</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">67,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">52</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest
    expense</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(6,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">50</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(21,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">31</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Loss before income taxes</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(678,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">79</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,790,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">58</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Income taxes</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size="2" face="serif">-</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-100</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">5,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-10</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Net loss</font></td>
   <td align="right">&nbsp;</td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(678,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">77</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(1,795,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">58</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td align="right"><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td align="right"><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-14</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf15"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p>&nbsp;</p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
  <td><font size="2" face="serif"><b>Sales</b></font></td>
  <td>&nbsp;</td>
  <td colspan="4" align="center"><font size="2" face="serif"><b><font size="1">Three Months Ended<br>
    September
    30,2005</font></b></font><font size="1">&nbsp;</font></td>
  <td>&nbsp;</td>
  <td colspan="4" align="center"><font size="1" face="serif"><b>Nine Months Ended
        <br>
    September 30,2005</b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
months ended<br>
Sept. 30, 2004 </b></font></td>
  <td>&nbsp;</td>
  <td valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
months ended<br>
Sept. 30, 2004</b></font></td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td><hr noshade size="1">
    </td>
  <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Sales, net</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Document
    Security</font></td>
   <td>&nbsp;</td>
   <td><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">137,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">132</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td><font size=2 face="serif">$</font></td>
   <td align="right"><font size=2 face="serif">553,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">191</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Printing</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">114,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-35</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">364,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-25</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Legal
    supplies</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">122,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">2</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">380,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">6</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
    Revenue</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">373,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">5</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">1,297,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">26</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<u>Document Security</u></font></p>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Document security
    sales increased 132% for third quarter and 191% for the first nine months
    of 2005.
    The increases during the quarter are primarily the result of increases in
    sales of custom security documents for our customers. The increases the first
    nine months of 2005 also reflect the early orders under our distribution
    and marketing contract with Boise. While we still consider these sales to
    be nominal, we believe that the early results are indicative of the
potential for our safety paper products. However, we also are aware that our
    safety paper products are still a relatively new and there can be no assurance
    that we will continue to receive orders at a pace higher or lower then the
    initial product rollout. During the third quarter of 2005, we began to more
    aggressively target the custom security market by offering custom design
and manufacturing services to the end-user market for security documents. </font></p>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To date, licensing
    revenue has been insignificant. We are currently in the process of presenting
    and
    testing our technology with multiple printers, corporations and government
    agencies, however, we have not entered into any definitive licensing agreements
    with any parties. We are also in the contract negotiation stage with several
    clients which should conclude in 2005 or early 2006. We believe that the
    nature of our technology and the typical length and breadth of
licensing agreements that we seek to enter into with our customers creates a
    sales cycle of six to twelve months. In addition, during the third quarter
    of 2005, we began to limit our licensing business to only large or strategic
customers. </font></p>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<u>Printing and legal supplies</u>
</font></p>
<p><font size="2" face="serif">&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. During the quarter ended September 30, 2005, we experienced
    a 35% decline in our sales to external commercial printing customers primarily
    due to three factors. First, during the quarter, we utilized a larger amount
    of our printing capacity for custom security
print orders which have a higher profit margin than traditional commercial print
    orders. Second, results were adversely affected by a large, one-time order
    from a customer in 2004 that did not occur in the 2005 period. Third, we
    experienced a decline in business from one significant customer which we
believe will be made up in the fourth quarter of 2005. </font></p>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue from our
    legal supplies business continued to grow during the third quarter and the
    first nine months
    of 2005. We view our legal 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 appear to be significant as to
our total sales, we do not expect that to be true in </font><font size="2"><font face="serif"><font size="2">the
future. The division continues to increase its revenue by seeking to grow its
customer base in a cost effective manner. </font></font></font></p>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-15</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf16"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>

<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td><b><font size="2">Gross Profit</font></b></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td colspan="3" align="center"><font size="2" face="serif"><b><font size="1">Three Months Ended<br>
      September
    30,2005</font></b></font><font size="1">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td colspan="4" align="center"><font size="1" face="serif"><b>Nine Months Ended <br>
    September 30,2005</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
months ended<br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
    <td valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td>&nbsp;</td>
    <td valign="bottom"><font size="1" face="serif">&nbsp;</font></td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
months ended<br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Gross profit</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Document
    Security</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">66,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">214</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="center">&nbsp;</td>
   <td align="right"><font size=2 face="serif">259,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">232</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Printing</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">60,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-19</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="center">&nbsp;</td>
   <td align="right"><font size=2 face="serif">183,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">13</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Legal
    supplies</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">60,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">67</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="center">&nbsp;</td>
   <td align="right"><font size=2 face="serif">183,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">21</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size="1">
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
    gross profit</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">186,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">42</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="center">&nbsp;</td>
   <td align="right"><font size=2 face="serif">625,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">60</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
  <td align="center">&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
  <td align="right">&nbsp;</td>
  <td>&nbsp;</td>
</tr>
</table>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td colspan="3" align="center"><font size="2" face="serif"><b><font size="1">Three Months Ended <br>
      September
    30,2005</font></b></font><font size="1">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td colspan="3" align="center"><font size="1" face="serif"><b>Nine Months Ended <br>
    September 30,2005</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
months ended<br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
months ended<br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
   <td><font size="2" face="serif">Gross profit percentage:</font></td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Document Security</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">48</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">35</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">47</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">14</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Printing</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">53</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">25</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">50</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">50</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Legal supplies</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">49</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">64</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">48</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">14</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
    gross profit percentage</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">50</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">35</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">48</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right"><font size=2 face="serif">27</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<u>Document Security</u></font></p>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The 214% increase
    in gross profit in the third quarter of 2005 when compared to the third quarter
    of
    2004 is the result of increased volumes of custom security print orders versus
    prior year amounts. The gross profit percentage increase reflects the improvements
    in inventory management and pricing gained by larger order quantities which
the Company is able to make as its sales increase. </font></p>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<u>Printing and legal supplies</u>
</font></p>
<p><font size="2" face="serif">
        Gross profits from our printing and legal supplies operations support our document security business. While gross profits declined on a dollar basis due to the revenue variances described above, printing gross profit percentages have increased for
both periods presented generally as the result of improvements in the customer mix as the sales declines described above were generally to commercial printing and copying customers which had lower than average profit margins associated with them.
