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<SEC-DOCUMENT>0001167687-05-000022.txt : 20050331
<SEC-HEADER>0001167687-05-000022.hdr.sgml : 20050331
<ACCEPTANCE-DATETIME>20050331160234
ACCESSION NUMBER:		0001167687-05-000022
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20041231
FILED AS OF DATE:		20050331
DATE AS OF CHANGE:		20050331

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:		10KSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-32146
		FILM NUMBER:		05720312

	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>10KSB
<SEQUENCE>1
<FILENAME>dmc10ksb123104.htm
<TEXT>
<html>
  <head>
    <title>dmc10ksb123104</title>
  </head>

  <body>
    <div>
      <p align="center"><b><font size="+2">SECURITIES AND EXCHANGE COMMISSION</font><br>
       Washington, D.C. 20549</b></p>

      <p align="center"><b>Form 10-KSB</b></p>

      <p align="center"><b>[X]&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Annual Report under Section 13 or 15(d) of the Securities<br>
       Exchange Act of 1934<br>
      <br>
       For the fiscal year ended December 31, 2004<br>
       or<br>
       [ &nbsp;]&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Transitional Report under Section 13 or 15(d) of the<br>
       Securities Exchange Act of 1934</b></p>

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

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

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

      <div align="center">
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><img width="227" height="73" src="dmc_logo.jpg"></p>
            </td>
          </tr>

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

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

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

      <div align="center">
        <br>


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

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

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

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

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

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

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

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

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

      <div align="center">
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>First Federal Plaza<br>
               28 East Main Street, Suite 1525<br>
               Rochester, New York 14614</b></p>
            </td>
          </tr>

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

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

      <div align="center">
        <br>


        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>(585) 325-3610</b></p>
            </td>
          </tr>

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

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

      <p align="center"><b>Securities registered under Section 12(b) of the Exchange Act: NONE<br>
      <br>
       Securities registered under to Section 12(g) of the Exchange Act:</b></p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p align="center"><b>Common Stock (Par Value - $0.02)</b></p>
            </td>
          </tr>

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

          <tr>
            <td>
              <p align="center">(Title of Class)</p>
            </td>
          </tr>
        </table>
      </div>

      <p><b>CHECK WHETHER THE ISSUER:</b></p>

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

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

      <p>(2) has been subject to such filing requirements for the past 90 days. YES [X]&nbsp;&nbsp;&nbsp; NO [ ]</p>

      <p>Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.&nbsp;&nbsp;[&nbsp; ]</p>

      <p>The Registrant's revenue for the fiscal year ended December 31, 2004: $1,594,768</p>

      <p>The aggregate market value of the stock held by non-affiliates (5,618,592 shares) computed by reference to the closing price of such stock ($ 6.92), as of March 30, 2005, was $38,880,657.</p>

      <p>As of March 30, 2005, there were 12,008,902 shares of Common Stock of Document Security Systems, Inc. outstanding.</p>

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

      <p align="center"><b>PART I</b></p>

      <p><b>ITEM 1 - DESCRIPTION OF BUSINESS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc. ("Document Security" "we" "us" the "Company") is a leader in optical anti-scanning, anti-counterfeiting technologies. We develop, license and sell anti-counterfeiting technology and products. We deliver advanced anti-counterfeiting technology products and solutions for homeland security, governments and law enforcement agencies. We also provide our technology and products to security printers and the check and forms industry and for brand packaging, labels, tickets and to businesses concerned with enhancing security, reducing identity theft and protecting critical financial instruments and vital records. We were organized as a New York corporation in 1984, and in 2002 we acquired several privately owned companies engaged in the document security technology industry.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On August 1, 2002, we acquired all of the corporate stock of Lester Levin, Inc. (d/b/a Patrick Printing and d/b/a Legal Store) from its sole shareholder, Patrick White. Pursuant to the acquisition agreements, Mr. White became our President, Chief Executive Officer, Chief Financial Officer and Chairman.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Also on August 1, 2002, we acquired all of the corporate stock of Thomas M. Wicker Enterprises, Inc., a consulting and document security research and development firm. In connection with the acquisition, we entered into an employment agreement with Mr. Thomas Wicker, the former owner, to be our Chief Technology Officer. Further, on November 1, 2002, we acquired all of the corporate stock of Document Security Consultants, Inc., a privately-held wholesale and retail manufacturer of Wicker 2000 security paper products. As part of this acquisition, we entered into an agreement to employ David Wicker as our Vice President of Operations. We also acquired, at that time, a majority interest in the corporate stock of Imperial Encryptions, Inc.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>


  <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As a result
    of these transactions, we believe that we acquired a combined core business
    with intellectual property, know-how and reputation accumulated over many
    years, which has the potential of making Document Security Systems an important
    participant, if not leader, in the document security and anti-counterfeiting
    industry. The check security technologies that we acquired have been the standard
    for the check and forms industry for over 30 years. These technologies had
    been invented over several years by Ralph Wicker (now deceased) and members
    of his family, including Thomas Wicker and David Wicker, now directors and/or
    officers of Document Security Systems.&nbsp;The Wicker Family was, we believe,
    responsible for the development of the check security technology known as
    the "pantograph."&nbsp; The pantograph technology is used by the check and
    forms industry to secure checks from copying and duplication. We believe that
    the Wicker technology is the basis for protection of many of today's most
    important printed documents such as currency, car titles, checks and prescription
    forms.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In February 2005, we further consolidated our ownership of the Wicker Family based technologies. At that time, we completed the purchase of economic interests and actual ownership from approximately 45 persons and entities in technologies that the Wicker Family has sold over several decades. &nbsp;The technology related to these interests include patent rights and trade secrets in certain document anti-fraud and anti-counterfeiting technology. Document Security Systems was a partial owner or licensee of the technology prior to the completion of the transaction. Prior to completion of the transaction, there were approximately 49 interest holders (other than the Wicker Family) with varying degrees of ownership in the technology. Some interest holders held net rights, others held gross rights and others actual legal ownership and/or expansive licensing rights to the technology.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Further, Document Security Systems, in December 2004, entered into a definitive binding agreement with the Wicker Family, which effectively provides that Document Security Systems has obtained the legal ownership of the same technology (including patent ownership rights) previously held by the Wicker Family. The members of the Wicker Family executing the agreement were:&nbsp; The Estate of Ralph Wicker, Mary Wicker, Thomas Wicker, David Wicker, Christine Wicker, Kenneth Wicker, and Michael Caton. Thomas Wicker serves as an officer and director of Document Security Systems, and his brother, David Wicker, is an officer.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The agreement with the Wicker Family provides that Document Security Systems will retain 70% of the future economic benefit derived from the exploitation of the technology, which may include licensing or royalty rights, patent or other infringement suits or enforcement actions, and the Wicker Family will receive 30% of such economic benefit, on a gross basis. The Wicker Family may not enter into any new assignments or licenses with respect to the technology. The Wicker Family members did not receive any securities of Document Security Systems or other payment for this transaction.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; See further discussion below under <i>"Consolidation of Patent Interests."</i>&nbsp;</p>

      <p><b>Our Core Products, Technology and Services&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our core business is counterfeit document prevention, including government issued documents, currency, private corporate records and securities. Our business plan is aimed at profiting from our technologies and trade secrets through manufacturing and licensing arrangements. We also offer our verification technology to authenticate originals from forgeries. We currently have exclusive and complete ownership of 21 technologies for which patent applications have been made in the United States and 133 other countries through the Patent Cooperation Treaty. These proprietary technologies have provided us with nearly all of our total technology revenue. We also have acquired the complete ownership interests in 3 U.S. patents, a European Patent Office patent that covers 13 European countries, and one Canadian patent for document anti-counterfeit and anti-fraud technology.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp
;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In 2004 we trademarked the name AuthentiGuard&trade; for our various technologies and products. Our full commercial product suite now includes: AuthentiGuard&trade; Block-Out, AuthentiGuard&trade; Pantograph 4000, AuthentiGuard&trade; ObscuraScan, AuthentiGuard&trade; Prism&reg;, AuthentiGuard&trade; Survivor 21, AuthentiGuard&trade; Laser Moir&eacute;, and AuthentiGuard&trade; VeriGlow, AuthentiGuard&trade; Concentric Fine Lines, AuthentiGuard&trade; MicroPerf, and AuthentiGuard&trade; Phantom.</p>

      <p>&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our primary anti-counterfeiting technologies, marketed under the following trade names, are summarized below:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
    </div>

    <blockquote>
      <blockquote>
        <div>
          &middot;&nbsp;AuthentiGuard&trade; LASER MOIR&Eacute; TECHNOLOGY process prevents desktop scanners from imaging documents into computers and software. The technology is embedded into whatever the user wishes to protect from duplication and theft, such as photographs, portraits and backgrounds of currencies or documents. When the document is scanned that contains this hidden security technology, the resulting scan is moir&eacute;d and/or pixilated, in which bars are placed over the image, and colors appear as rainbow wavy-like distortions, which renders the resulting image unusable. Laser Moir&eacute; can protect ID cards, photographs, prints, original art, currency, drivers' licenses, postage stamps, tickets, labels, and brand packaging.
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; PRISM TECHNOLOGY is an authentication technology, as it indicates whether a document is genuine, as opposed to indicating whether it is an unauthorized copy. Prism requires the use of our proprietary handheld plastic verifier. When the verifier is held over a document or image, a multi-color hidden word, symbol, or image is displayed. This technology can hide warning words, codes, logos, images, and symbols into two-color and full color process printed documents. A counterfeiter cannot capture the hidden image when creating a forgery. Therefore, when a handheld plastic verifier is placed over the counterfeited document, the hidden verification image is absent, thereby alerting the user the document is a fake. This technology protects verification forms such as spare parts, packing slips, checks, currency, licenses, travelers' checks, legal documents, tickets, labels, brand packaging, and any full color images such as art prints or color pictures of any sort.
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; Pantograph 4000 is a patented security feature, which alerts users that counterfeiting has taken place. Hidden alert words such as "VOID," "COPY," or "UNAUTHORIZED COPY," or bar codes, logos, or other custom images appear when a handheld verifier is placed on a paper containing the technology or when the secured document is copied, scanned, faxed or reproduced in any form. There are other versions of this technology being sold by competitors but our research indicates that no version other then our pantograph 4000 defeats high and low resolution scanners, produces crisp clear and readable warning words and finally we have the only Safety Paper that defeats today's generation of digital scanning copiers. Customers that may utilize this product include: governments, printers, publishers, schools, financial services providers, pharmaceutical companies, hospitals, engineers and manufacturers. This line of security paper has been approved by several states for writing pres
criptions for controlled substances. Any printable surface can utilize the technology such as paper text and cover, Teslin, PVC, Tyvek and cardboard packaging. This technology has been used for gift certificates, school transcripts, coupons, tickets, checks, packing slips, receipts, schematic drawings, plans, music, scripts, training manuals, business plans, internal memos, letterhead, legal forms, prescription pads, and any other sensitive documents. In 2004 we entered into a North American exclusive paper distribution agreement for our newest Safety Paper, containing Pantograph 4000, with Boise White Paper LLC, a multi-billion dollar distribution company.
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; SURVIVOR 21 is a new technology that verifies the authenticity of electronic check scans which were outlined by the Federal Reserve in a voluntary program called "CHECK 21".&nbsp;&nbsp; This is the latest in our line of pantograph backgrounds that is used exclusively on financial instruments, such as checks. This new program allows banks to end the daily manual sorting and distribution of checks and replace it with scanned images. According to our research, no other pantograph security image on the market survives the banking industry's high-speed check scanning systems. Therefore a bank has no way to determine the validity of a check scan. We built our Survivor 21 icon with our technology and when a check is printed with this feature it is invisible to the human eye but when the check is scanned for transmittal to the originating bank, our icon appears on the scan. In other words it survives the high-speed check processor scanning process. A joint test of this techno
logy with the NCR Corporation was completed in 2004 and provided our company with test samples for our research. The results of those samples proved the survivability of the technology.&nbsp;
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; OBSCURASCAN, A COLOR SEPARATION MULTIPLIER TECHNOLOGY that protects against the counterfeiting of any process color document, package, image or label. We have developed a way of embedding a hidden technology that severely alters images so that printing plates or digital color separations for the four-color process are distorted and therefore unable to re-create the full color image. Our technology multiplies the intensity of the scans for the four primary colors, yellow, magenta, cyan and black which are necessary in producing a full color image. A normal color separation may contain the following percentages of color intensity; 12% yellow, 24% magenta, 19% cyan and 23% black. Our technology magnifies the density of these scans, thus creating a 65% yellow, 71% cyan, 34% magenta and 81% black. When the counterfeiter produces his counterfeits with these settings, the output is a muddy, dark unusable blend of colors. Chattering wavy lines are also produced causing even m
ore distortion.&nbsp;
        </div>

        <div>
          <br>
           &middot;&nbsp;AuthentiGuard&trade; BLOCK-OUT ANTI-COLOR COPY TECHNOLOGY, also called the "anti-color reproduction system". This system prevents color copiers and photo processors from replicating any image that contains our patented block-out image. Our patented copy distortion image triggers a mechanism built by the Omoron Corporation. This trigger mechanism is housed in most color copier models and color photo processors built after 1997. On some models a &nbsp;solid black or barred image is produced. On other color copiers, no copy at all is produced.&nbsp;&nbsp; This technology is capable of being integrated into and protecting highly sensitive government documents such as currency, car titles, passports and licenses as well as checks, travelers' checks, postage stamps, photographs, original art and brand packaging.&nbsp;
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; MICROPERF EMBEDDED PERF IMAGE TECHNOLOGY that can be placed on vital records, documents, packaging or currency and is a micro sized perforation in the shape of a word or image that cannot be removed or altered in any way thereby protecting the authenticity of the original document. A special secure perf plate containing the technology is created with the technology and is applied by a press during the actual printing of the original item. The MicroPerf could replace holographs since they pass the currency crush tests and are a much more controlled technology than the world-wide availability of holographs.&nbsp;
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; PHANTOM EMBOSSMENT TECHNOLOGY that is placed on vital records, documents, packaging or currency. This technology is an embossment of a word or image that can only be seen when the protected item is tilted on a particular angle. When the ghosting appearance becomes visible, it verifies the authenticity of the item. Absence of the phenomena indicates a counterfeit. A special secure Embossment plate containing the technology is created with the technology and is applied during or after the printing process. The Phantom can only be seen when the user tips the protected package, label, currency or document at a particular angle, thus revealing the hidden word, code or symbol. The counterfeiter cannot scan the image since it is not visible by the scanner, thereby making it impossible for the counterfeiter to duplicate the ghosting effect.&nbsp;&nbsp;
        </div>

        <div>
          <br>
           &middot; AuthentiGuard&trade; VERIGLOW INVISIBLE CODE IMAGE TECHNOLOGY that is placed on vital records, documents, packaging or currency and is an invisible area of the document that can only be seen and revealed with our viewing system. The invisible image appears with the viewing system, and its hidden code or image is revealed with a special reading device. This is a two layer security product. First, the invisibility makes it impossible for the counterfeiter to capture or scan the image and secondly, the counterfeiter would have to have the de-coder reading device which releases the hidden code from the invisible area. This technology can be applied during the printing process or it can be applied to pre-printed items. The technology is slated for the protection of world wide currency and pharmaceutical packaging.&nbsp;
        </div>
      </blockquote>
    </blockquote>

    <div>
      <p><b>Security Consulting Services&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our knowledge, experience and expertise enables us to provide document security consulting services to businesses and government agencies for the design and implementation of document security technologies for various sensitive and critical documents, labeling and packaging.</p>

      <p><b>Websites&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We maintain the website, www.documentsecurity.com, which describes our patented document security solutions and offers our security consulting services. We also maintain the website, www.safetypaper.com, which is an e-commerce site, for our patented blank Safety Paper and hand-held security verifiers. These sales are restricted to end users worldwide, and paper distributors and printers outside of North America. In 2005, we will be opening a new website, www.protectedpaper.com, for custom printed document security paper products such as school transcripts, certificates, prescription forms, coupons and gift certificates.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &
nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Revenue Sources&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our core document security business segment has or is intended to have the following revenue sources:</p>
    </div>

    <blockquote>
      <blockquote>

    <div> 1. Licensing Fees and Royalties - generally a one-time licensing fee
      with continuing periodic quarterly or annual royalties based on a percentage
      of sales or a per piece royalty, subject to, in some cases, a minimum payment.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
      &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </div>

        <div>
          <br>
      2. Sales of blank SAFETY PAPER - blank Safety Paper is sold through our
      exclusive distribution agreement with Boise White Paper LLC to wholesale
      paper distributors and printers throughout North America under the brand
      name "Boise Beware."&nbsp; We sell the same Safety Paper to end users anywhere
      in the world and paper distributors and printers outside North America.
      We also sell custom Safety Paper throughout the world.&nbsp;Boise White
      Paper LLC is developing a retail sales strategy for the product. We also
      sell the product on Internet websites. Pricing is determined on mark-up
      from cost. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    </div>
      </blockquote>
    </blockquote>

    <div>
      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The revenue we receive from our commercial printing operation is viewed by us as a convenient means to reduce the cost of maintaining our research and development facilities. As to revenues we receive from the sale of legal supplies, other than the sale of Safety Paper, we consider this a source that is unrelated to our core business operation, as well as our former motion picture operations.&nbsp;&nbsp;&nbsp;</p>

      <p><b>Patents and Trademarks&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p><b>Patents</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our ability to compete effectively will depend in part on our ability to maintain the proprietary nature of our technology, products and manufacturing processes. We principally rely upon patent, trademark, and contract law to establish and protect our proprietary rights. The success of our business will depend, in part, on our proprietary technology and our protection of that technology.&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; It is our intention to use all legal means to protect our ownership of these technologies. We intend to be very aggressive in all of our protection efforts. We cannot assure you that our efforts to prevent the misappropriation of the intellectual property used in our business will be successful. Further, we cannot assure you that any patents will be issued for our U.S. or foreign applications or that, if issued, they will provide protection against competitive technologies or will be held valid and enforceable if challenged. Finally, we cannot assure you that competitors would not be able to design around any such proprietary right or obtain rights that we would need to license or design around in order to practice under these patents.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the past fiscal year, we have significantly expanded our patent and patent pending portfolios of covert anti-counterfeiting and authentication technologies. In addition, we maintain a portfolio of trade secrets that we developed. We have a number of U.S. and foreign patent applications for securing documents and for our survivable electronic check image for the "Check 21" program instituted by the Federal Reserve.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; It is our ongoing policy of filing patent applications to seek protection for novel features of our products. We believe that our patents are important to both our anti-counterfeiting and verification businesses. Our U. S. patents typically have a 17-year duration.&nbsp;</p>

      <p><b>Trademarks</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have registered our "AuthentiGuard" trademark, as well as our "Survivor 21" electronic check icon, and the term "Safety Paper," with the U.S. Patent and Trademark Office. Applications are pending in Europe and Canada for "AuthentiGuard."</p>

      <p><b>Patent Applications</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Currently, Document Security Systems has three formal patent applications with the United States, Canada and countries included in the Patent Cooperation Treaty (PCT), which includes Europe, Australia, Japan, South Africa, China and approximately 120 additional foreign countries. In addition we have formal provisional patents filed with the same countries for two additional technologies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The applications cover 18 different technologies. Included are our AuthentiGuard&trade; ObscuraScan, AuthentiGuard&trade; Survivor 21, AuthentiGuard&trade; VeriGlow and 15 other anti-counterfeiting technologies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As in any technology-sensitive business, there is a risk that claims allowed on any patents or trademarks held by us may not be broad enough to protect our technology or proprietary interests. In addition, our patents or trademarks may be challenged, invalidated or circumvented and we cannot be certain that the rights granted will provide us with competitive advantages. The loss of patent or trademark protection on our technology or the circumvention of our patent or trademark protection by competitors could have a material adverse effect on our business, operating results, financial condition, stock price and on our ability to compete successfully. We cannot be certain that any existing or future patent or trademark applications will result in issued patents or trademarks with the scope of the claims sought by us, or at all. Moreover, any current or future issued or licensed patents may not afford sufficient protection against compe
titors with similar technologies or processes, and the possibility exists that already issued patents may infringe upon or be designed around by others. In addition, there is a risk that others will independently develop proprietary technologies and processes which are the same as or substantially equivalent or superior to ours. There is even a risk that we have infringed, or will in the future infringe patents or trademarks owned by others, that we will need to develop non-infringing technology or acquire licenses under patents or trademarks belonging to others for technology potentially useful or necessary to us, and that such licenses may not be available to us on acceptable terms, if at all.</p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We may have to litigate to enforce our patents or to determine the scope and validity of other parties' proprietary rights. Litigation could be costly and divert our management's attention. An adverse outcome in any litigation may have a severe negative impact on our business, operating results, financial condition, stock price and on our ability to compete successfully. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office or oppositions in foreign patent and trademark offices, which could result in substantial cost to us and could result in limitations on the scope or validity of our patents or trademarks.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality agreements with our employees, consultants and third parties. There is a risk that these agreements may be breached, and that remedies available to us will be inadequate. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. A failure by us to protect our trade secrets, proprietary know-how and other intellectual property in a meaningful manner could have a material adverse effect on our business.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In October 2003, we entered into an agreement with IDT Venture Capital Corporation, a subsidiary of IDT Corporation. Pursuant to that agreement, IDT Venture Capital Corporation agreed to pay on our behalf certain legal costs incurred by us in auditing our intellectual property rights. In consideration for this agreement, we issued to IDT 500,000 common stock warrants and 100,000 shares of common stock.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Patent and Technology Ownership&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We entered into the anti-counterfeiting and authentication business when we acquired our subsidiaries in the second and third quarters of 2002, as discussed above. The subsidiaries and their former shareholders owned partial interests in certain technology, trade secrets and patents. Thomas Wicker, who is our Chief Technology Officer, is the son of the late Ralph Wicker, an inventor who focused his talents on anti-counterfeiting technology that would work with copiers and scanners. The original United States patents owned by Ralph Wicker were Patent No. 5,018,767 (granted in May, 1991) and 5,193,853 (granted in March, 1993).&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nb
sp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Patent No. 5,018,767 is a Process patent for the method of making counterfeit-proof images in documents. Using this process, replication produced by a scanner, copier or an electro-optical device, with a specific scanning protocol, is distorted in color or pattern. Patent No. 5,193,853 is a Product patent for a press printed document designed to be counterfeit- resistant and is based on the principles in Patent No. 5,018,767 The document produces a distortion in the color or pattern when the document is being copied on a copier, scanner or similar device. By way of further explanation, the document contains an image (such as VOID) that is not visible to the naked eye but becomes visible when the document is copied.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Several years prior to our acquisition of the intellectual property, the Wickers filed suit against the U.S. government claiming patent infringement on the use of their intellectual property on the newly designed U. S. $100 bill denomination that was distributed to the public for the first time in 1996. &nbsp;</p>