</font></p>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Legal supplies
    gross profit margins in the third quarter of 2005 as compared to the third
    quarter in
    2004 increased primarily due to a change in product mix resulting in a greater
    percentage of wholesale sales versus drop shipment sales. We generally generate
    higher gross margins on products that we purchase on a wholesale basis and
    resell to our customers versus products that we sell as a dealer for a larger
legal supply company. </font></p>
<p align="center"><font size="2" face="serif">F-16</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf17"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p><font size="2" face="serif"><b>Expenses<br>
</b><b>Operating expenses</b><b></b></font></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td colspan="4" align="center"><font size="2" face="serif"><b><font size="1">Three Months Ended <br>
      September
    30,2005</font></b></font><font size="1">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td colspan="4" align="center"><font size="1" face="serif"><b>Nine Months Ended <br>
    September 30,2005</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
months ended <br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
    <td valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
months ended <br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
   <td><font size="2" face="serif">Selling, general and administrative expenses:</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="1%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
   <td width="10%">&nbsp;</td>
   <td width="2%">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Compensation</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">260,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">79</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">724,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">75</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Professional Fees</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">156,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">64</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">490,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">114</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Sales and marketing</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">125,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">54</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">351,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">33</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Depreciation and amortization</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">23,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">188</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">117,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">388</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Other</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">110,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">41</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">269,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">3</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Research and development</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">79,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-26</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">240,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">-19</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Amortization of intangibles</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">135,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">2600</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">270,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">335</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Total
    operating expenses</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">888,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">71</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">2,461,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">59</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
</table>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<b>Selling, General and Administrative </b>
</font></p>
<p><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our selling, general and administrative costs have increased as we have increased the size of our organization to a level that we feel necessary to execute our business plan. Increases in compensation costs are primarily due to the additions in
sales, service and finance personnel. As mentioned above, we increased our sales and service departments to coincide with our national and international sales initiative and to improve our post sale support capabilities. Our addition in finance
internalizes our finance and corporate governance capabilities and is expected to be partially offset by decrease in professional fees.
</font></p>
<p><font size="2" face="serif">
        &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Professional fees have primarily increased due to increases in legal, accounting, investor and public relation costs and consulting fees. Legal costs are associated with general corporate fees and legal fees in connection with the litigation
referred to below in <i>Part II &#150;Legal Proceedings. </i>These legal costs do not include legal costs associated with the application and defense of our patents which the company capitalizes and amortizes over the expected life of the patent.
Consulting fees are primarily directed towards efforts to help the Company develop contacts and market opportunities with government and large multinational corporations.
</font></p>
<p><font size="2" face="serif">
        &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and marketing expense increases include increases in travel costs associated with greater participation in trade shows as well as an increase in potential customer site visits. We expect that sales and marketing expenses will continue to
fluctuate as we incur costs incidental with our sales volume.
</font></p>
<p><font size="2" face="serif">
        &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Depreciation expense has increased primarily due to leasehold improvements incurred during the last quarter of 2004 for our new corporate headquarters as well as additional computers and office equipment associated with our increase in personnel
levels.
</font></p>
<p><font size="2" face="serif">
        &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other expenses are primarily rent, supplies, and insurance costs that have not significantly fluctuated since 2004, except for the timing of certain office expenses and employee hiring costs which the company experience in the third quarter of
2005 but not in the third quarter of 2004.