  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In 1999,
    the Court ruled that certain claims of U.S. Patent 5,193,853 were invalid
    because the Court determined there were two prior art European patents. The
    Wickers later allowed this patent to lapse. The Court further ruled that certain
    claims of U.S. Patent 5,018,767 were also invalid due to the existence of
    this prior art.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; It should be noted that the prior art patents were later reviewed by the European Patent Office when they were cited by the Wickers in a counterpart EPO patent application. The Technical Board of Appeals of the EPO ruled that the Wickers' technology was patentable over the two prior art patents cited in the U.S. case. The Wickers were unable to use this finding in their appeal of the U.S. decision since it was discovered after the trial and therefore not allowed in the appeal process.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We believe that the European patent that we now own containing the same anti-counterfeiting currency protection technology is therefore in force and fully valid.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Consolidation of Patent Interests</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Effective January 1, 2004, we amended the November 2002 agreement in which we acquired Document Security Consultants, Inc. and Imperial Encryption, Inc. from members of the Wicker Family. That original agreement provided that we share with them on a 50/50 basis all future royalties generated from 16 license agreements. As part of the amendment, we paid the Wicker Family members $90,000 in exchange for their relinquishing the rights to their share of the future royalties. This was a one-time payment and we now receive 100% of all royalties generated from the original 16 licensees.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As discussed above, effective February 25, 2005, we purchased the various legal ownership and economic interests in certain technology (patents and trade secrets) from 44 "Interest Holders" who had purchased these interests in the technology from the original inventors of the technology, Ralph C. Wicker&nbsp; (deceased) and members of his family. The technology related to these interests includes patent rights and trade secrets in certain document anti-fraud and anti-counterfeiting technology. We were a partial owner or licensee of the technology prior to the completion of the transaction.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Prior to completion of this transaction, there were approximately 49 interest holders (other than the Wicker Family) with varying degrees of ownership in the technology. Some Interest Holders held "net" economic rights, others held "gross" economic rights and others had actual legal ownership and/or expansive licensing rights to the technology.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In December 2004, we also entered into a definitive binding agreement with the Wicker Family which effectively provides that we have obtained the legal ownership of the same technology (including patent ownership rights) previously held by the Wicker Family.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The agreement with the Wicker Family provides that we will retain 70% of the future economic benefit derived from the exploitation of the technology, which may include licensing or royalty rights, patent or other infringement suits or enforcement actions, and the Wicker Family will receive 30% of such economic benefit, on a gross basis. By purchasing various economic rights from the "net" and "gross" interest holders, we will be entitled to additional future economic benefit from the Wicker Family's 30% portion. The Wicker Family may not enter into any new assignments or licenses with respect to the technology.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We sought to purchase these interests in order to centralize ownership of the technology, which we believe will allow for more coordinated protection and enforcement of the technology rights, and allow for greater exploitation of the rights. We were not able to reach an agreement with approximately five Interest Holders and are continuing negotiations with two additional Interest Holders. Any gross or net Interest Holder who does not or has not completed the transaction with us will continue to have their rights under their original license agreements with the Wicker Family.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We jointly own Patent No. 5,707,083 with R.R. Donnelly. Under the terms of our agreement with R.R. Donnelly, it has no rights in any revenue generated by us through the technology represented by the patent. R.R. Donnelly may license the technology but is required to split any revenue with us after costs associated with any licensing. RR Donnelly has licensed technology from us and the Wicker Group related to Patent 5,018,767 for several years.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are continually and aggressively developing new and improved technologies. We currently have several formal and provisional patent applications filed with the U.S. and under the Patent Cooperation Treaty for foreign approvals.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We cannot be assured that our applications will be approved. We believe that the technologies are unique and that they are all "first-of-a-kind." We plan to continue to research and develop exclusive technologies mainly in the document security field.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Licensing Agreements&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We expect to exploit our anti-counterfeiting technology and trade secrets through licensing arrangements with potential customers, including government entities and private companies. Our technology can be utilized in protecting against counterfeiting and unauthorized copying or creation of many different forms of documents, including corporate documents such as internal reports or memorandums, paper currency, identification records and securities. In 2004 we added three new licensees and we eliminated five licensees for breach of contract or by mutual agreement. To date, the licensing fees and royalties we have received have been minimal. We anticipate that we will be able to significantly increase our licensing activity in 2005 since a portion of the 80 plus companies testing our various technologies have expressed interest in entering contract negotiations. One of our business strategies is to only license pre-qualified candidates
 that meet certain pre-established size and capabilities criteria. We only want to license companies that have the highest regard for security and have reputations for quality production standards. We are also in negotiations with some large end users of the technology where they have the right to print under their technology at their security printer of choice. This business segment is dynamic and we are continuing to review this portion of our business model.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Revenue from Licensing can take several forms. Licenses can be for a single technology or for a package of technologies.&nbsp;&nbsp; Licensee's can choose from a variety of payment models:</p>
    </div>

    <blockquote>
      <blockquote>
        <div>
          &middot; Pay one price per year &ndash; Licensee will estimate their annual usage and a single payment is paid and reviewed each year based on actual results.&nbsp;
        </div>

        <div>
          <br>
           &middot; Pay a percentage of sales of the technology &ndash; Licensees only pay as they sell product containing the technology. If, for example, they sell $1 million in our security technology printing, they would pay us from 3.5% to 10% of the sales price of their jobs.
        </div>

        <div>
          <br>
           &middot; Pay on a per piece method &ndash; Licensees pay royalties based on a price per piece.&nbsp;&nbsp; A pre-determined price schedule is implemented based on job volumes and a per-piece price is utilized. The higher the volume, the lower the price.
        </div>
      </blockquote>
    </blockquote>

    <div>
      <p><b>Commercial Printing&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In August 2002, we acquired the business of the Rochester, New York commercial printing firm (Lester Levin Inc.) that operates under the trade name Patrick Printing. The purpose of our acquisition of Patrick Printing was to obtain access to a facility for our research and development activities for the document security and anti-counterfeiting business. Although the revenue of the Patrick Printing business segment was significant in relation to our total net revenue in fiscal year 2004, we regard the ownership of Patrick Printing as providing us with research facilities in a non-laboratory environment, in which we are able to deal with actual customers while also enabling us to offset the costs of our research by the gross profit, if any, generated from commercial printing.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although we operate the Patrick Printing business segment with a view to operate profitably, our first priority is to have available the necessary equipment and facilities to accomplish what we perceive as our business purpose or corporate mission: "to be a customer-driven leader; inventing and providing security technology which solves current and future commercial and governmental customer needs in the fields of document security and authentication, anti-counterfeiting, brand and copyright protection."&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We presently believe that our ownership of Patrick Printing facilitates and minimizes the cost of our research and development efforts in a highly confidential environment. However, if we are able to continue to maintain the confidential nature of our research, we may in the future sell or outsource the commercial printing operation but retain the ability to make economical use of the "working lab."</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We maintain www.patrickprinting.com as our website for the Patrick Printing business.</p>

      <p><b>Non-Related Businesses</b></p>

      <p><b>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Legal Supplies Business</b></p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As part of the purchase of our printing operation, we acquired a business that sells legal forms and supplies to attorneys and law firms. This segment of our company, which now trades under the name The Legal Store, generates a significant part of its business via its e-commerce website, www.legalstore.com. Although our printing division provides The Legal Store operation with printing services and security products for resale to the legal profession, we do not consider The Legal Store as a part of our core operation. We now have under review the various options for the future direction of this business.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp
;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Sales and Marketing&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In 2004 we continued to allocate resources for the development of sales materials, trademarks and a major upgrade of our corporate website. We feel that we are an early market stage company. We deal with a very dynamic and ever changing portfolio of products and processes. After we develop and test our new intellectual property, our first step to bring it to market begins when we develop trade names and trademarks for the technology. Once we determined that we had a portfolio of products, but no real brand awareness to tie it all together, we decided to allocate some of our financial resources to market research to develop our brand name that describes what we, as a company, provide to the marketplace. After a significant amount of time and resources, we chose to trademark the term "AuthentiGuard&trade;."&nbsp; We believe that the name is synonymous with our products and processes. All of our technologies perform two functions. They authe
nticate originals and they also protect and guard originals from duplication and counterfeiting. "AuthentiGuard&trade;" is now utilized as our company's brand name. We have trademarked it in the United States, Canada, Europe and parts of Africa. Our next task was to develop the brand look or logo. When that was completed, we then changed the name of our product suite of products and processes by accenting each technology name with the "AuthentiGuard&trade;" name by preceding each product and process name. For example, we have "AuthentiGuard&trade; Phantom" as well as "AuthentiGuard&trade; Prism" and "AuthentiGuard&trade; VeriGlow."&nbsp;&nbsp; As an example of usage of the logo for "AuthentiGuard&trade;", Boise White Paper LLC agreed to co-brand our technology as they had the logo placed on the cover of their "Boise Beware" Safety Paper packages.&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We also undertook a complete re-design of our corporate website. The goals of our website re-design were to develop a more professional look, prominently display our new brand names, educate clients on our portfolio suite of products, communicate with our investors and improve the site's availability for search engines. We maintain www.documentsecurity.com as our corporate website.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At the conclusion of 2004, we announced the signing of an exclusive licensing and marketing agreement with Boise White Paper LLC ("Boise") whereby Boise markets and sells our blank Safety Paper on an exclusive basis in North America. The process included working closely with Boise on various types of market research and the development of their brand name and associated packaging. We believe our efforts in this area have helped Boise create a new exciting product that will be highly successful in the market place. Sales from the product began in December 2004.&nbsp;</p>


  <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We expect 2005
    will be a turning point for our company. We will move from product and brand
    development to a year in which we hope to complete revenue generating agreements
    with the over 80 companies that have been testing our various technologies.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We recently announced an agreement with Digicomp Inc., a highly regarded software development company that specializes in technology applications for the check and forms industry, to create user friendly software versions of our AuthentiGuard&trade; product suite. Among other objectives, this company will greatly reduce the time that potential customers take reviewing and testing the technology by eliminating many of the equipment settings printers need to make before they can begin printing samples. Also, this software will greatly enhance accounting and control. Another feature of the software will also allow our technology to easily "talk" to the new generation of digital variable data printing engines such as the Xerox IGEN, Kodak Versamark and the Hewlett Packard Indigo machines. Our software will allow these machines to print safe secure financial instruments such as gift certificates, checks, rebates, etc., with several of our most
 potent technologies.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In 2005, we believe the real impact will be felt from our North American exclusive safety paper (Boise Beware) agreement with Boise. The product roll-out began in March 2005 when Boise began educating its sales force and providing their sales people with samples and pricing. Current plans for mid-2005 include the placement of the product in more than 900 OfficeMax stores in the U.S. and in the Grand and Toy stores in Canada. This will include the support of a relatively large marketing campaign. The CopyMax retail copy operations located inside or near the Office Max stores are also expected to be selling and recommending the "Boise Beware" paper product line to its copy customers.</p>

      <p>&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; One of our objectives for the coming fiscal year is to redesign our pricing models to optimize our profit potential. This may include further changes to or refinements to our licensing programs. We are considering, among other things, a "pay one price model" which gives us a more predictable and controllable income stream. We may also consider the actual manufacturing of secure printing products on behalf of end users and vendors. Manufacturing has lower margins but the sales are significantly higher. We think these and other pricing options we are developing will drive a more profitable business model for our company.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We recently engaged Martin, Fisher, Thompson Associates, a Washington D.C. lobbying group to represent us and our technologies with Federal departments, agencies and associations.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We will be reorganizing and expanding our sales operation to accommodate all of our 2005 initiatives. We have recently hired a former Oracle Corporation national account sales representative to head our sales organization. This person will work closely with our CEO to help design new revenue models and expand our sales efforts by bringing our products and processes to the world's largest companies and governments.&nbsp;</p>

      <p><b>Competition&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our industry is highly competitive and characterized by rapid technological change and product innovations and evolving standards. Many of our competitors have longer operating histories, more established products, greater name recognition, larger customer bases, and greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products. Competition may also force us to decrease the price of our products and services. There is no assurance that we will be successful in developing and introducing new technology on a timely basis, new products with enhanced features, or that these products, if introduced, will enable us to establish selling prices and gross margins at profitable levels.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbs
p;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although our technology is effective primarily on analog and digital copiers and scanners, our competition covers a wide array of document security and anti-counterfeiting solutions. We are constantly conducting research and development to improve our technology, including the development of new patents and trade secrets. We will rely upon our patents and trade secrets to attempt to thwart competition, although there can be no assurance that we will be successful.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Some of our competition includes Standard Register Company, who specializes in printing security technologies for the check and forms and medical industries. Another competitor is the international security printing firm, De La Rue Plc, that specializes in printing secure currency, tickets, labels, lottery tickets and vital records for governments and Fortune 500 companies.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Xerox, an industry leader in copying and scanning, has made recent entries into the anti-counterfeiting arena. One such product requires a blue or red light for its identifier. Xerox has also announced a special toner and is calling the prints from this special toner "Holographs," which we believe that by definition, are not true holographs. In our opinion, a better term to define this technology is the use of "clear-coat varnish," which Xerox is applying as a toner from a copy machine rather than from the traditional printing press.&nbsp;&nbsp; Xerox also has a competing Safety Paper product called "X Void."&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other competing hidden word technologies that are being marketed by competitors include the "Big Dot" and "Little Dot" technology, which we believe is not effective in high-level modern digital copiers. Also, our studies indicate that use of thermo-chromatic or heat sensitive inks wear out quickly and are not useful in warm climates.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Digital watermarks are also being introduced into the marketplace by Digimarc Corporation and MediaSec Technologies LLC. These digital protection systems require software and hardware such as scanners and computers to implement and utilize the technology and consequently, this technology must be utilized in a controlled environment with the necessary equipment to create the verification process.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Employees</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have 21 full-time employees, two of which are executive officers, and we have one independent consultant. It is important that we continue to retain and attract qualified management and technical personnel. Our employees are not covered by any collective bargaining agreement and we believe that our relations with our employees are good.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Government Regulation</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In light of the events of September 11, 2001 and the subsequent war on terrorism, governments, private entities and individuals have become more aware of, and concerned with, the problems related with counterfeit documents. Homeland Security is still a high priority in the United States. While there are no specific regulations or laws, which directly impact our business, this new heightened awareness may result in new laws or regulations which could impact our business. We believe, however, that any such laws or regulations would be aimed at requiring or promoting anti-counterfeiting, and therefore would have a positive impact on our business plans.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>ITEM 2 - PROPERTY</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our executive and administrative offices are located in the First Federal Plaza Building, 28 East Main Street, Rochester, New York 14614. We currently sublease approximately 4,700 square feet of office space under a master lease, which expires in May 2006, at a cost of approximately $3,900 per month. We also rent approximately 3,000 square feet of additional space in downtown Rochester for our printing and supplies businesses under leases expiring in 2006 and 2008. Our total rent expense for the second space is approximately $4,260 per month. We believe our facilities are adequate for our current operations.</p>

      <p><b>ITEM 3 - LEGAL PROCEEDINGS&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 31, 2003, we commenced an action entitled "NEW SKY COMMUNICATIONS, INC., AS SUCCESSOR-IN-INTEREST TO THOMAS M. WICKER, THOMAS M. WICKER ENTERPRISES, INC. AND DOCUMENT SECURITY CONSULTANTS V. ADLER TECHNOLOGIES, INC. N/K/A ADLERTECH INTERNATIONAL, INC. AND ANDREW MCTAGGERT" (U.S. DISTRICT COURT, WESTERN DISTRICT OF NEW YORK CASE NO. 03-CV-6044T (F)) regarding certain intellectual property in which we have an interest. We brought suit alleging various causes of action against Adler Technologies, Inc. ("Adler") and Andrew McTaggert ("McTaggert") for breach of contract, breach of the duty of good faith and fair dealing and various business torts. Adler distributes and supplies anti-counterfeit currency devices and McTaggert is a principal of, and the primary contact at, Adler. Adler had entered into several agreements with Thomas M. Wicker Enterprises and Document Security Consultants, both of which were acquired by us in 2002
. These agreements, generally, authorized Adler to manufacture in Canada our "Checkmate(R)" patented system for verifying the authenticity of currency and documents. Other agreements were entered into between the parties and Thomas Wicker regarding other technology owned by Wicker and assigned to us including "Archangel," an anti-copy technology, and "Blockade," which creates a wave pattern on documents when they are reproduced or scanned. It is our contention that Adler breached&nbsp;&nbsp; these agreements, failed to make an appropriate accounting, and may have exceeded the scope of its license. Adler has denied the material allegations of the complaint and has counterclaimed that it owns or co-owns or has a license to use certain of our technology, including several U.S. patents.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The case is in the discovery phase and it is too soon to determine how the various issues raised by the lawsuit will be resolved. There can be no assurance that we will be successful in our suit against Adler and McTaggert or that Adler's counterclaims will not be upheld. If Adler is successful in all of its counterclaims, we may be adversely affected in our ability to market certain technology</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We will be undertaking significant patent enforcement projects in 2005. We have acquired a legal team and performed the due diligence and intelligence gathering necessary to accomplish this task.&nbsp;&nbsp; Patent enforcement will be critical and a high-priority project for our company in the coming year.</p>

      <p><b>ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our Annual Meeting of Shareholders was held on December 17, 2004. The matters before the shareholders for vote, as described in our Proxy Statement dated as of November 11, 2004 were:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1. The election of six persons to the Board of Directors;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2. The approval of the 2004 Employee Stock Option Plan and all options granted to date; and</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3. The approval of the 2004 Non-executive Director Stock Option Plan and all options granted to date.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Shareholders of record as of November 8, 2004 were entitled to attend and vote at the meeting. As of the record date of November 8, 2004, there were 10,926,818 shares of Common Stock outstanding. Shareholders representing 9,303,548 shares were present for quorum purposes in person or by proxy.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All of the matters before the Meeting were approved by the shareholders. The results of the voting were as follows:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1. Election of Directors</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="147" valign="bottom">
              <p><b>Name of Nominee</b></p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="center"><b>Votes<br>
               For</b></p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="center"><b>Votes Withheld</b></p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p>Patrick White</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="right">9,296,160</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="right">7,388</p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p>Thomas Wicker</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="right">9,296,206</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="right">7,342</p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p>Alan E. Harrison</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="right">9,296,161</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="right">7,387</p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p>Timothy Ashman</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="right">9,296,141</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="right">7,407</p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p>Robert Fagenson</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="right">9,296,160</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="right">7,388</p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p>Ira A. Greenstein</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="right">9,296,125</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="right">7,423</p>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The directors were elected for terms of one year. The Board is comprised of a total of six persons.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2. Approval of 2004 Employee Stock Option Plan</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="147" valign="top">
              <p align="center"><b>Votes<br>
               For</b></p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="center"><b>Votes Against</b></p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="center"><b>Votes Withheld</b></p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p align="center">8,305,217</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="center">58,030</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="center">940,301</p>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3. Approval of 2004 Non-Executive Director Plan</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="147" valign="top">
              <p align="center"><b>Votes<br>
               For</b></p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="center"><b>Votes Against</b></p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="center"><b>Votes Withheld</b></p>
            </td>
          </tr>

          <tr>
            <td width="147" valign="top">&nbsp;</td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">&nbsp;</td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">&nbsp;</td>
          </tr>

          <tr>
            <td width="147" valign="top">
              <p align="center">8,166,145</p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td width="84" valign="top">
              <p align="center">199,604</p>
            </td>

            <td width="35" valign="top">&nbsp;</td>

            <td width="95" valign="top">
              <p align="center">937,799</p>
            </td>
          </tr>
        </table>
      </div>

      <p><b>ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our common stock is listed on the American Stock Exchange, where it trades under the symbol "DMC." Prior to April 22, 2004, our common stock was traded on the OTC Bulletin Board.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following table sets forth the high and low closing prices for the shares of our common stock, for the periods indicated.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td valign="top">
              <p><b>QUARTER ENDING</b></p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td valign="top">
              <p align="right"><b>HIGH</b></p>
            </td>

            <td width="40" valign="top">&nbsp;</td>

            <td valign="top">
              <p align="right"><b>LOW</b></p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>March 31, 2003</p>
            </td>

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

            <td valign="top">
              <p align="right">$2.30</p>
            </td>

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

            <td valign="top">
              <p align="right">$0.70</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>June 30, 2003</p>
            </td>

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

            <td valign="top">
              <p align="right">2.30</p>
            </td>

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

            <td valign="top">
              <p align="right">1.50</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>September 30, 2003</p>
            </td>

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

            <td valign="top">
              <p align="right">7.00</p>
            </td>

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

            <td valign="top">
              <p align="right">2.10</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>December 31, 2003</p>
            </td>

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

            <td valign="top">
              <p align="right">5.10</p>
            </td>

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

            <td valign="top">
              <p align="right">3.50</p>
            </td>
          </tr>

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

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

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

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

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

          <tr>
            <td valign="top">
              <p><b>QUARTER ENDING</b></p>
            </td>

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

            <td valign="top">
              <p align="right"><b>HIGH</b></p>
            </td>

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

            <td valign="top">
              <p align="right"><b>LOW</b></p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>March 31, 2004</p>
            </td>

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

            <td valign="top">
              <p align="right">$7.00</p>
            </td>

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

            <td valign="top">
              <p align="right">$4.15</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>June 30, 2004</p>
            </td>

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

            <td valign="top">
              <p align="right">9.90</p>
            </td>

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

            <td valign="top">
              <p align="right">5.40</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>September 30, 2004</p>
            </td>

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

            <td valign="top">
              <p align="right">9.80</p>
            </td>

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

            <td valign="top">
              <p align="right">5.15</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>December 31, 2004</p>
            </td>

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

            <td valign="top">
              <p align="right">7.83</p>
            </td>

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

            <td valign="top">
              <p align="right">5.26</p>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On March 24, 2005 our Common Stock had a high of $6.80 and a low of $6.72 and a closing price of $6.79.</p>

      <p><b>Issued and Outstanding</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our certificate of incorporation authorizes 200,000,000 shares of common stock, par value $0.02. As of March 30, 2005, we had 12,008,902 shares of common stock, issued and outstanding.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Recent Issuances of Unregistered Securities</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Shares Issued For Services</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During 2004, we issued a total of 58,000 shares of our common stock in payment for services. Of this total, 18,000 shares were issued to employees pursuant to a previously determined vesting schedule and were valued at $3,840, which represented the market value at the date of the grant; and we also issued 40,000 shares of common stock in satisfaction of an outstanding obligation for services which were rendered in 2003. The expense for the services was recorded as an accrued expense payable in December 2003 in the amount of $190,601, or $4.76 per share, which approximated the market value of the securities at the time the liability was recorded.&nbsp;&nbsp;All of the shares issued for services were issued without registration in reliance on an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended, and were restricted as to transferability.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Shares Issued for Purchase of Patent Interests</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In January 2005, we commenced an offer to acquire various patent interests from approximately 42 persons and entities who had purchased these interests in the technology from the original inventors of the technology, Ralph C. Wicker (deceased) and members of the Wicker Family. We issued a total of 541,460 shares of our Common Stock for the rights of the various interest holders who accepted the offer. The total aggregate cost of the acquisition of the interests from the Interest Holders is expected to be approximately $4,228,000. The value of the shares of our Common Stock was determined based upon the price of our Common Stock on the earlier of the date that the Interest Holder delivered their acceptance of the offer to us, or February 15, 2005. The closing price of the shares of our Common Stock on the American Stock Exchange on February 15, 2005 was $7.25 per share. The shares issued in the transaction are "restricted securities" 
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 have agreed to file a registration statement with the Securities and Exchange Commission on or before June 1, 2005 to register for resale 20% of the shares that were received by each Interest Holder.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Securities Authorized For Issuance under Equity Compensation Plans</b></p>


  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following
    table provides summary information as of December&nbsp;31, 2004 for all of
    our stock option plans and other outstanding options and warrants issued as
    compensation. See<em> Item 10 - Executive Compensation - Stock Option Plans
    </em>of this Form 10-KSB and <i>Note&nbsp;6</i> to our consolidated financial
    statements for additional discussion.</p>

      <p align="center"><strong>Equity Compensation Plan Information</strong></p>


  <table border="0" align="center" cellpadding="0" cellspacing="0">
    <tr valign="bottom">
          <td>
            <p align="left"><b>Plan category</b></p>
          </td>

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

          <td>
            <p align="center"><b>Number of securities<br>
             to be issued upon<br>
             exercise of outstanding<br>
             options, warrants<br>
             and rights</b></p>
          </td>

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

          <td>
            <p align="center"><b>Weighted average<br>
             exercise price of<br>
             outstanding options,<br>
             warrants and rights</b></p>
          </td>

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

          <td>
            <p align="center"><b>Number of securities<br>
             remaining available<br>
             for future issuance</b></p>
          </td>
        </tr>

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

          <td>&nbsp;</td>

          <td>
            <hr noshade>
          </td>

          <td>&nbsp;</td>

          <td>
            <hr noshade>
          </td>

          <td>&nbsp;</td>

          <td>
            <hr noshade>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>Equity compensation plans approved by security holders</p>
          </td>

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

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

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

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

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

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

        <tr>
          <td valign="top" nowrap>
            <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2004 Employee Stock Option Plan</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">63,000</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">$&nbsp;&nbsp; 6.48</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">137,000</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2004 Non-Executive Director Plan</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">23,750</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">4.59</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">76,250</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>Equity compensation plans not approved by security holders</p>
          </td>

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


      <td valign="top" nowrap> </td>

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


      <td valign="top" nowrap> </td>

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


      <td valign="top" nowrap> </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Contractual option grants
          for services<sup>(1)</sup></p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">1,032,500</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">3.29</p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right">-</p>
          </td>
        </tr>

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

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


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

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


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

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


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

        <tr>
          <td valign="top" nowrap>
            <p><strong>Total</strong></p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right"><strong>1,119,250</strong></p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right"><strong>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; $&nbsp;&nbsp; 3.50</strong></p>
          </td>

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


      <td valign="top" nowrap>
        <p align="right"><strong>213,250</strong></p>
          </td>
        </tr>
      </table>


  <br>
  &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1) All of
  these options/warrants were issued during fiscal year 2003. Of such 1,032,500
  grants, 500,000 were exercised in March 2005 and are no longer outstanding.<br>
  <p><b>Stockholders</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As of March 24, 2005, we had approximately 8,000 beneficial owners of our common stock and 4,379 record holders.</p>

      <p><b>Dividends</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have never paid a dividend nor do we intend to pay a dividend on our common stock in the near-term. We plan to use all of our earnings, if any, for working capital.</p>

      <p><b>Stock Transfer Agent and Warrant Agent</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our stock transfer agent is American Stock Transfer &amp; Trust Co., 6201 15th Avenue, Brooklyn, NY 11219. We act as our own warrant agent for our outstanding warrants.</p>

      <p><b>Share Repurchased by the Registrant</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have not purchased or repurchased any of our securities in the fiscal year ended December 31, 2004 including the fourth quarter.</p>

      <p><b>ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION</b></p>

      <p><b>Forward-Looking Statements</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Except for the historical information contained herein, this report contains forward-looking statements (identified by the words "estimate," "project," "anticipate," "plan," "expect," "intend," "believe," "hope," "strategy" and similar expressions), which are based on our current expectations and speak only as of the date made. These forward-looking statements are subject to various risks, uncertainties and factors, including, without limitation, those described below that could cause actual results to differ materially from the results anticipated in the forward-looking statements.</p>

      <p><b>Overview</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are a supplier of document security technology. We supply document security technology to security printers, corporations and governments primarily in the United States. Some examples of the wide range of uses for our technology are 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, consumer product and pharmaceutical packaging, tickets, checks, and school transcripts.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We entered this market by acquisition during the second half of 2002. The majority of our technology revenue will come from multi-year contracts with security printers who pay for the technology, based either on a percentage of the sales price of the printed secure document or on a pre-negotiated per-piece royalty. In addition, we sell and manufacture Safety Paper through third-party licensees. Beginning in January 2005, our branded Safety Paper is being distributed by Boise White Paper LLC on an exclusive basis throughout North America. 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 file. We believe we are one of the leading providers of safety paper. Our patented version of the paper was recently successfully test
ed on the new generation of check scanners, which are being installed in financial institutions.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We expect that our new technologies developed in 2003 and 2004 will result in additional revenue during fiscal 2005. 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 expect that our technologies will be embedded on pharmaceutical packaging, consumer product packaging, checks, and currencies.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In fiscal 2004, we invested nearly $422,000 in research and development efforts. We also spent approximately $361,000 for the acquisition of patent interests, which included $90,000 for the acquisition of future royalty fees on certain licensing agreements and $271,000 for patent legal fees associated with the patent applications, &nbsp;acquisition of new patents, and economic rights. Our research and development costs are treated as an expense of operations while the direct payments for obtaining patents is capitalized as an asset on our balance sheet. In 2005, we have continued to consolidate our patent portfolio by acquiring various economic and patent ownership interests for approximately $4.2 million of our stock. We believe we now have the flexibility to take full advantage of the worldwide need for our products and technologies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We made significant marketing advances in 2004 by consolidating our products for marketing under the new AuthentiGuard&trade; brand, which we believe will be much more recognizable in the coming year. Marketing expenses in 2004 were up more than 150% to approximately $333,000.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We intend to increase our revenues by expanding the uses for our Safety Paper to a wide range of industries, both in North America and internationally and expect to benefit from our new distribution agreements. We plan to actively seek revenue from government agencies, commercial printers, packaging companies, publishers, engineers, the gaming, medical, financial, and pharmaceutical industries, schools and colleges.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Additional revenue is generated from the sale of printing and specialty office supplies to the legal profession. The principal purpose of these non-core sales is to provide a testing ground for our products and to offset research and development costs associated with the development of our technologies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We expect that the licensing of our various document security technologies will begin in 2005 to show significant increases in royalty income. In addition, we will seek to form business alliances and joint ventures with other document security companies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; By aggressively enforcing our intellectual property rights, we believe that we will be able to secure additional and ongoing revenue.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our market development strategy is to provide our product and technologies to large volume document users and packaging distributors at a fair and competitive price. We intend to minimize barriers to adoption and encourage the broad-based deployment of our technologies. For example, the Federal Aviation Administration approved one of our technologies for our aerospace clients who utilize our technology in their spare parts order forms and packing slips. We intend to license similar documents, such as world currencies and products for the personal identification document market. Our goal is to significantly increase revenue during the next two to three years.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Since our entry into the document security industry, we have invested a significant portion of our resources and capital in formulating our infrastructure, developing our products and technology and building our sales and marketing organizations. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with early stage technology and applications.</p>

      <p><b>RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDING DECEMBER 31, 2004 AND DECEMBER 31, 2003</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report.</p>

      <p><b>Sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the fiscal year ending December 31, 2004, we had net sales of $1,594,768. This represents an increase of $310,024, or 24%, over sales of $1,284,744 in the year ended December 31, 2003. Approximately 30% of the increase in sales resulted from our core business segment, document security.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net sales from our primary business activity, document security and anti-counterfeiting, were $425,786 in 2004, an increase of $93,466, or more than 28% over 2003 net sales of $332,320. Although we consider these sales to be nominal, as the year 2004 was devoted to continuing our research, consolidating our ownership of existing patents, and putting the sales infrastructure in place to capitalize on what we believe is significant demand for our technologies and products. We are optimistic that we will be able to obtain significant increases in sales from our technologies in the 2005 fiscal year.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are not actively soliciting additional printing sales related to our commercial printing business, unless they are related to our core anti-counterfeiting technology business. Our sales in 2004 from our printing segment totaled approximately $691,000, which compares to 2003 sales of $527,000. This represents a 31% increase over 2003.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our legal forms and supplies business segment is a non-core part of our company and we have attempted to simplify its operation by emphasizing e-commerce sales. Although the sales of this segment, approximately $455,000 in 2004, appear to be significant as to our total sales, we do not expect that to be so in 2005 and in subsequent years. Sales in 2003 from our legal supplies business were approximately $397,000. This represents a 15% increase over 2003. We are continuing to evaluate our various options as to our plans for this division.</p>

      <p><b>Gross Profit</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our combined gross profit for the year ended December 31, 2004 increased by $96,263, or 17.2%, to $658,083 as compared to the gross profit of $561,820 reported in fiscal 2003. The increase in gross profit resulted primarily from the increase in sales as there was only a slight year-to-year change in cost of goods sold as a percentage of sales, from 56% in 2003 to 59% in 2004.&nbsp;&nbsp; Gross profit of our core document security unit increased $4,850 or 2.6% from $189,230 in 2003 to $194,070 in 2004. Gross profit as a percentage of sales in our core business declined from 56.9% to 45.6%. This percentage decline resulted from the increased proportion of sales of relatively lower profit margin of safety paper as a percentage of the total sales of the document security business unit. As our product sales mix shifts, towards our higher margin technology products, we expect our overall product gross profit margin to increase.</p>

      <p><b>Expenses</b></p>

      <p><b>Operating Expenses</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Selling, general and administrative expenses</b>, for the year ended December 31, 2004, increased $767,083 to $1,879,078 from $1,111,995 in fiscal year 2003. This represents an increase of 69% over 2003. This increase reflects additional expenses associated with an increase of staff as we build our capacity and infrastructure. In addition, we experienced higher corporate governance expenses and we also experienced additional costs from our new corporate headquarters location. Listed below is additional detail regarding the specific expense categories:</p>
    </div>

    <blockquote>
      <blockquote>
        <div>
          <b>Payroll expenses</b> - As the number of our employees increased in all aspects of our operations, our total payroll expense increased 9,6% or $43,603 from $452,724 in 2003 to $496,327 in 2004. The increase of staff size and corresponding increase in total payroll, positions us to handle the expected growth in our core anti-counterfeiting operations.
        </div>

        <div>
          <br>
           <b>Marketing expenses -</b> increased nearly 152% or $200,847 from $132,533 in 2003 to $333,380 in 2004. The increase of this expenditure is due to a brand name creation project, the costs of developing trademarks and the associated re-packaging of our technology products and processes, and a complete re-design of our corporate website.&nbsp;&nbsp;
        </div>

        <div>
          <br>
           <b>Professional fees -</b> increased $372,765 from $92,306 in 2003 to $465,071 in 2004. This more than three-fold increase was primarily a response to expenses required for enhanced corporate governance. Included in 2004 were expenses for enhanced corporate governance, audit, securities and general corporate legal fees, and legal fees in connection with the litigation referred to above in <i>Item 3- Legal Proceedings</i>.
        </div>

        <div>
          <br>
           <b>Stock Exchange listing fees</b> - In 2004 we also incurred expenses totaling $68,500 related to the listing of our common stock on the American Stock Exchange that we did not have in 2003.
        </div>

        <div>
          <br>
           <b>Depreciation expense -</b> as part of selling, general and administrative expenses declined approximately 7.6% or $4,761 from $62,686 in 2003 to $57,925 in 2004. In 2004, an additional $69,869 of depreciation expense was included as part of the cost of sales rather than as expense, which compares to $42,454 in 2003. Included in this expense are costs associated with leasehold improvements for our new corporate headquarters.
        </div>

        <div>
          <br>
           <b>Other selling, general and administrative</b> <b>expenses</b> - in 2004, added up to $457,875 compared to $371,746 in 2003. The bulk of the increase in these expenses was due to rent of $47,000 and other costs associated with our new corporate headquarters.
        </div>
      </blockquote>
    </blockquote>

    <div>
      <p><b>Research and Development</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As a technology company dependent upon innovation and concerned with the constant updating of our patents and trade secrets, we increased our total expenditure for research and development by 82% or $190,002, from $231,716 in 2003 to $421,718 in 2004. The bulk of the increase was associated with the costs of tests for the development of new technologies and the improvement of previous technologies.</p>

      <p><b>Impairment of Goodwill</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As part of our annual fair value test of recorded goodwill, we estimated that as of December 31, 2004, our printing unit (Patrick Printing) had sustained an $81,013 impairment of goodwill. This non-cash charge to operations is presented as "Loss on goodwill impairment" in the accompanying statement of operations.</p>

      <p><b>Patent Protection</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In 2003 we had an additional category of operating expense, <i>Patent protections expense</i>, which totaled $647,376. That sum represented the value of stock and warrants issued to IDT Venture Capital Corporation for assistance with the protection of our patent portfolio. We did not have a similar item of expense in 2004.</p>

      <p><b>Interest Income and Expense</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our interest expense increased to $28,434 in 2004, up from $18,975 in 2003. This increase primarily came about because of an increase of the average principal balance of our liabilities. Interest income increased in 2004 to $55,181 from $3,818 the prior year, as the average balance of our invested funds was higher than in 2003.</p>

      <p><b>Net Loss</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net loss before taxes increased $244,789 or 16.9%, from $1,452,290, in fiscal year 2003, to $1,696,979, in fiscal year 2004. The increase in the pre-tax loss was the result of an increase, in 2004 over 2003, of selling, general and administrative expenses of $767,083; an increase of research and development expense of $190,002; a loss on impairment of goodwill of $81,013, which were offset by increased gross profit of $96,263, the reduction of patent protection expense of $647,376; and a net increase of other income-net of $49,670.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net loss after taxes in 2004 was $1,703,866 compared to $1,452,190 in 2003 or an increase of $251,676. The 2004 after-tax net loss was computed after providing for state tax of $6,887.</p>

      <p><b>Loss per Share</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The basic net loss per common share was $0.16 for the year ended December 31, 2004 and $0.16 for the year ended December 31, 2003. The "basic net loss per share" is computed by dividing the net loss, by the weighted average common shares outstanding. In 2004, the weighted average of common shares outstanding was 10,895,676 compared to 9,341,289 in fiscal year 2003.</p>

      <p><b>Key Indicators of Future Results</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We believe that our gross profit margin is a significant key indicator for our company. We expect that our gross margin, as a percentage of sales, should grow significantly because our variable costs of goods associated with our technology sales is low and as our royalty income and licensing fees become a larger part of our total revenue, our overall costs of sales percentage will decline. We continue to expect that operating expenses as a percentage of sales will continue to increase in the near-term as we build our infrastructure; increase our marketing activities; meet corporate governance standards; and incur costs associated with our intellectual property portfolio. We feel that the increase of our operating expenses will begin to level off, and then drop significantly as a percentage of sales once our sales, license fees and royalties rise due to the investments delineated above.</p>

      <p><b>Liquidity and Capital Resources</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At December 31, 2004, we had cash and cash equivalents of approximately $2,658,000, which was down from $5,115,722 on December 31, 2003. At March 25, 2005, we had cash and cash equivalents of approximately $3,800,000. As of December 31, 2004, we had an additional $300,000 of restricted cash and cash equivalents that is being used as collateral for a bank loan to reduce our borrowing costs. Our total current assets ended the fiscal year 2004 at $3,166,439 compared to $5,390,723 at the end of 2003. Current liabilities increased approximately $24,000 from $515,801 at year-end 2003 to $539,730 at year-end 2004. Our working capital, which is the difference between our current assets and current liabilities, was $2,626,710 at December 31, 2004 compared to $4,874,922 at the end of 2003. The ratio of our current assets to our current liabilities, referred to as our current ratio, was 5.9:1 at December 31, 2004 compared to 10.5:1, at December
 31, 2003.</p>

      <p><b>Cash Flow</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We did not generate cash from operations in 2004 or 2003. Our operating activities consumed $1,424,196 of cash in 2004 compared to $326,710 in the fiscal year ended December 31, 2003.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We anticipate an increase in royalties from our licensing agreements with minimal additional ongoing costs. We also expect a significant increase in our safety paper sales.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although our net loss in 2004 was $1,703,866, it included non-cash charges for depreciation and amortization of approximately $128,000 and charges for professional and other services, in the total amount of $59,000, which were not paid for with cash, but with our stock, stock options and warrants.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have been able to pursue our business plan primarily from the receipt of cash from financing activities. In accordance with our business plan, we have been applying the proceeds of a private placement of our securities, which was completed in December 2003, to develop our anti-counterfeiting business.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the first fiscal quarter of 2005, up until March 24, 2005, we have received approximately $1,450,000 from the exercise of our common stock warrants, which included $1,250,000 from IDT Venture Capital Corporation, and approximately $200,000 from other warrant holders who purchased the warrants as part of our private placement, which was completed in December 2003.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We believe that we now have sufficient cash for our needs for at least the next 12 months.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In order to support our existing and proposed long-term operations, we may need additional financing. Although we have outstanding warrants to purchase our common stock, at exercise prices below the current market price, there is no assurance that all or any of the warrants will be exercised. If the warrants are not exercised, we may be required to raise funds, by borrowing or selling stock, to meet our cash needs and there is no guarantee that, at that time, we will be able to raise additional funds, or if we are able to, it would be at terms acceptable to us.</p>

      <p><b>Off-Balance Sheet Arrangements</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We do not have any off-balance sheet arrangements which have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.</p>

      <p><b>Capital Expenditures</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our core business of developing and selling anti-counterfeiting products is more intellectually-intensive than equipment-intensive. However, in 2004, as part of our major infrastructure initiative and new corporate headquarters, we spent approximately $329,000 for fixed assets, including $53,000 for furniture and fixtures; $183,000 for equipment; and $92,000 for leasehold improvements.&nbsp;&nbsp; We also had capitalized lease assets of $159,470 in 2004. In 2005, we expect to make only some minor capital expenditures for replacement equipment for research and development purposes, furniture and fixtures to accommodate new hires, as well as some new and improved sales administration and project management software packages.</p>

      <p><b>Inflation</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during 2004.</p>

      <p><b>Critical Accounting Policies</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. The consolidated financial statements for the fiscal year ended December 31, 2004 describe the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts and sales returns, goodwill impairments, inventory allowances, revenue recognition, as well as loss contingencies and restructurings. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our consolidat
ed financial statements:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Goodwill Impairments</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets of an acquired business. We perform a goodwill impairment assessment on an annual basis, or more frequently if changes in circumstances or the occurrence of events suggest that an impairment exists. The impairment test entails comparing the carrying value of goodwill to the estimated fair value of a reporting unit that the goodwill is assigned. There are a number of significant management assumptions and estimates inherent in estimating the fair value of the reporting unit including those used to estimate future cash flows and the appropriate rate that incorporates our cost of capital and the risk profile of the cash flows. Actual cash flows may be less than those estimated by our management. A change in industry or market conditions or a downturn in our operations could result in an impairment of goodwill.</p>

      <p><b>Long lived assets</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fixed assets are carried at cost. Depreciation is computed over the estimated useful life of five to seven years using the straight-line depreciation method. Leasehold improvements are amortized over the shorter of their useful life or the lease term. Intangible assets consist primarily of royalty rights, patents and contractual rights. Amortization is computed over the estimated useful life of five to ten years using the straight-line depreciation method. Patents and contractual rights will begin to be amortized when placed in service. Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We continuously evaluate the recoverability of our long-lived assets based on estimated future cash flows from and the estimated fair value of such long-lived assets, and provide for impairment if such undisco
unted cash flows are insufficient to recover the carrying amount of the long-lived asset.</p>

      <p><strong>Income Taxes</strong></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have recorded deferred tax assets relating primarily to net operating loss carryforwards for United States federal and state tax purposes. We recorded a valuation allowance equal to 100% of the carrying value of our net deferred tax assets to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amounts, a resulting reduction of the valuation allowance would increase our income in the period the determination was made. At December 31, 2004, we had approximately $1.9 million in gross deferred tax assets, which were fully offset by a valuation allowance.</p>

      <p><b>Revenue Recognition</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We recognize revenue from product sales when the goods are shipped to the customer and title has been transferred. We do not engage in bill and hold transactions and do not enter into inventory consignment agreements. We also generate royalty fees from the sale of licensee agreements for the use of our document security technology. Royalty revenue will be generally recognized in the quarter in which a report is received from a licensee detailing the shipments of products incorporation our intellectual property components. License fees will be recognized upon the execution of the license agreement and transfer of intellectual property, provided no further significant performance obligations exist and collectibility is deemed probable.</p>