</font></p>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-17</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf18"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<font face="serif"><p><font size="2">
  </font><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><font size="2"><b>Research and Development</b>
  </font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continue to invest in research
    and development to improve our existing technologies and develop new technologies
    that will
  enhance our position in the document security market. Research and development
  costs consists primarily of compensation costs for our chief technology officer
  and third party subcontracting costs incurred to test our technologies on equipment
  that we do not have access to internally. These costs have decreased in both
  periods of 2005
  primarily due to a reduction in subcontracting costs. We expect that our research
  and development costs will continue at current levels for the foreseeable future
  as we continue to research new technologies and different uses of our current
technologies. </font></p>
<p><font size="2">
  </font><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><font size="2"><b>Amortization of intangibles </b>
  </font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Commencing in the second quarter
    of 2005, we began to amortize the costs associated with the patents that
    we acquired in
  2005. As described above, we consolidated our patent portfolio with the purchase
  of legal and economic ownership rights to several patents in the first quarter
  of 2005. We are amortizing these costs over the weighed average expected life
  of the patents that we purchased which is approximately 9 years. This non-cash
  expense will continue to
  be a significant component of our operating expenses during the amortization
  period. In addition, we expect to capitalize additional costs associated with
  the application and defense of our patents which will increase the amortization
expense that we will incur in future periods. </font></p>
<p><font size="2">
  <b>Other income and expense</b></font><font size="2">
  </font></p>
</font>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
  <tr>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td colspan="4" align="center"><font size="2" face="serif"><b><font size="1">Three Months
    Ended <br>
    September 30,2005</font></b></font><font size="1">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td colspan="4" align="center"><font size="1" face="serif"><b>Nine Months Ended <br>
      September
    30,2005</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="center" valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
months ended<br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
    <td align="right" valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
months ended<br>
Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right"><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
  <td align="left"><font face="serif"><font size="2">Other income
    (expense):</font></font></td>
  <td align="right" width="2%">&nbsp;</td>
  <td align="right" width="1%">&nbsp;</td>
   <td align="right" width="10%"><font size=2 face="serif">30,000</font></td>
   <td width="2%">&nbsp;</td>
   <td align="right" width="10%"><font size=2 face="serif">131</font></td>
   <td width="2%"><font size=2 face="serif">%</font></td>
   <td align="right" width="1%">&nbsp;</td>
   <td align="right" width="10%"><font size=2 face="serif">67,000</font></td>
   <td width="2%">&nbsp;</td>
   <td align="right" width="10%"><font size=2 face="serif">52</font></td>
   <td width="2%"><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td align="left"><font face="serif"><font size="2">Interest income</font></font></td>
  <td align="right">&nbsp;</td>
  <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(6,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">50</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">(21,000</font></td>
   <td><font size=2 face="serif">)</font></td>
   <td align="right"><font size=2 face="serif">31</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td align="left"><font face="serif"><font size="2">Interest expense </font></font></td>
  <td align="right">&nbsp;</td>
  <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">24,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">167</font></td>
   <td><font size=2 face="serif">%</font></td>
   <td align="right">&nbsp;</td>
   <td align="right"><font size=2 face="serif">46,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size=2 face="serif">64</font></td>
   <td><font size=2 face="serif">%</font></td>
</tr>
</table>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our other income
    and expense is comprised of interest income, which we derive from our cash
    savings and
    interest expense which we incur on our debt and capitalized lease obligations.
    Interest income has increased due to increase in our rate of return compared
    to the same periods of 2004. Our interest expense has increased due to the
    addition of several capitalized leases in the last quarter of 2004. We expect
    that our interest income will decrease as we use cash in
operations. We expect interest expense to be stable. </font></p>
<p align="center"><font size="2" face="serif">F-18</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf19"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p><font size="2" face="serif"><b>Net loss </b></font></p>
<table width="100%" border=0 align="center" cellpadding=0 cellspacing=0>
  <tr>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td colspan="4" align="center"><font size="2" face="serif"><b><font size="1">Three
            Months Ended <br>
      September 30,2005</font></b></font><font size="1">&nbsp;</font></td>
    <td>&nbsp;</td>
    <td colspan="4" align="center"><font size="1" face="serif"><b>Nine Months
          Ended <br>
      September 30,2005</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="center" valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 3<br>
      months ended<br>
      Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
    <td align="right" valign="bottom"><font size="1" face="serif"><b>$</b></font></td>
    <td align="right">&nbsp;</td>
    <td>&nbsp;</td>
    <td align="center"><font size="1" face="serif"><b>% change vs. 9<br>
      months ended <br>
      Sept. 30, 2004</b></font></td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="left">&nbsp;</td>
    <td align="right">&nbsp;</td>
    <td align="right"><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
    <td align="right"><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td><hr noshade size="1">
    </td>
    <td align="right"><hr noshade size="1">
    </td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td align="left"><font face="serif"><font size="2">Net loss</font></font></td>
    <td align="right" width="2%">&nbsp;</td>
    <td align="right" width="1%">&nbsp;</td>
    <td align="right" width="10%"><font size="2">(678,000</font></td>
    <td width="2%"><font size=2 face="serif">)</font></td>
    <td align="right" width="10%"><font size=2 face="serif">77</font></td>
    <td width="2%"><font size=2 face="serif">%</font></td>
    <td align="right" width="1%">&nbsp;</td>
    <td align="right" width="10%"><font size=2 face="serif">(1,795,000</font></td>
    <td width="2%"><font size=2 face="serif">)</font></td>
    <td align="right" width="10%"><font size=2 face="serif">59</font></td>
    <td width="2%"><font size=2 face="serif">%</font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
    <td><hr noshade size=1>
    </td>
    <td>&nbsp;</td>
  </tr>
</table>
<p><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the three and nine months
    ended September 30, 2005 we continued to experience a net loss. While we
    have experienced growth
  in our net sales and our gross profit, these increases have not offset our
  increases in our operating expense, especially a significant increase in amortization
  of intangibles expense that has resulted from the investments we have made
in our patent assets. </font></p>
<font face="serif"></font>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td><font size="2" face="serif"><b>Loss per share</b></font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center" colspan=6><font size="1" face="serif"><b>Three Months Ended</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=5><font size="1" face="serif"><b>Nine Months Ended</b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center" colspan=3><font size="1" face="serif"><b>September 30,<br>