      <p><b>Stock Based Compensation</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the past several years we have issued warrants and options to non-employees for services and in connection with obtaining equity. We estimated the fair value of those securities using the Black-Scholes warrant and option pricing model. The Black-Scholes model uses critical assumptions that significantly affect the estimated fair value of those awards, such as an estimated volatility factor of our common stock and the estimated lives of the awards (which is equal to the maximum contractual term for awards to non-employees). Additionally, as further discussed below under <i>"Recent Accounting Pronouncements,"</i> we are required to recognize compensation expense on options issued to employees beginning in 2006, and we expect that we will use similar estimation methods. Changes in the volatility of our common stock and other estimation factors used in the Black-Scholes model can significantly impact the estimated value and resultant 
compensation cost on similar equity instruments issued in the future.</p>


  <hr noshade>
  <p><b>Risk Factors</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; An investment in our securities is subject to numerous risks, including the Risk Factors described below. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained or incorporated by reference in this Form 10-KSB, including our financial statements and related notes.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities and Exchange Act of 1934. Investors are cautioned that there are additional risks associated with investing in our Company, and are referred to the Risk Factors contained in our other Exchange Act filings with the SEC, which risks may change from time to time. Any forward-looking statements in this report are based on current conditions; expected future developments and other factors we believe are appropriate in the circumstances. Investors are cautioned that such statements are not a guarantee of future performance and actual results or developments may differ materially from those projected. We make no commitment to update any forward-looking statement included herein, or disclose any fact, events or circumstances that may affect the accuracy of any forward-looking statement.</p>

      <p><b><i>We have a limited operating history with our business model, which limits the information available to you to evaluate our business.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Since our inception in 1984, we have accumulated deficits from historical operations of approximately $7,900,000 at December 31, 2003, which has increased to approximately $9,550,000 at December 31, 2004. The bulk of those deficits were mainly derived from the previous movie production business organization that preceded our document security technology business. Our current business is based upon technology and assets that we have acquired only since July 2002. We have had minimal revenues generated to date from this technology. We have continued to incur losses since we began these new operations. Also, you have limited operating and financial information relating to this new business to evaluate our performance and future prospects. Due to the change in our business model, we do not view our historical financials as being a good indication of our future. We face the risks and difficulties of a company going into a new business inc
luding the uncertainties of market acceptance, competition, cost increases and delays in achieving business objectives. There can be no assurance that we will succeed in addressing any or all of these risks, and the failure to do so could have a material adverse effect on our business, financial condition and operating results.</p>

      <p><b><i>Current litigation may affect our technology rights and plan of operation.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 31, 2003, we commenced an action entitled "NEW SKY COMMUNICATIONS, INC., AS SUCCESSOR-IN-INTEREST TO THOMAS M. WICKER, THOMAS M.WICKER ENTERPRISES, INC. AND DOCUMENT SECURITY CONSULTANTS V. ADLER TECHNOLOGIES, INC. N/K/A ADLERTECH INTERNATIONAL, INC. AND ANDREW MCTAGGERT" (UNITED STATES DISTRICT COURT, WESTERN DISTRICT OF NEW YORK CASE NO.03-CV-6044T(F)) regarding certain intellectual property in which our company has an interest. The suit was commenced by our company alleging various causes of action against Adler Technologies, Inc. ("Adler") and Andrew McTaggert ("McTaggert") for breach of contract, breach of the duty of good faith and fair dealing and various business torts. Adler distributes and supplies anti-counterfeit currency devices and McTaggert is a principal of, and the primary contact at, Adler. Adler had entered into several agreements with Thomas M. Wicker Enterprises and Document Security Consultants, both 
of which were acquired by our company in 2002. These agreements, generally, authorized Adler to manufacture in Canada our "Checkmate&reg;" patented system for verifying the authenticity of currency and documents. Other agreements were entered into between the parties and Thomas Wicker regarding other technology owned by Wicker and assigned to us including "Archangel," an anti-copy technology, and "Blockade," which creates a wave pattern on documents when they are reproduced or scanned. It is our contention that Adler has breached these agreements, failed to make an appropriate accounting, and may have exceeded the scope of its license. Adler has denied the material allegations of the complaint and has counterclaimed against our company, claiming it (Adler) owns or co-owns or has a license to use certain technologies of ours, including several U.S. patents. If Adler is successful it may materially affect us, our financial condition, and our ability to market certain technology.</p>

      <p><b><i>If we are unable to adequately protect our intellectual property, our competitive advantage may disappear</i></b>.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our success will be determined in part by our ability to obtain United States and foreign patent protection for our technology and to preserve our trade secrets. Because of the substantial length of time and expense associated with developing new document security technology, we place considerable importance on patent and trade secret protection. Our ability to compete and the ability of our business to grow could suffer if these rights are not adequately protected. There can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. We also rely on trade secrets that are not patented. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or techniques, or otherwise gain access to our proprietary technology.</p>

      <p><b><i>We may face intellectual property infringement or other claims against us or our customers that could be costly to defend and result in our loss of significant rights.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although we have received U.S. Patents and a European Patent with respect to certain technologies of ours, there can be no assurance that these patents will afford us any meaningful protection. We intend to rely primarily on a combination of trade secrets, technical measures, copyright protection and nondisclosure agreements with our employees to establish and protect the ideas, concepts and documentation of software and trade secrets developed by us. Such methods may not afford complete protection, and there can be no assurance that third parties will not independently develop such technology or obtain access to the software we have developed. Although we believe that our use of the technology and products we developed and other trade secrets used in our operations does not infringe upon the rights of others, our use of the technology and trade secrets we developed may infringe upon the patents or intellectual property rights of oth
ers. In the event of infringement, we could, under certain circumstances, be required to obtain a license or modify aspects of the technology and trade secrets we developed or refrain from using same. We may not have the necessary financial resources to defend any infringement claim made against us or be able to successfully terminate any infringement in a timely manner, upon acceptable terms and conditions or at all. Failure to do any of the foregoing could have a material adverse effect on us. Moreover, if the patents, technology or trade secrets we developed or use in our business are deemed to infringe upon the rights of others, we could, under certain circumstances, become liable for damages, which could have a material adverse effect on us. As we continue to market our products, we could encounter patent barriers that are not known today. A patent search will not disclose applications that are currently pending in the United States Patent Office; and there may be one or more such pending applications t
hat would take precedence over our applications.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Furthermore, since the date of invention (and not the date of application) governs under U.S. patent law, future applications could be filed by another party, which would preempt our position. While we have taken and continue to take steps to become aware of related technical developments, there can be no assurance that we will not encounter an unfavorable patent situation. Other parties may assert intellectual property infringement claims against us or our customers, and our products may infringe the intellectual property rights of third parties. If we become involved in litigation, we could lose our proprietary rights, be subject to damages and incur substantial unexpected operating expenses. Intellectual property litigation is expensive and time-consuming, even if the claims are subsequently proven unfounded, and could divert management's attention from our business. If there is a successful claim of infringement, we may not be ab
le to develop non-infringing technology or enter into royalty or license agreements on acceptable terms, if at all. This could prohibit us from providing our products and services to customers.</p>

      <p><b><i>If our products and services do not achieve market acceptance, we may not achieve our revenue and net income goals in the time prescribed or at all.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are at the very early stage of introducing our document security technology and products to the market. If we are unable to operate our business as contemplated by our business model or if the assumptions underlying our business model prove to be unfounded, we could fail to achieve our revenue and net income goals within the time we have projected, or at all, which could have a material adverse effect on our business. As a result, the value of your investment could be significantly reduced or completely lost.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We cannot assure you that a sufficient number of such companies will demand our products or services or other document security products. In addition, we cannot predict the rate of market's acceptance of our document security solutions. Failure to maintain a significant customer base may have a material adverse effect on our business.</p>

      <p><b><i>The results of our research and development efforts are uncertain and there can be no assurance of the commercial success of our products.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We believe that we will need to continue to incur research and development expenditures to remain competitive. The products we currently are developing or may develop in the future may not be technologically successful. In addition, the length of our product development cycle may be greater than we originally expect and we may experience delays in future product development. If our resulting products are not technologically successful, they may not achieve market acceptance or compete effectively with our competitors' products.</p>

      <p><b><i>Changes in document security technology and standards could render our applications and services obsolete.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The market for document security products, applications, and services is fast moving and evolving. Identification and authentication technology is constantly changing as we and our competitors introduce new products, applications, and services, and retire old ones as customer requirements quickly develop and change. In addition, the standards for document security are continuing to evolve. If any segments of our market adopt technologies or standards that are inconsistent with our applications and technology, sales to those market segments could decline.</p>

      <p><b><i>The market in which we operate is highly competitive, and we may not be able to compete effectively, especially against established industry competitors with greater market presence and financial resources.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our market is highly competitive and characterized by rapid technological change and product innovations. Our competitors may have advantages over us because of their longer operating histories, more established products, greater name recognition, larger customer bases, and greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and devote greater resources to the promotion and sale of their products. Competition may also force us to decrease the price of our products and services. We cannot assure you that we will be successful in developing and introducing new technology on a timely basis, new products with enhanced features, or that these products, if introduced, will enable us to establish selling prices and gross margins at profitable levels. Although several potential competitors have expressed an interest to 
us in forming marketing alliances, there can be no assurance that we will undertake such efforts or if undertaken, such efforts will prove profitable.</p>

      <p><b><i>If we fail to retain our key personnel and attract and retain additional qualified personnel, we might not be able to pursue our growth strategy.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our future success depends upon the continued service of our executive officers and other key sales and research personnel who possess longstanding industry relationships and technical knowledge of our products and operations. The loss of any of our key employees, in particular, Patrick White, our President, Chief Executive Officer and Chief Financial Officer; Thomas Wicker, our Vice-President of Research and Development; and David Wicker, our Vice-President of Operations, could negatively impact our ability to pursue our growth strategy and conduct operations. Although we believe that our relationship with these individuals is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future. We have extended our employment agreements with Patrick White to June 2009. We have also extended our employment agreements with Thomas Wicker and David Wicker to June 2007. There can b
e no assurance that these persons will continue to agree to be employed by us after such dates.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We intend to hire a Chief Financial Officer for our company and believe that our ability to obtain a qualified Chief Financial Officer is material to our future success. We also must continue to hire other highly qualified individuals. Our failure to attract, train and retain management and technical personnel could adversely affect our company's ability to grow and to develop new products or product enhancements now and in the future.</p>

      <p><b><i>If we do not successfully expand our sales force, we may be unable to increase our revenues.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We must expand the size of our marketing activities and sales force to increase revenues. We continue to evaluate various methods of expanding our marketing activities, including the use of outside marketing consultants and representatives and expanding our in-house marketing capabilities. Going forward, we anticipate an increasing percentage of our revenues to come from the licensing of our newer technologies, where profit margins are significantly higher than those provided by Safety Paper. If we are unable to hire or retain qualified sales personnel, if newly hired personnel fail to develop the necessary skills to be productive, or if they reach productivity more slowly than anticipated, our ability to increase our revenues and grow could be compromised. The challenge of attracting, training and retaining qualified candidates may make it difficult to meet our sales growth targets. Further, we may not generate sufficient sales to o
ffset the increased expense resulting from expanding our sales force or we may be unable to manage a larger sales force.</p>

      <p><b><i>Future growth in our business could make it difficult to manage our resources.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our anticipated business expansion could place a significant strain on our management, administrative and financial resources. Significant growth in our business may require us to implement additional operating, product development and financial controls, improve coordination among marketing, product development and finance functions, increase capital expenditures and hire additional personnel. There can be no assurance that we will be able to successfully manage any substantial expansion of our business, including attracting and retaining qualified personnel. Any failure to properly manage our future growth could negatively impact our business and operating results.</p>

      <p><b><i>We cannot predict our future capital needs and we may not be able to secure additional financing.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We may need to raise additional funds in the future to fund more aggressive expansion of our business, complete the development, testing and marketing of our products, or make strategic acquisitions or investments. We may require additional equity or debt financings, collaborative arrangements with corporate partners or funds from other sources for these purposes. No assurance can be given that these funds will be available for us to finance our development on acceptable terms, if at all. Such additional financings may involve substantial dilution of our stockholders or may require that we relinquish rights to certain of our technologies or products. In addition, we may experience operational difficulties and delays due to working capital restrictions. If adequate funds are not available from operations or additional sources of financing, we may have to delay or scale back our growth plans.</p>

      <p><b><i>We do not intend to pay cash dividends.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We do not intend to declare or pay cash dividends on our common stock in the foreseeable future. We anticipate that we will retain any earnings and other cash resources for investment in our business. The payment of dividends on our common stock is subject to the discretion of our Board of Directors and will depend on our operations, financial position, financial requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors that our Board of Directors deems relevant.</p>

      <p><b><i>Provisions of our certificate of incorporation and agreements could delay or prevent a change in control of our company.</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Certain provisions of our certificate of incorporation may discourage, delay, or prevent a merger or acquisition that a shareholder may consider favorable. These provisions include:</p>
    </div>

    <blockquote>
      <blockquote>
        <div>
          &middot;&nbsp; Authority of the Board of Directors to issue preferred stock.
        </div>

        <div>
          &middot;&nbsp; Prohibition on cumulative voting in the election of directors.
        </div>
      </blockquote>
    </blockquote>


<div>
  <hr noshade>
  <p><b>ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our audited financial statements for the fiscal years ended December 31, 2004 and December 31, 2003 follow Item 14, beginning at page F-1.</p>

      <p><b>ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 6, 2004, we engaged the firm of Freed Maxick &amp; Battaglia, CPAs, PC as our independent auditing firm and determined not to continue the retention of Michael F. Cronin, CPA as our independent auditor.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The termination of Michael F. Cronin, CPA was recommended and approved by the Audit Committee of our Board of Directors and is not the result of any disagreement with Michael F. Cronin, CPA on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. Michael F. Cronin, CPA, had been our independent auditor for the fiscal years ended December 31, 2002 and 2001 and the reports issued by Michael F. Cronin, CPA did not contain any adverse or qualified opinions, did not contain any disclaimer of opinion, and was not qualified or modified as to audit scope or accounting principles. In addition, during the last two fiscal years of his engagement and subsequent periods, there were no disagreements with Michael F. Cronin, CPA regarding accounting principles, or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to his satisfaction, would have 
caused him to make reference to the subject matter in connection with his report on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Prior to the change of accounting firms, neither the Board of Directors nor management consulted Freed Maxick &amp; Battaglia, CPAs, PC regarding the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>ITEM 8A - CONTROLS AND PROCEDURES</b></p>

      <p><b>(a) Evaluation of disclosure controls and procedures.</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with participation of our management, including the Chief Executive Officer and Chief Financial Officer (who serves as our principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer (who serves as our principal accounting officer) and other members of management concluded that our disclosure controls and procedures are effective in timely alerting them to material periodic SEC filings.</p>

      <p><b>(b) Changes in internal controls.</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; There were no changes to internal controls in the 90-day period prior to December 31, 2004, the end of our fiscal year, or in the period from January 1, 2005 to the date of the filing of our report on Form 10-KSB.</p>


  <hr noshade>
  <p align="center"><b>PART III</b></p>

      <p><b>ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following is a list of our directors and executive officers, their respective ages and the positions they hold with us.</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="1">
          <tr>
            <td valign="top">
              <p><b>Name</b></p>
            </td>

            <td width="30" valign="top">&nbsp;</td>

            <td valign="top">
              <p align="center"><b>Age</b></p>
            </td>

            <td width="30" valign="top">&nbsp;</td>

            <td valign="top">
              <p><b>Positions</b></p>
            </td>
          </tr>

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Patrick White</p>
            </td>

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

            <td valign="top">
              <p align="center">51</p>
            </td>

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

            <td valign="top">
              <p>Chairman of the Board, President,<br>
               CEO and Chief Financial Officer</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>Thomas M. Wicker</p>
            </td>

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

            <td valign="top">
              <p align="center">43</p>
            </td>

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

            <td valign="top">
              <p>Vice President and Director</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>Alan E. Harrison</p>
            </td>

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

            <td valign="top">
              <p align="center">55</p>
            </td>

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

            <td valign="top">
              <p>Director</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>Timothy Ashman</p>
            </td>

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

            <td valign="top">
              <p align="center">62</p>
            </td>

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

            <td valign="top">
              <p>Director</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>Robert Fagenson</p>
            </td>

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

            <td valign="top">
              <p align="center">56</p>
            </td>

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

            <td valign="top">
              <p>Director</p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>Ira A. Greenstein</p>
            </td>

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

            <td valign="top">
              <p align="center">44</p>
            </td>

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

            <td valign="top">
              <p>Director</p>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The principal occupation and business experience for each executive officer and director, for at least the past five years, follows:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Patrick White</b> was named Chairman, President and Chief Executive Officer and Chief Financial Officer of Document Security Systems, Inc., in August 2002. A former financial services and printing industry executive, he had previously spent 23 years at Rochester Community Savings Bank, which was later acquired by Charter One Bank. During his tenure, the bank grew from an $800 million private thrift to a $4 billion publicly held institution. Since 1989, Mr. White owned and operated four printing companies, and during this tenure he updated his original traditional offset printing companies to a state-of-the-art digital imaging operation. Since 1990, he worked in the research and development of various document security technologies and began marketing security print products in 1994. He holds both a Bachelor of Science degree in Accounting, and an MBA from Rochester Institute of Technology.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Thomas M. Wicker</b> joined our company as Vice President and Director in August 2002. He has worked as a document security scientist for over 20 years. Prior to joining us, he worked for the document security consulting firm, Thomas M. Wicker Enterprises. Currently Mr. Wicker serves as a Vice President and Chief Technology Officer of the Company, directing the technical operations behind our patented document security properties. Mr. Wicker has consulted for the Federal Bureau of Investigation, the Central Intelligence Agency, Moore Business Forms, American Bank Note Company and various other government and high-end corporate security printers.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Alan E. Harrison</b> was appointed to our Board of Directors in May 2003. For more than the past five years, Mr. Harrison has been the Digital Printing and Publishing Sales Specialist for IKON Office Solutions, Inc., in Rochester, New York. Mr. Harrison also serves on our Audit Committee.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Timothy Ashman</b> was appointed to our Board of Directors and its Audit Committee on January 5, 2004. Mr. Ashman was employed by HSBC Bank USA, formerly Marine Midland Bank, from 1964 until his retirement as Vice President in 2001. During his career in banking, he concentrated in branch banking administration, commercial lending, and municipal finance and government banking. Mr. Ashman is a graduate of the University of Rochester, with a B.A. degree in Business Administration and is also a graduate of the Stonier School of Banking at Rutgers University. Since his retirement in 2001, he has been a consultant to Raymond Wager, CPA, P.C., a Rochester, NY firm which specializes in auditing school districts, municipalities, and foundations.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Robert Fagenson</b> is the Chairman and President of Fagenson &amp; Company, a New York Stock Exchange member brokerage firm. Mr. Fagenson is also Vice Chairman of Van der Moolen Specialists USA, LLC, the fourth-largest New York Stock Exchange specialist firm. Mr. Fagenson formerly served as a Director and Vice Chairman of the New York Stock Exchange. Mr. Fagenson is currently the vice chairman of VDM Specialists, a member firm of the New York Stock Exchange. Mr. Fagenson also serves as a member of the Board of Directors for Rent-Way Inc. Mr. Fagenson was appointed to our Board of Directors in September 2004.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Ira A. Greenstein</b> is President and a Director of IDT Corporation (NYSE: IDT), a leading provider of wholesale and retail telecommunications services with annual revenues over $1.8 billion. IDT also enables computer users to place calls via the Internet to a regular telephone through its Net2Phone (NASDAQ: NTOP) subsidiary. Prior to joining IDT in January 2000, Mr. Greenstein was a partner in the law firm of Morrison &amp; Foerster LLP from February 1997 to November 1999 where he served as the chairman of the firm's New York Office business department. Concurrent to his stint at Morrison &amp; Foerster, Mr. Greenstein served as general counsel and secretary of Net2Phone from January 1999 to November 1999. Prior to 1997, Mr. Greenstein was an associate in the New York and Toronto offices of Skadden, Arps, Meagher &amp; Flom LLP. Mr. Greenstein also served on the Securities Advisory Committee to the Ontario Securities Commission 
from 1992 through 1996. From 1991 to 1992, Mr. Greenstein served as counsel to the Ontario Securities Commission. Mr. Greenstein currently serves on the Board of Overseers of Touro College. Mr. Greenstein received a B.S. degree from Cornell University and a J.D. from Columbia University Law School. Mr. Greenstein was appointed to our Board of Directors in September 2004.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our Directors will hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Our executive officers are elected by the Board of Directors and hold office at the will of the Board, subject to any employment agreements.</p>

      <p><b>Compensation of Directors</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Members of our Board of Directors have not received compensation for attendance at board meetings and do not currently receive cash compensation in any form, except for reimbursement of travel expenses. In order to attract and retain qualified persons to our board, in January 2004, we established, subject to shareholder approval, a stock option plan for our non-executive board members. The plan provides for the granting of five-year options, to purchase our stock at 100% of fair market value at the date of grant. Under the plan, each non-executive director receives options to acquire 5,000 shares upon becoming a board member and 5,000 shares each year thereafter while serving as a director. For joining the Board at a point partially within a year, the award is pro rated. The stock option plan was approved by our shareholders on December 17, 2004.</p>

      <p><b>Committees of the Board of Directors</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the fiscal year ended December 31, 2003, we did not have any Committees of the Board of Directors and our common stock was not listed on the American Stock Exchange. On January 5, 2004, we established an Audit Committee and a Compensation Committee. The original members of the two committees were Timothy Ashman and Alan Harrison, both of whom are independent directors as defined under Part 1, Section 121 of the American Stock Exchange Company Guide. On September 24, 2004 the Board of Directors was increased by two members and Mr. Robert Fagenson and Mr. Ira Greenstein were appointed to fill the vacancies. Both Mr. Fagenson and Mr. Greenstein are independent directors as defined under Part 1, Section 121 of the American Stock Exchange Company Guide.</p>

      <p><b>Audit Committee</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Prior to January 5, 2004, we did not have an Audit Committee and our Board, as a whole, performed the functions of an Audit Committee. On January 5, 2004, the Board of Directors formed an Audit Committee comprised of our then two independent directors (as defined under Part 1, Section 121 of the American Stock Exchange Company Guide), Mr. Harrison and Mr. Ashman. Both Mr. Ashman, who serves as Chairman of the Audit Committee and Mr. Harrison have been the sole members of the Audit Committee since its formation. Mr. Ashman, as determined by our Board of Directors, qualifies as a "financial expert" as defined in Item 401 under Regulation S-B of the Securities Act of 1933.&nbsp;</p>

      <p><b>Compensation and Management Resources Committee</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On September 24, 2004, the Board of Directors formed a Compensation and Management Resources Committee, the members of which consist of Mr. Harrison, Mr. Fagenson and Mr. Greenstein all of whom are independent directors (as defined under Part 1, Section 121 of the American Stock Exchange Company Guide). Mr. Harrison serves as Chairman of the Compensation Committee.</p>

      <p><b>Nominating and Corporate Governance Committee</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On September 24, 2004, our Board of Directors formed the Nominating and Corporate Governance Committee of the Board of Directors. The current members of this committee, are Patrick White, Ira Greenstein and Alan Harrison, of whom, Mr. Greenstein and Mr. Harrison are independent directors (as defined under Part 1, Section 121 of the American Stock Exchange Company Guide). Mr. Harrison serves as Chairman of this Committee.</p>

      <p><b>Compliance with Section 16(a) of the Securities Exchange Act</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than ten percent of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on our review of copies of such reports and representations from our executive officers and directors, we believe that our executive officers and directors complied with all Section 16(a) filing requirements during the year ended December 31, 2004, except for the filing of Form 4 by Mr. White to report the grant of stock options in June 2004 which were subject to approval by our shareholders of the stock option plan which was completed in December 2004. Mr. White has advised the Audit Committee that the required filing is in the process of being completed.</p>

      <p><b>Code of Ethics</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 5, 2004, our Board of Directors adopted a Code of Ethics for our employees and management, including our Chief Financial Officer and Chief Executive Officer. Our Code of Ethics was included as an Exhibit to our Report on Form 10-KSB filed for the fiscal year ended December 31, 2003.</p>

      <p><b>ITEM 10 - EXECUTIVE COMPENSATION</b></p>

      <p><b>Summary Compensation Table</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following table<sup>(1)</sup> provides summary information for the years 2004, 2003 and 2002 concerning cash and non-cash compensation paid to Patrick White, our President, Chief Executive Officer and Chief Financial Officer.</p>

      <div align="center">

    <table border="0" cellspacing="0" cellpadding="0">
      <tr>

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


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


        <td colspan="5" valign="bottom" nowrap>
          <p align="center"><b>Annual Compensation</b></p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="center"><b>Long-Term<br>
               Compensation</b></p>
            </td>


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


        <td rowspan="3" valign="bottom" nowrap>
          <p align="center"><b>Other<br>
               Compensation</b></p>
            </td>
          </tr>

          <tr>

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


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


        <td colspan="5" valign="bottom" nowrap>
          <hr noshade>
            </td>


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


        <td valign="bottom" nowrap>
          <hr noshade>
            </td>


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

          <tr>

        <td valign="bottom" nowrap>
          <p><b>Name and Principal Position</b></p>
            </td>


        <td width="20" valign="bottom" nowrap>&nbsp;</td>


        <td valign="bottom" nowrap>
          <p align="center"><b>Year</b></p>
            </td>


        <td width="15" valign="bottom" nowrap>&nbsp;</td>


        <td valign="bottom" nowrap>
          <p align="center"><b>Salary</b></p>
            </td>


        <td width="15" valign="bottom" nowrap>&nbsp;</td>


        <td valign="bottom" nowrap>
          <p align="center"><b>Bonus</b></p>
            </td>


        <td width="20" valign="bottom" nowrap>&nbsp;</td>


        <td valign="bottom" nowrap>
          <p align="center"><b>Securities<br>
               Underlying<br>
               Options</b></p>
            </td>


        <td width="20" valign="bottom" nowrap>&nbsp;</td>
          </tr>

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

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

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

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

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

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

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

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

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

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

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

          <tr>

        <td rowspan="3" valign="top" nowrap>
          <p>Patrick White<br>
            President, Chief Executive Officer and<br>
            Chief Financial Officer <sup>(2)</sup></p>
            </td>

            <td rowspan="3" valign="top">&nbsp;</td>


        <td valign="bottom" nowrap>
          <p align="center">2004</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="right">$ &nbsp;125,354</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p>$ &nbsp;&nbsp;0</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="center">30,000 Shares<sup>(3)</sup></p>
            </td>


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


        <td valign="bottom" nowrap>
          <p>$ &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;0</p>
            </td>
          </tr>

          <tr>

        <td valign="bottom" nowrap>
          <p align="center">2003</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 75,000</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p>&nbsp;&nbsp;&nbsp; &nbsp;0</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="center">0 Shares</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0</p>
            </td>
          </tr>

          <tr>

        <td valign="bottom" nowrap>
          <p align="center">2002</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 31,250</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p>&nbsp;&nbsp;&nbsp;&nbsp; 0</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p align="center">0 Shares</p>
            </td>


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


        <td valign="bottom" nowrap>
          <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0</p>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1) The columns for "Other Annual Compensation," "Restricted Stock Awards" and "LTP Payouts" have been omitted because there is no such compensation to be reported.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (2) Mr. White's employment commenced August 1, 2002.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (3) Represents options to acquire shares of common stock granted to Mr. White, of which 10,000 have vested and 20,000 are subject to future vesting requirements. The exercise price of the options is $7.25.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The prior Chief Executive Officer is no longer with the Company. No other executive officer had compensation equal to or in excess of $100,000 during the fiscal year ended December 31, 2004.</p>

      <p><b>Option/SAR Grants in Last Fiscal Year</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following table sets forth information regarding grants of stock options during the fiscal year ended December 31, 2004 made to our named executive officers.</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="816" colspan="9" valign="bottom">
              <p><b>Individual Grants</b></p>
            </td>
          </tr>

          <tr>
            <td width="171" valign="bottom">
              <p><b>Name</b></p>
            </td>

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

            <td width="139" valign="bottom">
              <p align="center"><b>Number of Securities Underlying Options/SARs Granted</b></p>
            </td>

            <td width="19" valign="bottom">&nbsp;</td>

            <td width="139" valign="bottom">
              <p align="center"><b>Percent of Total Options Granted to Employees/SARs in Fiscal Year</b></p>
            </td>

            <td width="19" valign="bottom">&nbsp;</td>

            <td width="124" valign="bottom">
              <p align="center"><b>Exercise or Base Price ($/Share)</b></p>
            </td>

            <td width="22" valign="bottom">&nbsp;</td>

            <td width="164" valign="bottom">
              <p align="center"><b>Expiration Date</b></p>
            </td>
          </tr>

          <tr>
            <td width="171" valign="top">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="15" valign="top">&nbsp;</td>

            <td width="139" valign="top">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="19" valign="top">&nbsp;</td>

            <td width="139" valign="top">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="19" valign="top">&nbsp;</td>

            <td width="124" valign="top">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td width="22" valign="top">&nbsp;</td>

            <td width="164" valign="top">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

          <tr>
            <td width="171" valign="top">
              <p>Patrick White</p>
            </td>

            <td width="15" valign="top">&nbsp;</td>

            <td width="139" valign="top">
              <p align="center">30,000</p>
            </td>

            <td width="19" valign="top">&nbsp;</td>

            <td width="139" valign="top">
              <p align="center">100%</p>
            </td>

            <td width="19" valign="top">&nbsp;</td>

            <td width="124" valign="top">
              <p align="center">$7.25</p>
            </td>

            <td width="22" valign="top">&nbsp;</td>

            <td width="164" valign="top">
              <p align="center">7/1/2011</p>
            </td>
          </tr>
        </table>
      </div>

      <p><b>Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following table sets forth information related to the exercise of stock options by Mr. White and information related to the fiscal year-end value of unexercised stock options held by our named executive officer. &nbsp;We have not issued any stock appreciation rights.</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td rowspan="2" valign="bottom">
              <p><b>Name</b></p>
            </td>

            <td width="20" rowspan="2" valign="bottom">&nbsp;</td>

            <td rowspan="2" valign="bottom">
              <p align="center"><b>Shares Acquired on<br>
               Exercise (#)</b></p>
            </td>

            <td width="20" rowspan="2" valign="bottom">&nbsp;</td>

            <td rowspan="2" valign="bottom">
              <p align="center"><b>Value Realized<br>
               ($)</b></p>
            </td>

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

            <td colspan="3" valign="bottom">
              <p align="center"><b>Number of Securities Underlying Unexercised<br>
               Options/SARs at<br>
               Fiscal Year-End</b></p>
            </td>

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

            <td colspan="3" valign="bottom">
              <p align="center"><b>Value of Unexercised<br>
               in-the-Money<br>
               Options/SARs at<br>
               Fiscal Year-End</b></p>
            </td>
          </tr>

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

            <td valign="bottom">
              <p align="center"><b>Exercisable</b></p>
            </td>

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

            <td valign="bottom">
              <p align="center"><b>Unexercisable</b></p>
            </td>

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

            <td width="10" valign="bottom">
              <p align="center"><b>Exercisable</b></p>
            </td>

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

            <td valign="bottom">
              <p align="center"><b>Unexercisable</b></p>
            </td>
          </tr>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top" nowrap>
              <p>Patrick White</p>
            </td>

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

            <td valign="top">
              <p align="center">N/A</p>
            </td>

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

            <td valign="top">
              <p align="center">N/A</p>
            </td>

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

            <td valign="top">
              <p align="center">10,000</p>
            </td>

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

            <td valign="top">
              <p align="center">20,000</p>
            </td>

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

            <td valign="top">
              <p align="right">$&nbsp;&nbsp;&nbsp;&nbsp; 0</p>
            </td>

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

            <td valign="top">
              <p align="right">$&nbsp;&nbsp;&nbsp; 0</p>
            </td>
          </tr>

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

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

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

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

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

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

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

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

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

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

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

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

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

      <p><b>Employment Agreements</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Patrick White</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Effective June 10, 2004, we entered into a new employment agreement with Patrick White, who serves as our Chairman, Chief Executive Officer, President and interim Chief Financial Officer. The agreement was negotiated and approved by the Compensation Committee of the Board of Directors. The agreement is for a term of five years, with an annual base salary of $150,000, with automatic increases at the rate of not less than 10% per year. Under the agreement, Mr. White also was granted 30,000 options, which vest at the rate of 10,000 immediately, and thereafter 10,000 per year. The grant of these options was ratified by the vote of our shareholders in conjunction with their approval of the 2004 Employee Stock Option Plan at our annual meeting, which was held on December 17, 2004. In the event that Mr. White is terminated without cause or his duties are materially changed without his consent or there is a change of control of the Company, 
he will be entitled to 18 months salary. The agreement also provides for non-competition and non disclosure by Mr. White in favor of the Company. A change of control is defined as (i) the Board of Directors of the Company approves of (A) any merger, consolidation, reorganization or other business combination of Company where the pre transaction shareholders of the Company do not continue to own 50.1% of the post transaction outstanding shares of Common Stock having the right to vote in an election of Company's Board of Directors, (B) the sale, exchange, transfer or other disposition of all or substantially all of the assets of Company (in one transaction or a series of transactions contemplated by any party as a single plan), or (C) any plan or proposal for the liquidation or dissolution of Company; or (ii) any person or entity, together with all "affiliates" and "associates" (as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the "<i>Exchange Act</i>")) of such person or entity, shall become t
he "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of Company representing 50.1% or more of either (A) the combined voting power of Company's then outstanding securities having the right to vote in an election of Company's Board of Directors ("<i>Voting Securities</i>") or (B) the then outstanding shares of all classes of stock of Company.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Thomas M. Wicker</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We entered into an employment agreement with Mr. Thomas Wicker in connection with our acquisition of his company in 2002. Mr. Thomas Wicker's duties included serving as an officer and as a member of our Board of Directors. He presently serves as Vice President and Chief Technology Officer. Under the agreement, all future proprietary intellectual property or technology developed by Thomas Wicker during the term of his employment shall be deemed to be developed by him, for us, on a work-for-hire basis, and all right, title and interest in such intellectual property and technology shall be our sole and exclusive property. Mr. Thomas Wicker also agreed to restrictive covenant and non-competition provisions, which prevents him from working for or providing services to any competing entity for a two-year period following termination of his employment. As part of the initial employment agreement, Mr. Thomas Wicker assigned to us all of his 
rights in certain patents, trade secrets and intellectual property. During fiscal year ended December 31, 2003, Mr. Thomas Wicker's previous employment agreement provided for a base annual salary of $63,000 and was subject to an automatic two-year extension upon mutual agreement. In October 2003, the Company agreed to make 24 consecutive monthly payments on a personal loan obtained by Mr. Thomas Wicker from Charles LaLoggia, one of our significant shareholders. The cost per month to the Company for the loan payments is approximately $870. Mr. Thomas Wicker is required to pay the remaining principal balance in full to Mr. LaLoggia in September 2005.</p>


  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On June
    11, 2004<b>,</b> we entered into a new employment agreement with Mr. Thomas
    Wicker. The new agreement was negotiated and approved by the Compensation
    Committee of the Board of Directors. The agreement is for a term of three
    years, with an annual base salary of $72,500, with automatic increases at
    the rate of not less than 10% per year. Under the agreement, Mr. Thomas Wicker
    is eligible to receive a cash bonus at the end of each year, conditioned on
    the financial performance of the Company and the discretion of the Compensation
    Committee or the Board of Directors. In addition, Mr. Thomas Wicker is eligible
    to participate in the Company's 2004 Employee Stock Option Plan. Mr. Thomas
    Wicker's agreement also includes provisions for an 18 month severance payment
    following termination without good cause.</p>

      <p><b>Stock Option Plans</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Our employees, directors and officers are eligible to participate in our two existing option plans, as described below.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>2004 Employees' Stock Option Plan</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In January 2004, our Board of Directors approved, subject to shareholder approval, the adoption of the 2004 Employees' Stock Option Plan (the "2004 Plan") to provide for the grant of options to purchase up to 200,000 shares of our common stock to all employees, including executive officers. Shareholders approved the 2004 Plan on December 17, 2004. Under the terms of the 2004 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs") under Section 422A of the Internal Revenue Code, or options which do not so qualify ("Non-ISOs"). We did not have a stock option plan in effect during the fiscal year ended December 31, 2003.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The 2004 Plan is administered by the Compensation Committee designated by the Board of Directors. The Compensation Committee has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or Non-ISOs; the periods during which each option will be exercisable; and the number of shares subject to each option. The Committee has full authority to interpret the 2004 Plan and to establish and amend rules and regulations relating thereto.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Under the 2004 Plan, the exercise price of an option designated as an ISO shall not be less than the fair market value of the common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent (10%) shareholder (as defined in the 2004 Plan), such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value. The aggregate fair market value of shares subject to options granted to a participant, which are designated as ISOs and which become exercisable in any calendar year may not exceed $100,000.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Compensation Committee may, in its sole discretion, grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay the exercise price or any taxes that may arise in connection with the exercise or cancellation of an option. The Compensation Committee can also permit the payment of the exercise price of the options using the common stock of our company held by the optionee for at least six months prior to exercise.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As of December 31, 2004, a total of 63,000 options were granted under the 2004 Plan. Of these, 23,000 are immediately exercisable and 40,000 are subject to vesting requirements. As of March 30, 2005, we had outstanding an aggregate of 123,000 options under the 2004 Employees' Stock Option Plan.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Non-Executive Director Stock Option Plan</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Also in January 2004, our Board of Directors adopted The Non-Executive Director Stock Option Plan (the "Director Plan"), which provides for options for up to 100,000 shares to non-executive directors and advisors. The Director Plan was approved by our shareholders on December 17, 2004. Under the terms of the Director Plan, an option to purchase (a) 5,000 shares of our common stock shall be granted to each non-executive director upon joining the Board of Directors (or upon the approval of this plan if the director joined prior to its adoption date) and (b) 5,000 shares of our common stock shall be granted to each non-executive director thereafter on January 2<sup>nd</sup> of each year; provided that any non-executive director, who has not served as a director for an entire year prior to January 2nd of each year then such non-employee director shall receive a pro rata number of options based on the time the director has served in such 
capacity during the previous year.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The exercise price for options granted under the Director Plan is 100% of the fair market value of the common stock on the date of grant. Until otherwise provided in the Director Plan, the exercise price of options granted under the Director Plan must be paid at the time of exercise, either in cash, by delivery of shares of the common stock of our company or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the Director Plan, expires five years from the date of grant. Neither the Board nor the Compensation Committee has discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Committee will make all determinations of the interpretation of the Director Plan. Options granted under the Director Plan
 are not qualified for incentive stock option treatment.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As of December 31, 2004, options for 23,750 shares had been granted under the Director Plan. In January 2005, an additional 15,000 options were granted to our four non-executive directors under the Director Plan. As of March 30, 2005, we had outstanding an aggregate of 38,750 options under the Director Plan.</p>

      <p><b>ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As of March 30, 2005, we had 12,008,902 shares of Common Stock issued and outstanding. The following table sets forth the number and percentage of shares of Common Stock beneficially owned by the directors, officers and principal shareholders (those owning more than 5% of the Company's outstanding Common Stock) of the Company and by all officers and directors as a group as of March 30, 2005.</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td valign="bottom">
              <p><b>Name and address</b></p>
            </td>

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

            <td colspan="2" valign="top">
              <p align="center"><b>Common<br>
               Shares<br>
               Owned</b></p>
            </td>

            <td valign="top">
              <p align="center">&nbsp;</p>
            </td>

            <td colspan="2" valign="top">
              <div align="center">
                <b>% Common<br>
                 Shares<br>
                 Owned</b>
              </div>
            </td>
          </tr>

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

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

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

            <td valign="top">
            </td>

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

          <tr>
            <td valign="top">
              <p>Patrick White</p>
            </td>

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

            <td valign="top">
              <p align="right">811,100</p>
            </td>

            <td valign="top">
              <p><sup>(1)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">6.7%</p>
            </td>

            <td valign="top">
              <p><sup>(7)</sup></p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>58 Bosworth Field</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Mendon, New York 14506</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Officer and Director</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Thomas Wicker</p>
            </td>

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

            <td valign="top">
              <p align="right">1,000,000</p>
            </td>

            <td valign="top">
              <p><sup>(10)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">8.3%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>5908 Stone Hill Road</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Lakeville, New York 14480</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Officer and Director</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Alan E. Harrison</p>
            </td>

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

            <td valign="top">
              <p align="right">13,750</p>
            </td>

            <td valign="top">
              <p><sup>(2)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">less than 1%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>185 Canterbury Rd.</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Rochester, NY&nbsp; 14607</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Director</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Timothy Ashman</p>
            </td>

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

            <td valign="top">
              <p align="right">12,600</p>
            </td>

            <td valign="top">
              <p><sup>(3)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">less than 1%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>6 Chadwell Circle</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Fairport, NY 14450</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Director</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Robert B. Fagenson</p>
            </td>

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

            <td valign="top">
              <p align="right">1,007,500</p>
            </td>

            <td valign="top">
              <p><sup>(4)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">&nbsp;8.4%</p>
            </td>

            <td valign="top">
              <p><sup>(8)</sup></p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>535 E. 86th Street</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>New York, New York 10028</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Director</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Ira A. Greenstein</p>
            </td>

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

            <td valign="top">
              <p align="right">7,500</p>
            </td>

            <td valign="top">
              <p><sup>(5) (6)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">less than 1%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>c/o IDT Venture Capital&nbsp; Corp.</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>520 Broad St.</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Newark, NJ 07102<br>
               Director</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Vera Neuman</p>
            </td>

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

            <td valign="top">
              <p align="right">1,000,000</p>
            </td>

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

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

            <td valign="top">
              <p align="right">8.3%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>1102 53rd Street</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Brooklyn, New York 11219</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Martin Vegh</p>
            </td>

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

            <td valign="top">
              <p align="right">1,000,000</p>
            </td>

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

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

            <td valign="top">
              <p align="right">8.3%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>121 Joseph Avenue</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Staten Island, New York 10314</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Charles M. LaLoggia</p>
            </td>

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

            <td valign="top">
              <p align="right">1,586,610</p>
            </td>

            <td valign="top">
              <p><sup>(10)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">13.2%</p>
            </td>

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

          <tr>
            <td valign="top">
              <p>457 Park Avenue</p>
            </td>

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>Rochester, New York 14607</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td valign="top">
              <p>All Officers and Directors</p>
            </td>

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

            <td valign="top">
              <p align="right">2,852,450</p>
            </td>

            <td valign="top">
              <p><sup>(1)</sup></p>
            </td>

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

            <td valign="top">
              <p align="right">23.7%</p>
            </td>

            <td valign="top">
              <p><sup>(9)</sup></p>
            </td>
          </tr>

          <tr>
            <td valign="top">
              <p>(-6- persons) as a Group, 1,2,3,4,5,6,10</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1) Includes options&nbsp; which may be immediately exercised to purchase 10,000 shares of common stock.<br>
      <br>
       &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (2) Consists of options which may be immediately exercised to purchase 13,750 shares of common stock.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (3) Includes options which may be immediately exercised to purchase 10,000 shares of common stock.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (4) Includes options which may be immediately exercised to purchase 7,500 shares of common stock.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (5) Consists of options which may be immediately exercised to purchase 7,500 shares of common stock.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (6) Does not include 600,000 shares of common stock owned IDT Venture Capital Corporation of which Mr. Greenstein disclaims beneficial ownership. Mr. Greenstein is an executive officer and director of IDT Corp, which is affiliated with IDT Venture Capital Corporation.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (7) Calculation based on 12,018,902 shares of common stock</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (8) Calculation based on 12,016,402 shares of common stock</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (9) Calculation based on 12,057,652 shares of common stock&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (10) Mr. Thomas Wicker has pledged 400,000 shares owned by him as collateral for a loan from Mr. LaLoggia.</p>