2005</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>September 30,<br>
2004</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>September 30,<br>
2005</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>September 30,<br>
2004</b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td colspan=3><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size=1></td>
   <td>&nbsp;</td>
   <td colspan=2><hr noshade size=1></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center" colspan=3>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Net loss</font></td>
   <td width="2%" align="center">&nbsp;</td>
   <td width="1%" align="center"><font size="2" face="serif">$</font></td>
   <td width="10%" align="right"><font size="2" face="serif">(678,406</font></td>
   <td width="2%"><font size="2" face="serif">)</font></td>
   <td width="1%" align="center"><font size="2" face="serif">$</font></td>
   <td width="10%" align="right"><font size="2" face="serif">(381,821</font></td>
   <td width="2%"><font size="2" face="serif">)</font></td>
   <td width="1%" align="center"><font size="2" face="serif">$</font></td>
   <td width="10%" align="right"><font size="2" face="serif">(1,794,594</font></td>
   <td width="2%"><font size="2" face="serif">)</font></td>
   <td width="1%" align="center"><font size="2" face="serif">$</font></td>
   <td width="10%" align="right"><font size="2" face="serif">(1,129,239</font></td>
   <td width="2%"><font size="2" face="serif">)</font></td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td><hr noshade size="2">
    </td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
   <td><hr noshade size="2">
    </td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
   <td><hr noshade size=2></td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
   <td><hr noshade size=2></td>
   <td><hr noshade size=2></td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Net loss per share, basic
    and</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;diluted</font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size="2" face="serif">$</font></td>
   <td align="right"><font size="2" face="serif">(0.05</font></td>
   <td><font size="2" face="serif">)</font></td>
   <td align="center"><font size="2" face="serif">$</font></td>
   <td align="right"><font size="2" face="serif">(0.04</font></td>
   <td><font size="2" face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">(0.15</font></td>
   <td><font size="2" face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">(0.10</font></td>
   <td><font size="2" face="serif">)</font></td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size=2>
  </td>
  <td><hr noshade size=2>
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size=2>
  </td>
  <td><hr noshade size=2>
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size=2>
  </td>
  <td><hr noshade size=2>
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size=2>
  </td>
  <td><hr noshade size=2>
  </td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;Weighted average common</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;shares outstanding, basic
    and</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">&nbsp;&nbsp;&nbsp;diluted</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">12,285,046</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">10,908,607</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">11,856,517</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">10,885,137</font></td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size=1>
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size="1">
  </td>
  <td><hr noshade size=1>
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size=1>
  </td>
  <td><hr noshade size=1>
  </td>
  <td>&nbsp;</td>
  <td><hr noshade size=1>
  </td>
  <td><hr noshade size=1>
  </td>
   <td>&nbsp;</td>
</tr>
</table>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our basic loss per share has increased due to the increased dollar value of our loss partially offset by an increase in the weighted average common shares outstanding in both periods of 2005 compared to 2004. Our shares
have increased as we have used our common shares for an acquisition and to purchase patent assets. In addition, we have issued shares as the result of exercises of warrants by some of our investors as well as to pay certain legal fees. The &#147;basic
net loss per share&#148; is computed by dividing the net loss, by the weighted average
common shares outstanding. </font></p>
<p><font size="2" face="serif">
<b>LIQUIDITY AND CAPITAL RESOURCES</b>
</font></p>
<p><font size="2" face="serif"> The Company&#146;s cash flows and other key indicators
of liquidity are summarized as follows: </font></p>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-19</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p20"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td>&nbsp;</td>
   <td align="center" colspan=6><font size="1" face="serif"><b>Nine Months Ended</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center" colspan=3><font size="1" face="serif"><b>September 30,<br>
2005<br>
(unaudited)</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><font size="1" face="serif"><b>September 30,<br>
2004<br>
(unaudited)</b></font></td>
   <td align="center">&nbsp;</td>
   <td align="center"><font size="1" face="serif"><b>%<br>
Change</b></font></td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td></td>
   <td align="center" colspan=2><hr noshade size="1">
    </td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2><hr noshade size="1">
    </td>
   <td align="center">&nbsp;</td>
   <td align="center"><hr noshade size="1">
    </td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td>&nbsp;</td>
   <td align="center" colspan=3>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center" colspan=2>&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
   <td align="center">&nbsp;</td>
</tr>
<tr>
   <td><font size="2" face="serif">Operating activities cash flows</font></td>
   <td width="2%">&nbsp;</td>
   <td width="1%"><font size="2" face="serif">$</font></td>
   <td align="right" width="10%"><font size="2" face="serif">(1,217,000</font></td>
   <td width="2%"><font size="2" face="serif">)</font></td>
   <td width="1%"><font size="2" face="serif">$</font></td>
   <td align="right" width="10%"><font size="2" face="serif">(1,218,000</font></td>
   <td width="2%"><font size="2" face="serif">)</font></td>
   <td align="right" width="10%"><font size="2" face="serif">0</font></td>
   <td width="2%"><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Investing activities cash flows:</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">(269,000</font></td>
   <td><font size="2" face="serif">)</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">(426,000</font></td>
   <td><font size="2" face="serif">)</font></td>
   <td align="right"><font size="2" face="serif">37</font></td>
   <td><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Financing activities cash flows</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">2,548,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">(33,000</font></td>
   <td><font size="2" face="serif">)</font></td>
   <td align="right"><font size="2" face="serif">7821</font></td>
   <td><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Working capital</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">3,518,000</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">2,627,000</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">34</font></td>
   <td><font size="2" face="serif">%</font></td>
</tr>
<tr>
   <td><font size="2" face="serif">Current ratio</font></td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">6.84</font></td>
   <td><font size="2" face="serif"> x</font></td>
   <td>&nbsp;</td>
   <td align="right"><font size="2" face="serif">5.87</font></td>
   <td><font size="2" face="serif"> x</font></td>
   <td align="right"><font size="2" face="serif">17</font></td>
   <td><font size="2" face="serif">%</font></td>
</tr>
</table>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the first
    nine months of 2005, we continued to use cash for operations at a rate consistent
    with
    the same period of 2004. Our operating cash flow loss during the first nine
    months of 2005 was primarily the result of our operating loss and our use
    of cash for insurance pre-payments and to increase our inventory levels.
    While our net loss has increased from 2004 levels, our cash flow has remained
    consistent due to the fact that our 2005 results are primarily
negatively impacted by a large increase in non-cash depreciation and amortization
expenses.</font></p>
<p><font size="2" face="serif">
        &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the first nine months of 2005, our investing activities used cash for investments in software, equipment and patents of $269,000, which was 37% less than the use of cash for investment during the first nine months of 2004. During 2005, we
have been able to use our common stock to pay for investments in patents and contractual rights which we may not have otherwise been able to had we been required to pay in cash. The use of equity for our investments has allowed us to retain cash
needed for operations during the early stages of our business without sacrificing the investments needed to secure our competitiveness in the future.
</font></p>
<p><font size="2" face="serif">
        &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Also during the first nine months of 2005, our financing activities resulted in cash inflows primarily from the issuance of our common stock to warrant holders who have exercised their right to buy our stock at prices ranging from $2.00 to $5.00.
The proceeds from these investors support our operations. Since entering the document security business, we have funded a significant portion of our cash needs by issuing our securities.
</font></p>
<p><font size="2" face="serif"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September 30,
    2005, we had cash and cash equivalents of approximately $3,720,000 along
    with restricted
    cash of $249,000. Our restricted cash is held as collateral for our current
    and long-term debt obligation which was approximately $230,000 at September
    30, 2005. Our working capital as of September 30, 2005 was approximately
    $3,518,000 which was $891,000 or 34% higher than working capital at September
    30, 2004. Our ability to improve our working capital
position was based on our ability to use our securities to obtain funding and
    make investments in patent assets. Our working capital position is expected
    to deteriorate as long as we continue to lose money from operations. In order
    to support our existing and proposed operations, we may need additional financing.
    Although we have outstanding warrants to purchase our common stock with 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 additional
    funds by borrowing or selling stock to meet our cash needs, and there is
no guarantee that we will be able to raise such additional funds. </font></p>
<p><font size="2" face="serif">
</font></p>
<p align="center"><font size="2" face="serif">F-20</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p21"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<font face="serif"><p><font size="2">
  <b>ITEM 3 - CONTROLS AND PROCEDURES</b>
</font></p>
<p><font size="2"> </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2"><u>Evaluation of Disclosure Controls and Procedures.</u> Our
  management, with the participation of our principal executive officer and principal
  accounting officer, has evaluated the effectiveness of our disclosure controls
  and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
  Exchange Act of 1934, as amended (the &#147;Exchange Act&#148;)), as of the
  end of the period covered by this Quarterly Report on Form 10-QSB. Based on
  that evaluation, our principal executive officer and principal accounting officer
  have concluded that as of that date, our disclosure controls and procedures
  were designed to ensure that information required to be disclosed in reports
  that we file or
  submit under the Exchange Act is recorded, processed, summarized and reported
  with the time periods specified in applicable SEC rules and forms and were
effective. </font></p>
<p><font size="2">
        </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">In addition, there have been no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
</font></p>
</font>
<p><font size="2" face="serif"> </font></p>
<p align="center"><font size="2" face="serif"><b>PART II<br>
  OTHER INFORMATION</b></font><font size="2" face="serif">
  </font></p>
<p><font size="2" face="serif"><b>ITEM 1 - LEGAL PROCEEDINGS</b>
</font></p>
<font face="serif">
<p><font size="2"> </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">There
    were no significant developments during the first nine months of 2005 in
    connection with our intellectual property litigation against
    Adler Technologies
  and Andrew McTagger. This litigation commenced by us in January 2003, is described
  in our Form 10-KSB Annual Report for the year ended December 31, 2004. The
  case is in the late stage of discovery and it is still 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 McTagger or that Adler&#146;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. </font></p>
<p><font size="2"> </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">We
    have been named as a defendant in a lawsuit entitled Frank LaLoggia v. Document
    Security Systems, Inc. (Index No. 05/8307 New York State
    Supreme Court,
  Monroe County) in which the plaintiff alleges that he is owed compensation
  in the amount of 3,000,000 shares of the Company&#146;s Common Stock for services
  allegedly provided to the Company. The complaint asserts that the Company owes
  the shares as a result of efforts made by Mr. Frank LaLoggia under a movie
  consulting agreement dating from 1996. Management believes that the plaintiff
  has received all compensation which was due to him in relation to the former
  movie business. The Company believes that even if the plaintiff was owed any
  compensation for services, the number of
  shares would be determined on a post reverse stock split basis, which was effected
  several years ago (resulting in a claim for 15,000 shares). Management believes
  that the claims, which relate to the former movie production business of the
  Company when it was named New Sky Communications, Inc. and was operated by
  different senior management, are without merit and subject to valid defenses.