      <p><b>ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Effective June 2004, we entered into new employment agreements with Mr. Patrick White, Thomas Wicker and Mr. David Wicker. The terms of these agreements are described above in <i>ITEM 10 - EXECUTIVE COMPENSATION, EMPLOYMENT AGREEMENTS</i>.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; As part of Mr. White's employment agreement, he was granted 30,000 options, of which 10,000 vested at the time of the grant and the balance of 20,000 are to vest 10,000 per year. The grant of these options was ratified by the vote of our shareholders in conjunction with their approval of the 2004 Employee Stock Option Plan at our annual meeting, which was held on December 17, 2004. The options are exercisable at $7.25 per share and expire in July 2011.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In November 2004, we refinanced an outstanding loan and line of credit, which had principal balances totaling approximately $259,000. The loan and line of credit had been secured by the assets of our subsidiary, Lester Levin, Inc. and were personally guaranteed by Patrick White. The new loan, which refinanced the debts, is secured by a certificate of deposit and did not require Mr. White's personal guaranty.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Effective January 1, 2004, we entered into an agreement with members of the Wicker Family, which amended an agreement dated November 1, 2000. The amendment terminated the Wickers' rights to future royalties and license fees. We paid a total of $90,000 to various members of the Wicker Family as consideration for their waiver of future payments. Of the $90,000, $10,000 was paid directly to Thomas Wicker, who is a director and executive officer of our company and $10,000 to David Wicker, who is an employee of our company. The Estate of Ralph Wicker and three other Wicker Family members received the balance of $70,000.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In December 2004, we entered into a definitive binding agreement with members of the Wicker Family which effectively provided that we have obtained the legal ownership of the same technology (including patent ownership rights) previously held by the Wicker Family. The members of the Wicker Family executing the agreement were The Estate of Ralph Wicker, Mary Wicker, Thomas Wicker, David Wicker, Christine Wicker, Kenneth Wicker and Michael Caton. Thomas Wicker serves as an executive officer and director of our company. His brother, David Wicker, is an officer of our company. The agreement with the Wicker Family provides that we will retain 70% of the future economic benefit derived from the exploitation of the technology, which may include licensing or royalty rights, patent or other infringement suits or enforcement actions, and the Wicker Family will receive 30% of such economic benefit, on a gross basis. The Wicker Family may not en
ter into any new assignments or licenses with respect to the technology. The Wicker Family members did not receive any securities of Document Security Systems, Inc., as part of this agreement.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In October 2003, we entered into an agreement with IDT Venture Capital Corporation, which gave us access to legal assistance and patent expertise as it pertained to patent enforcement issues and a review of our overall patent portfolio. In connection with the agreement we issued to IDT Venture Capital Corporation 100,000 shares of our common stock and warrants to acquire an additional 500,000 shares of our common stock at $2.50 per share. The warrants were scheduled to expire on February 1, 2014. On September 24, 2004, Mr. Ira Greenstein, the President of IDT Venture Capital Corp. was elected to our Board of Directors. On March 24, 2005, IDT Venture Capital Corporation exercised its warrants by payment to us of $1,250,000.</p>

      <p><b>ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K</b></p>

      <p><b>(a) Exhibits</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Exhibits listed below designated by an * are incorporated by reference to the filings by Document Security Systems, Inc. under the Securities Act of 1933 or the Securities and Exchange Act of 1934, as indicated. All other exhibits are filed herewith.</p>

      <table width="90%" border="0" align="center" cellpadding="3" cellspacing="0">
        <tr>
          <td valign="top" nowrap>
            <p>3.1</p>
          </td>

          <td valign="top">
            <p>Articles of Organization, as amended (incorporated by reference to exhibit 3.1 to the Company's Registration Statements No. 2-98684-NY on Form S-18).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>3.2</p>
          </td>

          <td valign="top">
            <p>By-laws, as amended (incorporation by reference to exhibit 3.2 to the Company's Registration Statement No. 2-98684-NY on Form S-18).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.2</p>
          </td>

          <td valign="top">
            <p>Agreement dated November 7, 1996 with Charles M. LaLoggia (incorporated by reference from Company's Form 10Q for March 31, 1997).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.3</p>
          </td>

          <td valign="top">
            <p>Agreement dated July 2, 1996 with Frank LaLoggia (incorporated by reference from Company's Form 10Q for June 30, 1996).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.4</p>
          </td>

          <td valign="top">
            <p>Agreement dated May 12, 1997, between New Sky Communications, Inc. and Syracuse Film Productions, LLC (incorporated by reference from the Company's Form 10-K for December 31, 1997). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.5</p>
          </td>

          <td valign="top">
            <p>Promissory Note dated March 24, 1999 from New Sky Communications, Inc. to Carl R. Reynolds (incorporated by reference form Company's Form 10K for December 31, 1999).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.6</p>
          </td>

          <td valign="top">
            <p>Agreement dated March 22, 1999 between New Sky Communications, Inc. and Movieplace.com (incorporated by reference from Company's Form 10-K for December 31, 1999).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.7</p>
          </td>

          <td valign="top">
            <p>Employment Agreement, dated December 5, 2001 between New Sky Communication, Inc. and E. Anthony Wilson. (incorporated by reference from Company's Form 10-KSB for December 31, 2001).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.8</p>
          </td>

          <td valign="top">
            <p>Agreement dated December 12, 2001 between New Sky Communications, Inc. and Michael Cidoni, Stephen Morse, Cedric Herrera, Charles M. LaLoggia, Carl R. Reynolds and Paul Packer (incorporated by reference from Company's Form 10-KSB for December 31, 2001).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.9&nbsp;&nbsp;</p>
          </td>

          <td valign="top">
            <p>Agreement dated December 12, 2001 between New Sky Communications, Inc. and Charles M. LaLoggia, Carl R. Reynolds and Paul Packer (incorporated by reference from Company's Form 10-KSB for December 31, 2001). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.10</p>
          </td>

          <td valign="top">
            <p>Agreement dated July 31, 2002 between New Sky Communications, Inc. and Patrick White (incorporated by reference from Company's Form 8-K filed on August 8, 2002).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.11</p>
          </td>

          <td valign="top">
            <p>Agreement dated July 31, 2002 between New Sky Communications, Inc. and Thomas M. Wicker (incorporated by reference from Company's Form 8-K filed on August 8, 2002).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.12</p>
          </td>

          <td valign="top">
            <p>Agreement dated November 1, 2002 between New Sky Communications, Inc. and David Thomas M. Wicker, Christine Wicker, Kenneth Wicker and Michael Caton (incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 2002). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.13</p>
          </td>

          <td valign="top">
            <p>Employment Agreement dated November 1, 2002 between New Sky Communications, Inc. and David Wicker (incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 2002). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.14</p>
          </td>

          <td valign="top">
            <p>Form of Warrant Agreement between the Registrant and Fordham Financial Management, Inc.(incorporated by reference on Company's registration statement on Form S-3 filed on January 20, 2004).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.15</p>
          </td>

          <td valign="top">
            <p>Form of Warrant Agreement between the Registrant and W.A.B. Capital (incorporated by reference on Company's registration statement on Form S-3 filed on January 20, 2004).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.16</p>
          </td>

          <td valign="top">
            <p>Form of Warrant Agreement between the Registrant and Howard Safir (incorporated by reference on Company's registration statement on Form S-3 filed on January 20, 2004).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.17</p>
          </td>

          <td valign="top">
            <p>Form of Series A Warrant Agreement issued by the Registrant to participants in its private placement offering completed on December 29, 2003. (incorporated by reference on Company's registration statement on Form S-3 filed on January 20, 2004).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.18</p>
          </td>

          <td valign="top">
            <p>Form of Registration Rights Agreement issued by the Registrant to participants in its private placement offering completed on December 29, 2003. (incorporated by reference on Company's registration statement on Form S-3 filed on January 20, 2004)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.19</p>
          </td>

          <td valign="top">
            <p>Form of Warrant issued to IDT Venture Capital Corporation dated October 31, 2003.(incorporated by reference on Schedule 13D filed by IDT Venture Capital Corporation dated December 2, 2003)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.20</p>
          </td>

          <td valign="top">
            <p>Form of Securities Purchase Agreement between Registrant and IDT Venture Capital Corporation dated as of October 31, 2003. (incorporated by reference on Schedule 13D filed by IDT Venture Capital Corporation dated December 2, 2003).*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.21 <sup>(1)</sup></p>
          </td>

          <td valign="top">
            <p>Form of Licensing and Marketing Agreement between Registrant and Boise White Paper LLC dated January 19, 2005. (redacted version)</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.22</p>
          </td>

          <td valign="top">
            <p>Form of Surrender and Assignment Agreement dated as of February 25, 2005 between Registrant and the Net Interest Holders. (filed as Exhibit 10.1 to form 8-K dated February 25, 2005)*&nbsp;</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.23</p>
          </td>

          <td valign="top">
            <p>Form of Surrender and Assignment Agreement dated as of February 25, 2005 between Registrant and the Gross Interest Holders (filed as Exhibit 10.2 to Form 8-K dated February 25, 2005)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.24</p>
          </td>

          <td valign="top">
            <p>Agreement of Sublease dated May 2004 for the Premises Located at 28 E. Main Street, Rochester, New York (filed as Exhibit 10.1 to Form 10-QSB for the Quarter ended June 30, 2004)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.25</p>
          </td>

          <td valign="top">
            <p>Form of Employment Agreement dated as of June 10, 2004 between Registrant and Patrick White (filed as Exhibit 10.2 to Form 10-QSB for the Quarter ended June 30, 2005)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.26</p>
          </td>

          <td valign="top">
            <p>Form of Employment Agreement dated as of June 11, 2004 between Registrant and Thomas Wicker</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.27</p>
          </td>

          <td valign="top">
            <p>Form of 2004 Employee Stock Option Plan (filed as Appendix D to Proxy Statement for the Meeting of Shareholders held on December 17, 2004)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>10.28</p>
          </td>

          <td valign="top">
            <p>Form of Non Executive Director Stock Option Plan (filed as Appendix E to Proxy Statement for the Meeting of Shareholders held on December 17, 2004)*</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>14</p>
          </td>

          <td valign="top">
            <p>Code of Ethics (filed as Exhibit 14.1 to Form 10-KSB for the fiscal year ended December 31, 2003.</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>16</p>
          </td>

          <td valign="top">
            <p>Letter on change of Certifying Accountant (incorporated by reference to the Registrant's Report on Form 8-K filed on January 9. 2003 as Exhibit 99.1). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>17.1</p>
          </td>

          <td valign="top">
            <p>Resignation letter of Carl R. Reynolds, dated December 3, 2001 (incorporated by reference from Company's Form 10-KSB for December 31, 2001). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>17.2</p>
          </td>

          <td valign="top">
            <p>Resignation letter of E. Anthony Wilson dated August 1, 2002 (incorporated by reference from Company's Form 8-K filed on August 8, 2002). *</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>21</p>
          </td>

          <td valign="top">
            <p>Subsidiaries of Registrant</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>23.1</p>
          </td>

          <td valign="top">
            <p>Consent of Freed Maxick &amp; Battaglia, CPAs, PC</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>31.1</p>
          </td>

          <td valign="top">
            <p>Certification -18 USC 1350 Section 302</p>
          </td>
        </tr>

        <tr>
          <td valign="top" nowrap>
            <p>32.1</p>
          </td>

          <td valign="top">
            <p>Certification -18 USC 1350 Section 906</p>
          </td>
        </tr>
      </table>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1) This exhibit contains a redacted copy of the agreement. We have filed a confidentiality request with the Commission with respect to certain portions of the agreement.</p>

      <p><b>&nbsp;(b)&nbsp;&nbsp; Reports on Form 8-K</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On October 28, 2004, we filed an amendment under Form 8-K/A, to correct a typographical error in Item 5.02 of our Form 8-K filing of September 30, 2004.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On December 22, 2004, we reported on Form 8-K, under Item 5.02 the election of directors, and approval of stock option plans at our shareholders' meeting.</p>

      <p><b>ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES</b></p>

      <p><b>Audit Fees</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The aggregate fees billed for professional services rendered by our principal accountant, Freed Maxick &amp; Battaglia, CPAs, PC for the audit of our annual financial statements, review of financial statements included in our quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the years ended December 31, 2004 and 2003 were $60,650 and $41,500, respectively. Our previous principal accountant, Michael F. Cronin, CPA billed for professional services in 2003, $10,285. Freed, Maxick, &amp; Battaglia, CPAs, PC was engaged as our principal accountant effective January 4, 2004, and their services included auditing the financial statements contained in their report on Form 10-KSB for the years ended December 31, 2004 and 2003.</p>

      <p><b>Audit Related Fees</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The aggregate fees billed for other related services by our principal accountant, Freed Maxick &amp; Battaglia, CPAs, PC and Michael F. Cronin, CPA, that are reasonably related to the performance of the audit or review of our financial statements, other than those previously reported in this Item 14, for the years ended December 31, 2004 and 2003 were $-0- and $-0-, respectively.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>Tax Fees</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The aggregate fees billed for professional services rendered by our principal accountant Freed Maxick &amp; Battaglia, CPAs, PC for tax compliance, tax advice and tax planning for the years ended December 31, 2003 and 2002 were $11,100 and $-0-, respectively. No fees for tax services were billed by Michael F. Cronin, CPA.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p><b>All other Fees</b></p>

      <p>&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No other fees were billed by our principal accounting firms for the years 2004 and 2003.</p>

      <p><b>Audit Committee</b></p>

      <p>&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our Audit Committee, since January 4, 2004, approved, in advance, all work performed by our principal accountant, Freed Maxick &amp; Battaglia, CPAs, PC. Prior to January 4, 2004, our board of directors, which had functioned as our Audit Committee, approved, in advance, all work performed by our then principal accountant, Michael F. Cronin, CPA.</p>
      <hr noshade>

      <div>
        <p align="center">&nbsp;</p>
      </div>

      <div align="center">
        <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES</b></p>

        <p align="center"><b>CONTENTS<br>
        </b></p>

        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td width="20" valign="top">&nbsp;</td>

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

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

            <td valign="top">
              <p align="right"><b>Page</b></p>
            </td>
          </tr>

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

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

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

            <td valign="top">
              <hr noshade>
            </td>
          </tr>

          <tr>
            <td colspan="2" valign="top">
              <p><b>Report of Independent Registered Public Accounting Firm</b></p>
            </td>

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

            <td valign="top">
              <p align="right">F-1</p>
            </td>
          </tr>

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

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

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

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

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

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

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

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

          <tr>
            <td colspan="2" valign="top">
              <p><b>Consolidated Financial Statements:</b></p>
            </td>

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

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

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

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

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

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

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

            <td valign="top">
              <p>Balance Sheets</p>
            </td>

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

            <td valign="top">
              <p align="right">F-2</p>
            </td>
          </tr>

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

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

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

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

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

            <td valign="top">
              <p>Statements of Operations</p>
            </td>

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

            <td valign="top">
              <p align="right">F-3</p>
            </td>
          </tr>

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

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

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

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

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

            <td valign="top">
              <p>Statements of Cash Flows</p>
            </td>

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

            <td valign="top">
              <p align="right">F-4</p>
            </td>
          </tr>

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

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

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

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

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

            <td valign="top">
              <p>Statements of Changes in Stockholders' Equity</p>
            </td>

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

            <td valign="top">
              <p align="right">F-5</p>
            </td>
          </tr>

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

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

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

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

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

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

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

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

          <tr>
            <td colspan="2" valign="top">
              <p><b>Notes to the Consolidated Financial Statements</b></p>
            </td>

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

            <td valign="top">
              <p align="right">F6 - F22</p>
            </td>
          </tr>
        </table>
        <br>
      </div>

      <div align="center">
        <hr noshade>

        <div>
          <p align="center"><strong>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</strong></p>

          <p align="left">Board of Directors and Shareholders<br>
           Document Security Systems, Inc. and Subsidiaries<br>
           Rochester, New York</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have audited the accompanying consolidated balance sheets of Document Security Systems, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations and stockholders' equity, and cash flows for the years then ended.&nbsp; These financial statements are the responsibility of the Company's management.&nbsp; Our responsibility is to express an opinion on these financial statements based on our audits.</p>

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

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Document Security Systems, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.</p>

          <p align="left">FREED MAXICK &amp; BATTAGLIA, CPAs, PC<br>
           /s/ FREED MAXICK &amp; BATTAGLIA, CPAs, PC</p>

          <p align="left">Buffalo, New York<br>
           March 21, 2005</p>

          <p align="center">F-1</p>
          <hr noshade>
        </div>
        <br clear="all">


        <div>
          <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
          </b> <b>CONSOLIDATED BALANCE SHEETS<br>
          </b> <b>December 31,</b></p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>ASSETS</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="center"><b>2004</b></p>
              </td>

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

              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <p align="center"><b>2003</b></p>
              </td>

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

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td width="20" valign="top" nowrap>&nbsp;</td>

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

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

              <td valign="top" nowrap>
                <hr noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr noshade>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Current assets:</b></p>
              </td>

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

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

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Cash and cash equivalents</p>
              </td>

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>2,657,865</b></p>
              </td>

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

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

              <td valign="top" nowrap>
                <p>$</p>
              </td>

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Accounts receivable, net</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>381,923</b></p>
              </td>

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Inventory</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>62,494</b></p>
              </td>

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Prepaid expenses</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>64,158</b></p>
              </td>

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

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

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

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

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

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

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p>Total current assets</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>3,166,440</b></p>
              </td>

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

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

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

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

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Restricted cash</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>300,000</b></p>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Fixed assets, net</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>380,971</b></p>
              </td>

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

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

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

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

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Equipment under capital lease, net</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>141,652</b></p>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Goodwill</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>284,278</b></p>
              </td>

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

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

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

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

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Other intangible assets, net</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>343,624</b></p>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

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

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>4,616,965</b></p>
              </td>

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

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

              <td valign="top" nowrap>
                <p>$</p>
              </td>

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

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

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

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

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

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

              <td valign="top" nowrap>
                <hr align="center" size="4" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>LIABILITIES AND STOCKHOLDERS' EQUITY</b></p>
              </td>

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Current liabilities:</b></p>
              </td>

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Trade accounts payable</p>
              </td>

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>409,868</b></p>
              </td>

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

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

              <td valign="top" nowrap>
                <p>$</p>
              </td>

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Accrued expenses</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>51,305</b></p>
              </td>

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Current portion of long-term debt</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>47,894</b></p>
              </td>

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Current portion of capital lease obligations</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>30,663</b></p>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Line of credit</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

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

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

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

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

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

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

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p>Total current liabilities</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>539,730</b></p>
              </td>

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

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

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

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

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Long term debt</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>218,226</b></p>
              </td>

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

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

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

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

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Long term capital lease obligations</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>118,267</b></p>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Commitments (see Note 9)</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>-&nbsp;&nbsp;</b></p>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Stockholders' equity:</b></p>
              </td>

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Common stock, $.02 par value; 200,000,000</p>
              </td>

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

              <td colspan="2" valign="top" nowrap>
                <p>&nbsp;shares authorized</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>218,536</b></p>
              </td>

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Additional paid-in capital</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>13,074,847</b></p>
              </td>

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

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

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

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

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

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

              <td colspan="2" valign="top" nowrap>
                <p>Accumulated deficit</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>(9,552,641</b></p>
              </td>

              <td valign="top" nowrap><strong>)</strong></td>

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

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

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

              <td valign="top" nowrap>)</td>
            </tr>

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

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <p>Total stockholders' equity</p>
              </td>

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

              <td valign="top" nowrap>
                <p align="right"><b>3,740,742</b></p>
              </td>

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

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

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

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

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

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

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

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

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

              <td valign="top" nowrap>
              </td>

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

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

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

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

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>4,616,965</b></p>
              </td>

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

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

              <td valign="top" nowrap>
                <p>$</p>
              </td>

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

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

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

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

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

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

              <td valign="top" nowrap>
                <hr align="center" size="4" noshade>
              </td>

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

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

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

              <td valign="top" nowrap>
                <hr align="center" size="4" noshade>
              </td>

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

          <p>See accompanying notes.</p>

          <p>F-2</p>
          <hr noshade>
        </div>
        <br clear="all">


        <div>
          <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          </b> <b><br>
           CONSOLIDATED STATEMENTS OF OPERATIONS<br>
          </b> <b>For the Years Ended December 31,</b></p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="41" valign="top" nowrap>&nbsp;</td>

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

              <td width="235" valign="top" nowrap>&nbsp;</td>

              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td width="8" valign="top" nowrap>&nbsp;</td>

              <td width="72" valign="top" nowrap>
                <p align="center"><b>2004</b></p>
              </td>

              <td width="5" valign="top" nowrap>
              </td>

              <td width="20" valign="top" nowrap>
              </td>

              <td width="8" valign="top" nowrap>
              </td>

              <td width="78" valign="top" nowrap>
                <p align="center"><b>2003</b></p>
              </td>

              <td width="8" valign="top" nowrap>
              </td>
            </tr>

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

              <td width="41" valign="top" nowrap>&nbsp;</td>

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

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

              <td colspan="3" valign="top" nowrap>
                <hr align="right" noshade>
              </td>

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

              <td colspan="3" valign="top" nowrap>
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Sales, net</b></p>
              </td>

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

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>1,594,768</b></p>
              </td>

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

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

              <td valign="top" nowrap>
                <p>$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">1,284,744</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p>Costs of sales</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>936,685</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">722,924</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Gross Profit</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>658,083</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">561,820</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Operating expenses:</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Selling, general and administrative expenses</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>1,879,078</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">1,111,995</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Research and development</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>421,718</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">231,716</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Loss on goodwill impairment</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>81,013</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Stock and options issued for patent protection</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">647,376</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>Operating expenses</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>2,381,809</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">1,991,087</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Loss before other income (expense)</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(1,723,726</b></p>
              </td>

              <td valign="top" nowrap>
                <p><b>)</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(1,429,267</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Other income (expense):</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Interest expense</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(28,434</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(18,975</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Interest income</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>55,181</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">3,818</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Other expense</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(7,766</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>26,747</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(22,923</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Loss before income taxes</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(1,696,979</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(1,452,190</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p>Income taxes</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(6,887</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Net loss</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>(1,703,866</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">(1,452,190</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Net loss per share, basic and diluted</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>&nbsp;(0.16</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">(0.16</p>
              </td>

              <td valign="top" nowrap>)</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>Weighted average common shares outstanding,</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top" nowrap>
                <p><b>&nbsp; basic and diluted</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>10,895,676</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">9,341,289</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="center" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="center" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>
          </table>

          <p>See accompanying notes.</p>

          <p>F-3</p>
          <hr noshade>
        </div>
        <br clear="all">


        <div>
          <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          </b> <b><br>
           CONSOLIDATED STATEMENTS OF CASH FLOWS<br>
          </b> <b>For the Years Ended December 31,</b></p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="center"><b>2004</b></p>
              </td>