  The Company intends to vigorously defend this action and has asserted against
  the plaintiff
  counterclaims for money damages up to $800,000 arising out of and related to
  his conduct under that same agreement. The complaint was filed on July 26,
  2005 and is currently in the discovery stage. There can be no assurance that
we will be successful in our defense or in our counterclaims. </font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On August 1, 2005 we commenced
    a suit against the European Central Bank alleging patent infringement by
    the European Central
  Bank and have claimed unspecified damages. The suit was brought by us in European
Court of First Instance in Luxembourg. The Company alleges that all Euro </font><font face="serif"><font size="2">banknotes
in circulation infringe its European Patent 455750B1, which covers a method of
incorporating an anti-counterfeiting feature into banknotes or similar security
documents to protect against forgeries by digital scanning and copying devices.
We are currently awaiting their defense. </font></font></p>
<p><font size="2">
</font></p>
</font>
<p align="center"><font size="2" face="serif">F-21</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p22"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a><font size="2">
</font></p>
<font face="serif">
<p><font size="2">
  <b>ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</b>
</font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the quarter ended March 31, 2005, the Company issued an aggregate of 541,460 shares of its common stock for the various legal ownership and economic interests in certain technology (patents and trade secrets)
  from 40 persons and entities who previously obtained these rights from the Wicker Family. The value of the shares of common stock was determined based upon the closing price of the shares of the Company&#146;s common stock on the American Stock
  Exchange on February 15, 2005 ($7.25 per share) The total aggregate fair value of the acquisition of the interests from the interest holders was $3,925,585. The shares issued in the transaction are &#147;restricted securities&#148; within
  the meaning of Rule 144 of the Securities Act of 1933. We relied upon the exemption
  from registration under the Securities Act of 1933 provided by Section 4(2)
  thereof in connection with the issuance of the securities. We filed a registration
  statement with the
  Securities and Exchange Commission to register for resale 20% of the shares
  that were received by each Interest Holder, which was declared effective on
August 9, 2005. </font></p>
<p><font size="2"> </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">During the quarter ended September
    30, 2005, we issued 83,705 shares of our common stock pursuant to the exercise
    of our
  common stock purchase warrants. Net proceeds from the exercise of the warrants
  were approximately $332,000. Of the shares issued upon the exercise of warrants,
  35,933 were issued at $5.00 per share for proceeds of $180,000, and 31,665
  were issued at $4.80 per share for proceeds of $152,000. In addition, 16,107
  shares were issued as a result of
  cashless exercise provisions of warrant agreements issued as part of our 2003
  private placement of common stock and warrants. Pursuant to these cashless
  exercises, 19,068 warrants were cancelled. The proceeds were used to fund general
  operations. The shares issued pursuant to the exercise of the warrants have
  been registered with the Securities and Exchange Commission under an effective
  Form S-3. We relied upon the exemption from registration under the Securities
  Act of 1933 provided by
Section 4(2) thereof in connection with the issuance of the securities </font></p>
<p><font size="2"> </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">On
    August 26, 2005, the Company agreed to issue 150,000 restricted shares to
    Strategic Resource Advisory Services, (&#147;SRAS&#148;), a subsidiary of IDT Corporation, in exchange for the payment of substantially all of the Company&#146;s legal
  expenses that it will incur during the Company&#146;s lawsuit with the European Central Bank. IDT Corporation is a related party to a member of the Company&#146;s
  Board of Directors. The Company expects to issue the shares during its fiscal
  fourth quarter, and the shares will not be registered under the Securities
Act of 1933. </font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September 9, 2005, the Company purchased Secured Document Systems (&#147;SDS&#148;) for 62,654 shares of its common stock. The value of the shares of common stock was determined based upon the closing price of the
  shares of the Company&#146;s common stock on the American Stock Exchange on September 9, 2005 of $8.26 per share. SDS is an entity that holds various economic rights to several of the Company&#146;s
  patents which it had previously obtained from the Wicker Family. The shares
issued in the transaction were not registered under the Securities Act of 1933. </font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We did not purchase any shares
    of our capital
stock during the nine months ended September 30, 2005. </font></p>
</font>
<p align="center"><font size="2" face="serif">F-22</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="p23"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a><font size="2">
</font></p>
<font face="serif">
<p><font size="2"><b>ITEM 3 - DEFAULTS UPON SENIOR SECURITIES</b>
  </font></p>
</font><font face="serif">
<p><font size="2">
  </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">None
  </font></p>
<p><font size="2">
  <b>ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</b>
</font></p>
<p><font size="2"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No matters were submitted to
    a vote of our security holders during the fiscal quarter ended September
    30, 2005. We anticipate
holding a meeting of shareholders in the fourth quarter of 2005. </font></p>
<p><font size="2">
  <b>ITEM 5 - OTHER INFORMATION</b>
</font></p>
<p><font size="2">
  </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">None
  </font></p>
<p><font size="2">
  <b>ITEM 6 - EXHIBITS </b>
</font></p>
<p><font size="2">
  </font><font face="serif"><font size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font></font><font size="2">(a) Exhibits
  </font></p>
</font>
<table width="100%" align="center" border=0 cellspacing=0 cellpadding=0>
<tr>
  <td width="10%">&nbsp;</td>
  <td>&nbsp;</td>
  <td width="57%">&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