              <td valign="top" nowrap>
              </td>

              <td width="20" valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <p align="center"><b>2003</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p><b>Cash flows from operating activities:</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Net loss</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>(1,703,866</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">(1,452,190</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Adjustments to reconcile net loss to net</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>cash used by operating activities:</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Depreciation and amortization expense</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>127,894</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">105,140</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Stock and stock warrants issued for services</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>59,223</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">790,056</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Loss on goodwill impairment</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>81,013</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>(Increase) decrease in assets:</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>Accounts receivable</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(225,023</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(19,770</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>Inventory</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>14,150</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(30,207</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>Prepaid expenses</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(22,701</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(22,943</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <p>Increase in liabilities:</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>Accounts payable</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>242,136</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">180,925</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>Accrued expenses</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>2,978</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">122,279</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p><b>Net cash used by operating activities</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(1,424,196</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(326,710</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p><b>Cash flows from investing activities:</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Purchases of fixed assets</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(328,602</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(19,945</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Purchase of royalty rights</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(90,000</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Purchase of patents and contractual rights</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(271,624</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p><b>Net cash used by investing activities</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(690,226</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(19,945</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p><b>Cash flows from financing activities:</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Net (repayment) borrowings on line of credit</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(86,341</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">4,156</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Repayment of long-term debt</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(216,555</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">(23,064</p>
              </td>

              <td valign="top" nowrap>
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Increase in restricted cash</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(300,000</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Borrowings of long-term debt</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>270,000</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Repayment of capital lease obligations</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(10,539</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="3" valign="top" nowrap>
                <p>Issuance of common stock, net of expenses</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">5,025,062</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p><b>Net cash provided (used) by financing activities</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(343,435</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">5,006,154</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p>Net increase (decrease) in cash and cash equivalents</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>(2,457,857</b></p>
              </td>

              <td valign="top" nowrap>
                <p><strong>)</strong></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">4,659,499</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p>Cash and cash equivalents - beginning of year</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right"><b>5,115,722</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">456,223</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td colspan="4" valign="top" nowrap>
                <p>Cash and cash equivalents - end of year</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p><b>$</b></p>
              </td>

              <td valign="top" nowrap>
                <p align="right"><b>2,657,865</b></p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p>$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">5,115,722</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>
          </table>

          <p>See accompanying notes.</p>

          <p>F-4</p>
          <hr noshade>
        </div>
        <br clear="all">


        <div>
          <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
          </b> <b>CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY<br>
          </b> <b>For the Years Ended December 31, 2004 and 2003</b></p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td rowspan="2" valign="top">&nbsp;</td>

              <td width="20" rowspan="2" valign="top">&nbsp;</td>

              <td colspan="4" valign="bottom">
                <p align="center"><b>Common Stock</b></p>
              </td>

              <td rowspan="2" valign="top">&nbsp;</td>

              <td colspan="2" rowspan="3" valign="top">
                <p align="center"><b>Additional<br>
                 Paid-in<br>
                 Capital</b></p>
              </td>

              <td rowspan="2" valign="top">&nbsp;</td>

              <td colspan="3" rowspan="3" valign="bottom">
                <p align="center"><b>Accumulated<br>
                 Deficit</b></p>
              </td>

              <td rowspan="2" valign="top">&nbsp;</td>

              <td colspan="2" rowspan="3" valign="top">
                <p align="center"><b>Total</b></p>
              </td>
            </tr>

            <tr>
              <td colspan="4" valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="bottom">
                <p align="center"><b>Shares</b></p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Amount</b></p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p><b>Balance, December 31, 2002</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">9,309,818</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">186,196</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">7,042,245</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">(6,396,585</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">831,856</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock issued for cash, net of related expenses</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">1,450,000</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">29,000</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">4,996,062</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">5,025,062</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock issued for services, net</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">85,000</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">1,700</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">204,776</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">206,476</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock issued to employees as compensation</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">24,000</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">480</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">3,360</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">3,840</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock warrants issued for services</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">579,740</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">579,740</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Net loss</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(1,452,190</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(1,452,190)</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p><b>Balance, December 31, 2003</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">10,868,818</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">217,376</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">12,826,183</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(7,848,775</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">5,194,784</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock issued for satisfaction of obligations</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">40,000</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">800</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">189,801</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">190,601</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock issued to employees as compensation</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">18,000</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">360</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">3,480</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">3,840</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Stock options issued for services</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">55,383</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">55,383</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Net loss</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(1,703,866</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(1,703,866)</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p><b>Balance, December 31, 2004</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">10,926,818</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">218,536</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">13,074,847</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">(9,552,641</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">3,740,742</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>
            </tr>
          </table>

          <p>See accompanying notes.</p>

          <p>F-5</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>
        </div>

        <div>
          <p align="left"><b>NOTE 1. - DESCRIPTION OF BUSINESS</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc. (the "Company") is a New York corporation formed in 1984 under the name Thoroughbreds USA, Inc. By amendment of its certificate of incorporation, the Company's name was changed to New Sky Communications, Inc. and in February 2003 it was changed again to Document Security Systems, Inc. The Company was a motion picture company that produced movies for domestic and foreign theater and video distribution, but was substantially inactive with minimal revenues. In 2002, the Company made several business acquisitions with the consequence of changing its business to providing printing services, selling preprinted legal documents, and developing, licensing and selling anti-counterfeiting technology and products.</p>

          <p align="left"><strong>NOTE 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</strong></p>

          <p align="left"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <i>Principles of Consolidation</i></b> - The consolidated financial statements include the accounts of Document Security Systems, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Use of Estimates</i></b> <b></b>- <b></b>The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Cash and Cash Equivalents</i></b> - <b></b>For financial statement presentation purposes, the Company considers those short-term, highly liquid investments with original maturities of three months or less to be cash or cash equivalents.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Restricted Cash</i></b> - Restricted cash consists of a five year certificate of deposit, which is being held as security on a term loan (see Note 5)<b><i></i></b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accounts Receivable</i></b> - The Company carries its trade accounts receivable at cost less an allowance for doubtful accounts.&nbsp; On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based upon management's estimates that include a review of the history of past write-offs and collections and an analysis of current credit conditions.&nbsp; At December 31, 2004 the Company established a reserve for doubtful accounts of approximately&nbsp;&nbsp; $13,700 ($6,900 - 2003). The Company does not accrue interest on past due accounts receivable.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <i><strong>Inventory</strong></i> &ndash; Inventories consist primarily of patented security paper and legal supplies held for resale and are stated at the lower of cost or market on the first-in, first-out ("FIFO") method.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Property and Equipment</i></b> <b>-</b> Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives or lease period of the assets whichever is shorter. Expenditures for renewals and betterments are capitalized. Expenditures for minor items, repairs and maintenance are charged to operations as incurred.&nbsp; Any gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place. For the year ended December 31, 2004, depreciation expense amounted to approximately $109,900 ($60,000 - 2003).</p>

          <p>F-6</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 2</b>. <b>- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)</b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Goodwill</i></b> - Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. With the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but are combined when reporting units within the same segment have similar economic characteristics. Under the criteria set forth by SFAS No. 142, the Company has four reporting units based on the current structure.&nbsp; An impairment loss generally would be recognized when the carrying amount of the report
ing unit's net assets exceeds the estimated fair value of the reporting unit.&nbsp; The Company completed its assessment of any potential impairment upon adoption of this standard and performs annual assessments. During the year ended December 31, 2004, the Company determined that an impairment existed (see Note 4). <i>&nbsp;</i></p>

          <p align="left"><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <strong>Intangible Assets</strong></i> - <i></i>Intangible assets consist of royalty rights, patent acquisition and application costs and contractual rights, which are being amortized over their expected lives.&nbsp; Amortization expense and accumulated amortization at December 31, 2004 amounted to $18,000.&nbsp; In 2003 the carrying value of covenants not to compete and capitalized loan costs were reduced to zero after incurring $45,000 in amortization expense that year (see Note 4).</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fair Value of Financial Instruments</i></b> -<b><i></i></b>Statements of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2004.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; These financial instruments include cash and cash equivalents, accounts payable and accrued expenses. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company's notes and term debt payable is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value approximates the fair value of these debt instruments in 2004 and 2003.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Revenue Recognition</i></b> - Sales are recognized when a product or service is delivered, shipped or provided to the customer and all material conditions relating to the sale have been substantially performed.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Research, Development and Related Expenses</i></b> <b></b>- <b></b>These costs are charged to operations in the year incurred and are shown on a separate line of the Consolidated Statement of Operations. Research and development expenses, covering basic scientific research and the application of scientific advances to the development of new and improved products and their uses, totaled approximately $422,000 for the year ended December 31, 2004 ($232,000 - 2003).</p>

          <div align="center">
            <p>F-7</p>
            <hr noshade>

            <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
            <br>
             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>
          </div>

          <p align="left"><b>NOTE 2</b>. <b>- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)</b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Advertising Costs</i></b> - The Company expenses advertising costs as incurred.&nbsp; Advertising expense was approximately $33,000 for the year ended December 31, 2004 ($25,000 - 2003).</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Stock Based Compensation</i></b> <i>-</i> The Company accounts for its employee stock option plans utilizing the intrinsic value method specified under APB Opinion No. 25, "Accounting for Stock Issued to Employees."&nbsp; Accordingly, no compensation expense is recognized for stock options issued to employees as long as the exercise price is greater than or equal to the market value of the common stock at the date of grant.&nbsp; In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") the Company discloses the summary of proforma effects to reported net income (loss) and earnings (loss) per share as if the Company has elected to recognize compensation costs based on the fair value of the employee options at the grant date.&nbsp; Nonqualified stock options and warrants issued to non-employees are recognized as compensation expense based upon
 the fair value of the consideration received or the fair value of the equity instruments issued, which ever is more reliably measurable.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i>Income Taxes</i></b> - <b></b>The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"), which requires recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income tax is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Earnings Per Common Share</i></b> - <b></b>The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which requires the presentation of basic and diluted earnings per share. Basic earnings per share reflects the actual weighted average of shares issued and outstanding during the period. Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss year, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potential common shares is anti-dilutive.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If the Company had generated earnings during the year ended December 31, 2004, 622,160 common equivalent shares would have been added to the weighted average shares outstanding to compute the diluted weighted average shares outstanding. If the Company had generated earnings during the year ended December 31, 2003, 63,983 common equivalent shares would have been added to the weighted average shares outstanding to compute the diluted weighted average shares outstanding.&nbsp;1,411,750 and 700,000 stock options and warrants were outstanding and exercisable with exercise prices below market during 2004 and 2003, respectively.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Concentration of Credit Risk</i></b> - The Company maintains its cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits.&nbsp; The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.<b><i></i></b></p>

          <div align="left">
            <p align="center">F-8</p>
            <hr align="center" noshade>

            <p align="center"><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
            <br>
             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

            <div align="left">
              <b><i><br clear="all">
              </i></b> <b>NOTE 2</b>. <b>- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)</b>
            </div>
          </div>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Recent Accounting Pronouncements</i></b> - In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, <i>Accounting for Stock-Based Compensation &ndash; Transition and Disclosure</i> ("SFAS 148"). SFAS 148 amends Statement No. 123, <i>Accounting for Stock-Based Compensation</i> ("SFAS 123"), to provide alternative methods for voluntary transition to the fair value method of accounting for stock-based employee compensation prescribed by SFAS 123. SFAS 148 also requires disclosure of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company adopted the disclosure provisions of SFAS 148 effective January 1, 2003 and has included the additional required disclosures above under "Stock-Based Compensation." Such adoption did not have a mat
erial impact on the financial statements (see Note 6).</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based Payment," or SFAS No. 123(R). SFAS No. 123(R) revises FASB Statement No. 123 "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, and its related implementation guidance. This Statement eliminates the ability to account for share-based compensation using the intrinsic value method under APB Opinion No. 25. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, known as the requisite service period, which i
s usually the vesting period. SFAS No. 123(R) is effective for companies filing under Regulation SB as of the beginning of the first interim or annual reporting period that begins after December 15, 2005, which will be the Company's&nbsp; first quarter of the year ending December 31, 2006. The Company&nbsp; anticipates adopting SFAS No. 123(R) beginning in the quarter ending March 31, 2006. Accordingly, the provisions of SFAS No. 123(R) will apply to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date must be recognized as the requisite service is rendered on or after the required effective date. These new accounting rules will lead to a decrease in reported earnings. Although the adoption of SFAS No. 123(R) could have a material impact on our financial position and results of operations, the Company 
is still evaluating the potential impact from adopting this statement.</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Segment Reporting</i></b> &ndash; In applying the provisions of Statement of Financial Accounting Standard No. 131 "Segment Reporting," the Company is organized, managed and internally reported as four business segments (see Note 11).</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Reclassifications</i></b> &ndash; Certain prior year amounts have been reclassified to conform to the current year presentation.</p>

          <p>F-9</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><strong>NOTE 3. - FIXED ASSETS</strong></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fixed assets consisted of the following at December 31:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td rowspan="2" valign="top">&nbsp;</td>

              <td width="20" rowspan="2" valign="top">&nbsp;</td>

              <td rowspan="3" valign="bottom">
                <p align="center"><strong>Estimated<br>
                 Useful<br>
                 Life</strong></p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="5" valign="top">
                <p align="center"><strong>2004</strong></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" rowspan="3" valign="bottom">
                <p align="center"><strong>2003<br>
                 Purchased</strong></p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top">&nbsp;</td>

              <td colspan="5" valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="bottom">
                <p align="center"><strong>Purchased</strong></p>
              </td>

              <td width="10" valign="top">&nbsp;</td>

              <td colspan="2" valign="bottom">
                <p align="center"><strong>Capitalized<br>
                 Under<br>
                 Capital<br>
                 Leases</strong></p>
              </td>

              <td width="20" valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <div align="right">
                  <hr align="right" noshade>
                </div>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <div align="right">
                  <hr align="right" noshade>
                </div>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <div align="right">
                  <hr align="right" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Machinery &amp; equipment</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">5 years</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">471,884</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">159,469</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">287,477</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Leasehold improvements</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">19 months (1)</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">115,413</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">23,800</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Furniture &amp; fixtures</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">7 years</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">61,491</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">8,908</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Other</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">6,847</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>&nbsp; Total cost</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">648,788</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">159,469</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">327,032</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Less accumulated depreciation</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">267,817</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">17,817</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">182,586</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Net</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">380,971</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">141,652</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">144,446</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>
            </tr>
          </table>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1) Expiration of lease term&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Depreciation expense for assets under capital leases was&nbsp; $17,817 for the year ended December 31, 2004 ($0 in 2003).<b>&nbsp;</b></p>

          <p align="left"><b>NOTE 4. - INTANGIBLE ASSETS</b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Goodwill</i></b> - <b></b>In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), the Company performs an annual fair value test of its recorded goodwill for its reporting units using a discounted cash flow and capitalization of earnings approach. As of December 31, 2004, the Company's estimate of the fair value of its reporting units indicated an $81,000 impairment of goodwill in its printing segment. This valuation adjustment is presented as "Loss on goodwill impairment" in the accompanying statement of operations. The goodwill remaining at December 31, 2004 consists of approximately $284,000 of which $81,000 and $203,000 were attributable to the legal store and document security segments, respectively. <b>&nbsp;</b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other Intangible Assets</i></b> - <b></b>Amortizable intangible assets are comprised of the following at December&nbsp;31, 2004:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Useful Life</b></p>
              </td>

              <td width="20" valign="top">
              </td>

              <td colspan="2" valign="top">
                <div align="center">
                  <b>2004</b>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Royalty rights</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">5 years</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>90,000</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Patent and contractual rights</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">10 years</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>271,624</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <div align="right">
                  <hr align="right" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>361,624</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Less accumulated amortization</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>18,000</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <div align="right">
                  <hr align="right" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Net carrying value</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>343,624</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>
            </tr>
          </table>

          <p>F-10</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 4. - INTANGIBLE ASSETS (CONTINUED)</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Actual and expected amortization for 2004 and each of the next 5 years is as follows:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td colspan="3" valign="top" nowrap>
                <p>2004 Actual</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>18,000</b></p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Expected:</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td width="20" valign="top">&nbsp;</td>

              <td width="100" valign="top">
                <p>2005</p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td width="40" valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>31,581</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>2006</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>45,162</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>2007</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>45,162</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>2008</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>45,162</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>2009</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>27,162</b></p>
              </td>
            </tr>
          </table>

          <p align="left"><b>NOTE 5. - LINE OF CREDIT AND LONG-TERM DEBT</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Long term debt consists of the following at December 31:&nbsp;</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td>&nbsp;</td>

              <td width="20">&nbsp;</td>

              <td colspan="2">
                <div align="center">
                  <strong>2004</strong>
                </div>
              </td>

              <td width="20">
              </td>

              <td colspan="2">
                <div align="center">
                  <strong>2003</strong>
                </div>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td colspan="2">
                <hr align="right" noshade>
              </td>

              <td>&nbsp;</td>

              <td colspan="2">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td>
                <div align="justify">
                  5 year note payable in monthly installments of<br>
                   $5,230, including interest at 6.0%, secured by a<br>
                   $300,000 certificate of deposit held by the lender<br>
                   and classified as restricted cash on the<br>
                   accompanying consolidated balance sheet.
                </div>
              </td>

              <td>&nbsp;</td>

              <td valign="bottom"><b>$</b></td>

              <td valign="bottom">
                <div align="right">
                  <b>266,120</b>
                </div>
              </td>

              <td valign="bottom">&nbsp;</td>

              <td valign="bottom">$</td>

              <td valign="bottom">
                <div align="right">
                  -&nbsp;&nbsp;&nbsp;&nbsp;
                </div>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>
            </tr>

            <tr>
              <td>
                <div align="justify">
                  10-year note payable to CIT Small Business<br>
                   Lending Corporation. The holder of the note was<br>
                   partially guaranteed by the U.S. Small Business<br>
                   Administration. The note bore interest at the bank's<br>
                   prime rate (4.0% at December 31, 2003) plus<br>
                   2.5%, was secured by a lien on the subsidiary's<br>
                   assets and was personally guaranteed by the<br>
                   Company's President.&nbsp; The note was refinanced<br>
                   during 2004.
                </div>
              </td>

              <td>&nbsp;</td>

              <td valign="bottom">&nbsp;</td>

              <td valign="bottom">
                <div align="right">
                  <b>-&nbsp;&nbsp;&nbsp;</b>
                </div>
              </td>

              <td valign="bottom">&nbsp;</td>

              <td valign="bottom">&nbsp;</td>

              <td valign="bottom">
                <div align="right">
                  212,675
                </div>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <hr align="right" noshade>
              </td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <div align="right">
                  <b>266,120</b>
                </div>
              </td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <div align="right">
                  212,675
                </div>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>
            </tr>

            <tr>
              <td>Less current portion</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <div align="right">
                  <b>47,894</b>
                </div>
              </td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <div align="right">
                  22,800
                </div>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <hr align="right" noshade>
              </td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td>Long term debt</td>

              <td>&nbsp;</td>

              <td><b>$</b></td>

              <td>
                <div align="right">
                  <b>218,226</b>
                </div>
              </td>

              <td>&nbsp;</td>

              <td>$</td>

              <td>
                <div align="right">
                  189,875
                </div>
              </td>
            </tr>

            <tr>
              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <hr align="right" size="4" noshade>
              </td>

              <td>&nbsp;</td>

              <td>&nbsp;</td>

              <td>
                <hr align="right" size="4" noshade>
              </td>
            </tr>
          </table>

          <p align="left">&nbsp;</p>

          <p>F-11</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 5. - LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 5 year maturities are as follows: &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="200" valign="top">
                <p>2005</p>
              </td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">47,894</p>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">
                <p>2006</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">50,891</p>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">
                <p>2007</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">54,074</p>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">
                <p>2008</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">57,457</p>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">
                <p>2009</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">55,804</p>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">266,120</p>
              </td>
            </tr>

            <tr>
              <td width="200" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>
          </table>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i>Line of Credit</i></b> - <b></b>The Company's subsidiary, Lester Levin, Inc., had a bank line of credit facility with Fleet National Bank of up to $100,000. The arrangement was personally guaranteed by the Company's President and bore interest at the bank's prime rate + 2.5%. At December 31, 2003, the balance on the line of credit was $86,341. The line was refinanced in 2004 with proceeds from a new long term debt obligation described above.</p>

          <p align="left"><b>NOTE 6. - STOCKHOLDERS' EQUITY</b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Stock Issued for Cash</i></b> &ndash; <b></b>In December 2003, the Company completed a private placement of 116 units, at $50,000 per unit, for gross proceeds of $5,800,000. Each unit consisted of 12,500 shares of common stock and 3,125 common stock warrants, exercisable at a price of $5 per share through November 2008.&nbsp; The private placement resulted in a total issuance of 1,450,000 shares of common stock and 362,500 warrants to investors. The net cash proceeds from the offering, after deduction of commissions, offering expenses and a consulting fee to the placement agent, was approximately $5,025,000.&nbsp; The value of the warrants, determined using the Black Scholes pricing model, amounted to approximately $690,000.&nbsp; As additional non-cash compensation to the placement agent, the Company issued an additional 362,500 warrants exercisable at a price of $4.80 per share through November 2008.&nbsp; Th
e value of the warrants, determined using the Black Scholes pricing model, amounted to approximately $708,000.&nbsp; As of December 31, 2004, the shares have been registered and are no longer subject to transferability restrictions.&nbsp;</p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Stock Issued for Services</i></b> &ndash; <b></b>During the year ended December 31, 2004, the Company issued 40,000 shares of its common stock in exchange for services valued at $190,601.&nbsp; The shares were valued at&nbsp; $4.76 per share, which approximated the market value at the time of agreements. As of December 31, 2004, the shares are not registered and are subject to restrictions as to transferability.&nbsp;</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the year ended December 31, 2003, the Company issued 100,000 shares of its common stock in exchange for legal services valued at $211,876.&nbsp; The shares were valued at&nbsp; $2.12 per share, which approximated the market value at the time of agreement. As of December 31, 2004, the shares are not registered and are subject to restrictions as to transferability.&nbsp; Also, 15,000 shares issued in 2002 for services rendered were returned to the Company and cancelled by mutual agreement.&nbsp; The previous charge to expense in 2002, in the amount of $5,400, was reversed in 2003.&nbsp;</p>

          <div align="left">
            <p align="center">F-12</p>
            <hr align="center" noshade>

            <p align="center"><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
            <br>
             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>
          </div>