  <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
   <td colspan="2" rowspan="2"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item 31.1&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><font size="2" face="serif">Certifications of Chief Executive Officer Pursuant to Section 302</font><font size="2" face="serif">of the Sarbanes Oxley Act</font></td>
  </tr>
<tr>
  <td></td>
</tr>
<tr>
  <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>

</tr>
<tr>
  <td>&nbsp;</td>
   <td colspan="2" rowspan="2"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item 31.2&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><font size="2" face="serif">Certifications of Principal Accounting Officer Pursuant to Section</font><font size="2" face="serif">302 of the Sarbanes Oxley Act</font></td>
  </tr>
<tr>
  <td></td>
</tr>
<tr>
  <td>&nbsp;</td>

   <td>&nbsp;</td>
   <td>&nbsp;</td>
</tr>
<tr>
  <td>&nbsp;</td>
   <td colspan="2" rowspan="2"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item 32.1&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><font size="2" face="serif">Certification of Chief Executive Officer Pursuant to Section 906</font><font size="2" face="serif">of the Sarbanes Oxley Act</font></td>
  </tr>
<tr>
  <td></td>
</tr>
<tr>
  <td>&nbsp;</td>
   <td>&nbsp;</td>
   <td>&nbsp;</td>

</tr>
<tr>
  <td>&nbsp;</td>
   <td colspan="2" rowspan="2"><font size="2" face="serif">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Item 32.2&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</font><font size="2" face="serif">Certification of principal Accounting Officer Pursuant to Section</font><font size="2" face="serif">906 of the Sarbanes Oxley Act</font></td>
  </tr>
<tr>
  <td></td>
</tr>
</table>
<p align="center"><font size="2" face="serif">F-23</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
<page> <a name="pf24"></a>
<p><a href="#contents"><font size="2">Back to Contents</font></a></p>
<p>&nbsp;</p>
<p align="center"><font size="2" face="serif">
<b>SIGNATURES</b>
</font></p>
<p><font size="2" face="serif"> &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. </font></p>
<p>&nbsp;</p>
<table width="100%" border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td width="50%">&nbsp;</td>
    <td colspan="2"><font size="2" face="serif"><b>DOCUMENT SECURITY SYSTEMS, INC.</b> </font></td>
  </tr>
  <tr>
    <td width="50%">&nbsp;</td>
    <td width="4%">&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2" face="serif">November 14, 2005 </font></td>
    <td><font size="2" face="serif">By:</font></td>
    <td><font size="2" face="serif"><u>/s/ Patrick White&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></font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size="2" face="serif">Patrick White </font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font size="2" face="serif">President, Chief Executive Officer and<br>
      Acting
    Chief Financial Officer </font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td><font size="2" face="serif">November 14, 2005</font></td>
    <td><font size="2" face="serif">By:</font></td>
    <td><font size="2" face="serif"><u>/s/ Philip Jones&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></font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font face="serif"><font size="2">Philip Jones </font></font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td><font face="serif"><font size="2">Controller/Principal Accounting Officer </font></font></td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
  <tr>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
    <td>&nbsp;</td>
  </tr>
</table>

<p align="center"><font size="2" face="serif">F-24</font></p>
<hr noshade align="center" width="100%" size="2">

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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>5
<FILENAME>b409780_ex31-1.htm
<DESCRIPTION>CERT. OF CEO SECTION 302
<TEXT>
<html>
<head><title>
Prepared and filed by St Ives Financial
</title>
</head>
<body bgcolor="#FFFFFF">
<PAGE>
<p align="right">
<b><font size="2">Exhibit 31.1</font></b><font size="2">
</font></p>
<p><font size="2">
<b>CERTIFICATION</b>
</font></p>
<p><font size="2">
I, Patrick White, certify that:
</font></p>
<p><font size="2">1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I have reviewed this quarterly report of Form 10-QSB of Document Security Systems, Inc.;</font></p>
<p><font size="2">2.&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;
</font></p>
<p><font size="2">
3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
</font></p>
<p><font size="2">4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registrant&#146;s other certifying officer and I are
    responsible for establishing and maintaining disclosure controls and procedures
    (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
    over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f), for the registrant and we have: </font></p>
<div style="text-indent: 3%">
<p align="left"><font size="2">a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to me by others within the
company, particularly during the period in which this quarterly report is being prepared;</font></p>
</div>
<div style="text-indent: 3%">
<p align="left"><font size="2">b)&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; </font></p>
</div>
<div style="text-indent: 3%">
<p align="left"><font size="2">c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Disclosed in this report any change in the registrant&#146;s internal control over financial reporting that occurred during the registrant&#146;s most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant&#146;s internal control over financial reporting; and </font></p>
</div>
<p><font size="2">5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registrant&#146;s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the registrant&#146;s
    audit committee of the board of directors (or persons performing the equivalent
functions); </font></p>
<div style="text-indent: 3%">
<p align="left"><font size="2"> a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All significant deficiencies and material weaknesses in
    the design or operation of internal controls over financial reporting which
    are reasonably likely to adversely affect the registrant&#146;s ability to
    record, process, summarize and report
financial information; and </font></p>
</div>
<div style="text-indent: 3%">
<p align="left"><font size="2">b)&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&#146;s internal
controls over financial reporting. </font></p>
</div>
<p align="left"><font size="2">Date: November 14, 2005</font></p>
<p align="left"><font size="2"><u>/s/Patrick White</u><br>Patrick White</font></p>
<hr noshade align="center" width="100%" size="2">
<div style="page-break-before:always"></div>
</body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>6
<FILENAME>b409780_ex31-2.htm
<DESCRIPTION>CERT. OF PAO SECTION 302
<TEXT>
<html>
<head><title>
Prepared and filed by St Ives Financial
</title>
</head>
<body bgcolor="#FFFFFF">
<PAGE>
<p align="right"><font size="2"><b>Exhibit 31.2</b></font></p>
<p align="center"><font size="2"><b>CERTIFICATION</b></font></p>
<p><font size="2">I, Philip Jones, certify that:</font></p>
<table width="100%" border=0 cellspacing=0 cellpadding=0>
<tr>
   <td valign="top" width="3%"><font size="2">&nbsp;</font></td>
   <td valign="top"><font size="2">&nbsp;</font></td>
</tr>
<tr>
   <td valign="top" width="3%"><font size="2">&nbsp;</font></td>
   <td valign="top"><font size="2">&nbsp;</font></td>
</tr>
</table>
<p align="left"><font size="2">1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I have reviewed this quarterly report of Form 10-QSB of Document Security Systems, Inc.;</font></p>
<p><font size="2">
2.&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;
</font></p>
<p><font size="2">3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
</font></p>
<p><font size="2"> 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registrant&#146;s other certifying officer and I are
    responsible for establishing and maintaining disclosure controls and procedures
    (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
    over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15(d)-15(f), for the registrant and we have: </font></p>
<div style="text-indent: 3%">
<p align="left"><font size="2">a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to me by others within the
company, particularly during the period in which this quarterly report is being prepared;
</font></p>
</div>
<div style="text-indent: 3%">
<p align="left"><font size="2">
b)&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;
</font></p>
</div>
<div style="text-indent: 3%">
<p align="left"><font size="2"> c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Disclosed in this report any change in the registrant&#146;s internal control over financial reporting that occurred during the registrant&#146;s most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant&#146;s internal control over financial reporting; and </font></p>
</div>
<p><font size="2"> 5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registrant&#146;s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant&#146;s auditors and the registrant&#146;s
    audit committee of the board of directors (or persons performing the equivalent
functions); </font></p>
<div style="text-indent: 3%">
<p align="left"><font size="2"> a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All significant deficiencies and material weaknesses in
    the design or operation of internal controls over financial reporting which
    are reasonably likely to adversely affect the registrant&#146;s ability to
    record, process, summarize and report
financial information; and </font></p>
</div>
<div style="text-indent: 3%">
<p align="left"><font size="2"> b)&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&#146;s internal
controls over financial reporting; </font></p>
</div>
<p><font size="2">Date: November 14, 2005</font></p>
<p><font size="2">
/s/ <u>Philip Jones&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</u><br>
Philip Jones</font></p>
<hr noshade align="center" width="100%" size=2>
</body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>7
<FILENAME>b409780_ex32-1.htm
<DESCRIPTION>CERT. OF CEO SECTION 906
<TEXT>
<html>
<head><title>
Prepared and filed by St Ives Financial
</title>
</head>
<body bgcolor="#FFFFFF">
<PAGE>
<p align="right">
  <font size="2"><b>Exhibit 32.1</b> </font></p>
<p align="center">
<b><font size="2">CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350<br>
AS ADOPTED
PURSUANT TO SECTION 906 OF </font></b>
<br>
<font size="2"><b>THE SARBANES-OXLEY ACT OF 2002 </b>
</font></p>
<p><font size="2">
In connection with the Quarterly Report of Document Security Systems, Inc. (the &#147;<i>Company</i>&#148;)
on Form 10-QSB for the quarter ending September 30, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the &#147;<i>Report&#148;</i>), I, Patrick White, Chief Executive Officer of the Company certify, pursuant to 18 U.S.C. section1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
</font></p>
<p><font size="2">
The Report fully complies with the requirements of the section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
</font></p>
<p><font size="2">
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
</font></p>
<p><font size="2">
Date: November 14, 2005
</font></p>
<p><font size="2">
<u>/s/Patrick White</u><br>
Patrick White<br>
Chief Executive Officer </font></p>
<hr noshade align="center" width="100%" size=2>


</body>

</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>8
<FILENAME>b409780_ex32-2.htm
<DESCRIPTION>CERT OF PAO SECTION 906
<TEXT>
<html>
<head><title>
Prepared and filed by St Ives Financial
</title>
</head>
<body bgcolor="#FFFFFF">
<PAGE>
<p align="right">
<font size="2"><b>Exhibit 32.2 </b></font></p>
<p align="center"><font size="2">
<b>CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350<br>
AS ADOPTED PURSUANT TO SECTION
906 OF </b>
</font><br>
<font size="2"><b>THE SARBANES-OXLEY ACT OF 2002 </b>
</font></p>
<p align="left"><font size="2">
In connection with the Quarterly Report of Document Security Systems, inc. (the &#147;<i>Company</i>&#148;)
on Form 10-QSB for the quarter ending September 30, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the &#147;<i>Report&#148;</i>), I, Philip Jones, Controller and Principal Accounting Officer of the Company, respectfully certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
</font></p>
<p><font size="2">
The Report fully complies with the requirements of the section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
</font></p>
<p><font size="2">
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
</font></p>
<p><font size="2">
Date: November 14, 2005
</font></p>
<p><font size="2">
/s/ <u>Philip Jones&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</u><br>
Philip Jones<br>
Controller/Principal Accounting Officer
</font></p>
<hr noshade align="center" width="100%" size=2>

</body>

</html>

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