          <p align="left"><b>NOTE 6. - STOCKHOLDERS' EQUITY (CONTINUED)</b></p>

          <p align="left"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <i>Stock Issued to Employees -</i></b> During the year ended December 31, 2002, the Company granted to employees rights to 96,000 shares of common stock.&nbsp; The stock rights vest 25% per year over a four-year period.&nbsp; The market value of the shares at the date of grant was $.14 per share or $13,000, and is being recorded as compensation expense over the vesting period.&nbsp; Compensation expense for the year ended December 31, 2004 amounted to $3,840 ($3,840 - 2003).&nbsp; During the year ended December 31, 2004, 18,000 shares vested and were issued to the employees (24,000 shares in 2003).&nbsp;&nbsp;&nbsp;&nbsp;</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i>Stock Warrants Issued for Services</i></b> - In 2003 the Company granted 725,000 warrants in connection with the private placement. The Company also granted 700,000 warrants as non-employee compensation for services rendered as follows:</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company granted warrants to purchase 500,000 shares of common stock at $2.50 per share. The warrants are scheduled to expire on February 1, 2014. The warrants were issued in exchange for assistance, including advice from legal counsel, with certain patent applications, an audit of our intellectual property rights and potential enforcement issues.&nbsp; The value of the warrants amounted to $435,500, determined by using the Black-Scholes pricing model, and was charged to legal expense in the year ended December 31, 2003.&nbsp;</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company granted warrants to purchase a total of 100,000 shares of common stock as compensation for consulting services. The warrants have an exercise price of $2.00 per share and expire on July 7, 2008. The value of the warrants amounted to $78,200, determined by using the Black-Scholes pricing method, and was charged to consulting expense in the year ended December&nbsp;31, 2003.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company granted warrants to purchase a total of 100,000 shares of common stock as compensation for consulting services.&nbsp; The warrants have an exercise price of $3.00 per share. Of these warrants, 40,000 vested immediately; 30,000 will vest upon receipt of a minimum of $1 million in fees generated by the consultant in the first year, which lapsed in 2004; and the remaining 40,000 will vest upon receipt of a minimum of $1 million in fees generated by the consultant in the second year. The warrants expire five years from the vesting dates. The value of the warrants amounted to $165,100, determined using the Black-Scholes pricing model. In the year ended December 31, 2003, $66,040 was charged to consulting expense for the vested warrants and the balance of $99,060 was deferred to future periods until the conditions are met to allow for vesting.</p>

          <div align="left">
            <p align="center">F-13</p>
            <hr align="center" noshade>

            <p align="center"><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
            <br>
             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>
            <br clear="all">
             <b>NOTE 6. - STOCKHOLDERS' EQUITY (CONTINUED)</b>
          </div>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following is a summary with respect to warrants outstanding at December&nbsp;31, 2004 and 2003 and activity during the years then ended:&nbsp;</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="20" valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <p align="center"><b>2004</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <p align="center"><b>2003</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Weighted</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Weighted</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Average</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Average</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Price</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Price</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Shares outstanding January 1</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">1,425,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.72</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">0.00</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Granted during the year</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">0.00</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">1,425,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.72</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Exercised</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">0.00</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">0.00</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Lapsed</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">&nbsp;&nbsp; &nbsp;&nbsp;30,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.00</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">&nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp;-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">0.00</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Outstanding at December 31</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">1,395,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.74</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">1,425,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.72</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Weighted average months</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>&nbsp;remaining</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">69.3</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">80.3</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p>Warrant summary:</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <p align="center"><b>Warrants Outstanding</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <p align="center"><b>Warrants Exercisable</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Weighted</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Weighted</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Range</b> <b>of</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Average</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Average</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Prices</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Price</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Price</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center">$2.00-$4.99</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">1,002,500</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.30</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">1,002,500</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.30</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center">$5.00-$7.75</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">&nbsp;&nbsp; 392,500</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">4.85</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">&nbsp;&nbsp; 362,500</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">5.00</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Total Shares</p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">1,395,000</p>
              </td>

              <td width="20" valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td width="20" valign="top">
              </td>

              <td valign="top">
                <p align="right">1,365,000</p>
              </td>

              <td width="20" valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p align="left"><b><i>Stock Option Plans</i></b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2004 EMPLOYEES' STOCK OPTION PLAN</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In January 2004, our Board of Directors approved, the adoption of The 2004 Employees' Stock Option Plan (the "2004 Plan") to provide for the grant of options to purchase up to 200,000 shares of our common stock to all employees, including executive officers. Under the terms of the 2004 Plan, options granted thereunder may be designated as options which qualify for incentive stock option treatment ("ISOs") under Section 422A of the Internal Revenue Code, or options which do not so qualify ("Non-ISOs"). We did not have a stock option plan in effect during the year ended December 31, 2003.&nbsp; This plan was approved by the stockholders' at a stockholder meeting on December 17, 2004.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The 2004 Plan is administered by the Compensation Committee designated by the Board of Directors. The Compensation Committee has the discretion to determine the eligible employees to whom, and the times and the price at which, options will be granted; whether such options shall be ISOs or Non-ISOs; the periods during which each option will be exercisable; and the number of shares subject to each option. The Committee has full authority to interpret the 2004 Plan and to establish and amend rules and regulations relating thereto.</p>

          <p>F-14</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 6. - STOCKHOLDERS' EQUITY (CONTINUED)</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Under the 2004 Plan, the exercise price of an option designated as an ISO shall not be less than the fair market value of the common stock on the date the option is granted. However, in the event an option designated as an ISO is granted to a ten percent (10%) shareholder (as defined in the 2004 Plan), such exercise price shall be at least 110% of such fair market value. Exercise prices of Non-ISO options may be less than such fair market value. The aggregate fair market value of shares subject to options granted to a participant, which are designated as ISOs and which become exercisable in any calendar year may not exceed $100,000.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Compensation Committee may, in its sole discretion, grant bonuses or authorize loans to or guarantee loans obtained by an optionee to enable such optionee to pay the exercise price or any taxes that may arise in connection with the exercise or cancellation of an option. The Compensation Committee can also permit the payment of the exercise price of the options using the common stock of the company held by the optionee for at least six months prior to exercise.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; NON-EXECUTIVE DIRECTOR STOCK OPTION PLAN</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Also in January 2004, our Board of Directors adopted The Non-Executive Director Stock Option Plan (the "Director Plan"), which provides for options for up to 100,000 shares to non-executive directors and advisors.&nbsp; This plan was approved by the stockholders' at a stockholder meeting on December 17, 2004.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Under the terms of the Director Plan, an option to purchase (a) 5,000 shares of common stock shall be granted to each non-executive director upon joining the Board of Directors (or upon the approval of this plan if the director joined prior to its adoption date) and (b) 5,000 shares of common stock shall be granted to each non-executive director thereafter on January 2<sup>nd</sup> of each year; provided that any non-executive director, who has not served as a director for an entire year prior to January 2nd of each year then such non-employee director shall receive a pro rata number of options based on the time the director has served in such capacity during the previous year.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The exercise price for options granted under the Director Plan is 100% of the fair market value of the common stock on the date of grant. Until otherwise provided in the Director Plan, the exercise price of options granted under the Director Plan must be paid at the time of exercise, either in cash, by delivery of shares of the common stock of our company or by a combination of each. The term of each option commences on the date it is granted and unless terminated sooner as provided in the Director Plan, expires five (5) years from the date of grant. Neither the Board nor the Compensation Committee has discretion to determine which non-executive director or advisory board member will receive options or the number of shares subject to the option, the term of the option or the exercisability of the option. However, the Compensation Committee will make all determinations of the interpretation of the Director Plan. Optio
ns granted under the Director Plan are not qualified for incentive stock option treatment.</p>

          <p>F-15</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <div align="left">
            <br clear="all">
             <b>NOTE 6. - STOCKHOLDERS' EQUITY (CONTINUED)</b>
          </div>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following is a summary with respect to options outstanding at December&nbsp;31, 2004 and 2003 and activity during the years then ended:&nbsp;</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td width="20" valign="top" nowrap>&nbsp;</td>

              <td colspan="4" valign="bottom" nowrap>
                <p align="center"><b>2004 Employee Plan</b></p>
              </td>

              <td width="20" valign="top" nowrap>
              </td>

              <td colspan="4" valign="top" nowrap>
                <p align="center"><b>Non-Executive<br>
                 Director Plan</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="4" valign="top" nowrap>
                <hr align="center" noshade>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="4" valign="top" nowrap>
                <hr align="center" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td width="20" valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Weighted</b></p>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Weighted</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Average</b></p>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Average</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Exercise</b></p>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Exercise</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Price</b></p>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <p align="center"><b>Shares</b></p>
              </td>

              <td width="20" valign="top" nowrap>
              </td>

              <td colspan="2" valign="top" nowrap>
                <p align="center"><b>Price</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <hr noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td colspan="2" valign="top" nowrap>
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Shares reserved under each plan</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">200,000</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">100,000</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Shares outstanding January 1, 2004</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Granted during 2004</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">63,000</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">6.48</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">23,750</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">4.59</p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Exercised</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Lapsed</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Outstanding at December 31, 2004</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">63,000</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">6.48</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">23,750</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">$</p>
              </td>

              <td valign="top" nowrap>
                <p align="right">4.59</p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Reserved shares, not issued at</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>&nbsp;December 31, 2004</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">137,000</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <p align="right">76,250</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>
                <p>Weighted average months remaining</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <p align="right">66.6</p>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
              </td>

              <td valign="top" nowrap>
                <p align="right">51.8</p>
              </td>
            </tr>

            <tr>
              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>&nbsp;</td>

              <td valign="top" nowrap>
                <hr size="4" noshade>
              </td>
            </tr>
          </table>
           <u></u>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The weighted average fair value of options granted by the Company in 2004 was $4.34 and $2.94 under the 2004 Employee Plan and Non-Executive Director Plan, respectively.&nbsp; All of the above warrants and options have been valued on the date of grant using the Black-Scholes pricing model.&nbsp; Following is the weighted average assumptions used in the model for warrants and options granted during the year ended December 31:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td width="50" valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>2004</b></p>
              </td>

              <td width="20" valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>2003</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Expected dividend yield</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>0.0</b></p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">0.0</p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Expected stock volatility</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>7</b><b>9.0</b></p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">39.5</p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Risk free interest rate</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>4.0</b></p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">2.0</p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Expected life in years</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>5.0</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">6.8</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following table summarizes the status of the Company's aggregate stock options as of December 31, 2004:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <p align="center"><b>Options Outstanding</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="4" valign="top">
                <div align="center">
                  <b>Options Exercisable</b>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="4" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <div align="center">
                  <b>Weighted</b>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="center"><b>Weighted</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>Weighted</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p align="center"><b>Range</b> <b>of</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>Average</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="center"><b>Average</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>Average</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <div align="center">
                  <b>Exercise</b>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="center"><b>Remaining</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>Exercise</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p align="center"><b>Prices</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>Price</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="center"><b>Life</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="center"><b>Shares</b></p>
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <div align="center">
                  <b>Price</b>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <div align="center">
                  <hr noshade>
                </div>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p align="center">$2.00-$4.99</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">13,750</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.57</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">48.1</p>
              </td>

              <td width="20" valign="top">
              </td>

              <td valign="top">
                <p align="right">13,750</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">3.57</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p align="center">$5.00-$7.75</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">73,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">6.41</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">70.2</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">33,000</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">6.41</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <div align="right">
                  <hr noshade>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr noshade>
                </div>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  <hr size="4" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Total shares</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">86,750</p>
              </td>

              <td width="20" valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">46,750</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p>F-16</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 6. - STOCKHOLDERS' EQUITY (CONTINUED)</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company discloses the summary of proforma effects to reported net income (loss) and earnings (loss) per share as if the Company has elected to recognize compensation costs based on the fair value of the employee options at the grant date. No options were granted in 2003.</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <p align="center"><b>P</b><b>er Share</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Net loss as reported</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">(1,703,866</p>
              </td>

              <td valign="top">
                <p align="left">)</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">(0.16</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>Increase in loss due to fair value</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">
                <p>&nbsp;of employee options</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">(144,910</p>
              </td>

              <td valign="top">
                <p align="left">)</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">(0.01</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">
                <p>Pro Forma loss</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">&nbsp;(1,848,776</p>
              </td>

              <td valign="top">
                <p align="left">)</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">(0.17</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p align="left"><b>NOTE 7. - INCOME TAXES</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December&nbsp;31:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="20" valign="top">
                <p>&nbsp;</p>
              </td>

              <td width="20" valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <p align="center"><b>2004</b></p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <p align="center"><b>2003</b></p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <hr noshade>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Currently payable:</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p>Federal</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p>State</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>6,887</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>Total currently payable</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>&nbsp;</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>6,887</b></p>
              </td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">
                <p align="right">&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Deferred:</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p>Federal</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>(639,106</b></p>
              </td>

              <td valign="top"><b>)</b></td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">133,083</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p>State</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>(98,491</b></p>
              </td>

              <td valign="top"><b>)</b></td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">(56,757</p>
              </td>

              <td valign="top">)</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Total deferred</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>(737,597</b></p>
              </td>

              <td valign="top"><b>)</b></td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">&nbsp;76,326</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p>Less increase (decrease) in allowance</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>737,597</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">(76,326</p>
              </td>

              <td valign="top">)</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Net deferred</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="3" valign="top">
                <p>Total income tax provision</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>6,887</b></p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">&nbsp;$</p>
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p align="center">F-17</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 7. - INCOME TAXES (CONTINUED)</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Individual components of deferred tax asset (liability) are as follows at December 31:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="20" valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td width="20" valign="top">
                <p>&nbsp;</p>
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>2004</b></p>
              </td>

              <td valign="top">
                <p align="center"><b>&nbsp;</b></p>
              </td>

              <td width="20" valign="top">
                <p align="center"><b>&nbsp;</b></p>
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>2003</b></p>
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Net operating loss carry forwards</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>1,616,034</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">2,362,805</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Amortization of intangible assets</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>(17,427</b></p>
              </td>

              <td valign="top">
                <p><strong>)</strong></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <div align="right">
                  -&nbsp;&nbsp;&nbsp;&nbsp;
                </div>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Warrants issued for services</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>247,380</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">226,099</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Allowance for doubtful accounts</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>5,320</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Net asset</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>1,851,307</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">2,588,904</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Less valuation allowance</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right"><b>(1,851,307</b></p>
              </td>

              <td valign="top">
                <p><strong>)</strong></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">(2,588,904</p>
              </td>

              <td valign="top">)</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <hr noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>-&nbsp;&nbsp;&nbsp;</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp; &nbsp;</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company has approximately $4,150,000 in net operating loss carryforwards ("NOL's") available to reduce future taxable income.&nbsp; Due to the change in stock ownership of the Company during 2002 and 2003, the amount of NOL's that can be utilized each year to reduce taxable income is limited.&nbsp; The net operating loss utilized to determine the deferred tax asset in 2003 was reduced to reflect this limitation. Due to the uncertainty as to the Company's ability to generate sufficient taxable income in the future and utilize the NOL's before they expire, the Company has recorded a valuation allowance to reduce the gross deferred tax asset to zero.&nbsp; These carryforwards expire at various dates from 2004 through 2024.&nbsp;</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying consolidated statements of operations are as follows:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <p align="center"><b>2004</b></p>
              </td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <p align="center">2003</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <hr width="55" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="3" valign="top">
                <hr width="55" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Statutory United States federal rate</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>&nbsp;(34</b></p>
              </td>

              <td valign="top">
                <p><strong>)</strong></p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(34</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">
                <p>%</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>State income taxes net of federal benefit</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>(5</b></p>
              </td>

              <td valign="top">
                <p><strong>)</strong></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(3</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Permanent differences</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>(5</b></p>
              </td>

              <td valign="top">
                <p><strong>)</strong></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">(2</p>
              </td>

              <td valign="top">
                <p>)</p>
              </td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Expiration of net operation loss</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>87</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">18</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Change in valuation reserves</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>(43</b></p>
              </td>

              <td valign="top">
                <p><strong>)</strong></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">21</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Effective tax rate</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right"><b>-</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>%</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">-</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>%</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>

          <p align="left"><strong>NOTE 8. - RETIREMENT PLAN</strong></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company sponsors a simple individual retirement account covering all eligible employees.&nbsp; Employees may elect to defer a portion of their salary on a pre-tax basis.&nbsp; The Company will match the employers contribution up to 3% of the employees annual compensation.&nbsp; During the year ended December 31, 2004, the Company contributed approximately $11,000 to the plan ($7,000 - 2003).</p>

          <div align="left">
            <p align="center">F-18</p>
            <hr align="center" noshade>

            <p align="center"><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
            <br>
             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>
          </div>

          <p align="left"><b>NOTE 9. - COMMITMENTS</b></p>

          <p align="left"><b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Facilities</i></b> - <b></b>The Company leases a total of approximately 7,200 square feet of office space for its administrative offices, its digital printing facilities and legal stationery business at a monthly rental aggregating approximately $8,200. Current year expense was approximately $84,000 ($52,000 -2003).&nbsp;&nbsp; The leases expire through December 2008.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i>Equipment Leases&nbsp;</i></b> - <b></b>The Company leases printing, copying, collating and stapling equipment for its printing operations. The leases may be capital leases or operating leases and are generally for a term of 36 to 60 months. Current year operating lease expense was approximately $77,000 ($63,000 - 2003).&nbsp; The leases expire through September 2009.&nbsp; A summary of lease commitments at December 31, 2004 are as follows:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="5" valign="top">
                <div align="center">
                  <b>Operating Leases</b>
                </div>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td width="20" valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Capital</b></p>
              </td>

              <td width="20" valign="top">
              </td>

              <td colspan="5" valign="top">
                <div align="center">
                  <hr width="100%" noshade>
                </div>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <p align="center"><b>Leases</b></p>
              </td>

              <td valign="top">
              </td>

              <td colspan="2" valign="top">
                <div align="center">
                  <b>Equipment</b>
                </div>
              </td>

              <td width="20" valign="top">
              </td>

              <td colspan="2" valign="top">
                <div align="center">
                  <b>Facilities</b>
                </div>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr width="100%" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr width="100%" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td colspan="2" valign="top">
                <hr width="100%" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Payments made in 2004</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">15,250</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">77,072</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">84,108</p>
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" size="4" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Future minimum lease commitments:</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">
                <p>2005</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">42,146</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">36,960</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">97,565</p>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">
                <p>2006</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">42,146</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">33,010</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">58,615</p>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">
                <p>2007</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">40,649</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">11,820</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">43,913</p>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">
                <p>2008</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">32,354</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">970</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">43,913</p>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">
                <p>2009</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">21,537</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" noshade>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Total future minimum lease commitments</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">178,832</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">82,760</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">244,006</p>
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" size="4" noshade>
              </td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Less amount representing interest</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">29,902</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Present value of future minimum lease</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>&nbsp; commitments</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">148,930</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Less current portion</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
                <p align="right">&nbsp;(30,663</p>
              </td>

              <td valign="top">)</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>

            <tr>
              <td width="30" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Long term portion</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p align="right">$</p>
              </td>

              <td valign="top">
                <p align="right">118,267</p>
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr width="100%" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>
            </tr>
          </table>
          <br clear="all">


          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i>Employment Agreements</i></b> - <b></b>The Company has entered into a five-year employment agreement with its President and Chief Executive Officer, Mr. Patrick White. The agreement, with a starting date of July 1, 2004, provides for an initial annual salary of $150,000 and subsequent annual increases of not less than 10%. The agreement also granted Mr. White option on 30,000 shares under the Company's 2004 Employee Plan. Mr. White's options have a exercise price of $7.25, expire in 2011 and vest ratably over a 3 year period beginning July 1, 2004.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company also employs Mr. Thomas Wicker as Director of Research and Development pursuant to a three-year employment agreement, with a starting date of June 11, 2004, and provides for an initial annual salary of $72,500 and subsequent annual increases of not less than 10%.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company also employs Mr. David Wicker pursuant to a three-year agreement, with a starting date of June 17, 2004, and provides for an initial annual salary of $72,500 and subsequent annual increases of not less than 10%.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All of the agreements provide for severance payments of 18 months of salary in the event of termination for certain causes.</p>

          <p>F-19</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <p align="left"><b>NOTE 10. - SUPPLEMENTAL CASH FLOW INFORMATION</b></p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td width="20" valign="top">
                <p>&nbsp;</p>
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>2004</b></p>
              </td>

              <td width="20" valign="top">
                <p><b>&nbsp;</b></p>
              </td>

              <td colspan="2" valign="top">
                <p align="center"><b>2003</b></p>
              </td>
            </tr>

            <tr>
              <td width="20" valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td colspan="2" valign="top">
                <hr align="right" noshade>
              </td>

              <td valign="top">
                <p>&nbsp;</p>
              </td>

              <td colspan="2" valign="top">
                <hr align="right" noshade>
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Cash paid for interest</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>28,434</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">18,975</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td colspan="2" valign="top">
                <p>Non-cash investing and financing activities:</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Equity instruments issued for services</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>&nbsp;&nbsp;249,824</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right"><b>&nbsp;&nbsp;</b> 790,056</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>Equipment purchased via capital lease</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>&nbsp;arrangements</p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p><b>$</b></p>
              </td>

              <td valign="top">
                <p align="right"><b>&nbsp;&nbsp;159,469</b></p>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <p>$</p>
              </td>

              <td valign="top">
                <p align="right">-&nbsp;&nbsp;&nbsp;</p>
              </td>
            </tr>

            <tr>
              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>

              <td valign="top">&nbsp;</td>

              <td valign="top">&nbsp;</td>

              <td valign="top">
                <hr align="right" size="4" noshade>
              </td>
            </tr>
          </table>

          <p align="left"><b>NOTE 11. - SEGMENT INFORMATION</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company's businesses are organized, managed and internally reported as four segments.&nbsp; The segments are determined based on differences in products, internal reporting and how operational decisions are made.&nbsp; All of the segments of the Company operate entirely within the United States of America and all revenue is generated from customers within the United States of America.&nbsp; There are no material transactions between segments.&nbsp; A summary of the four segments is as follows:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</i></b></p>

          <table border="0" cellspacing="0" cellpadding="4">
            <tr>
              <td><b><i>Printing</i></b></td>

              <td>-</td>

              <td>The Company provides commercial printing and copying services to the metropolitan Rochester area.</td>
            </tr>

            <tr>
              <td><b><i>Legal</i></b></td>

              <td>-</td>

              <td>The Company provides specialty legal supplies to lawyers and law firms located throughout the United States.</td>
            </tr>

            <tr>
              <td><b><i>Document Security</i></b></td>

              <td>-</td>

              <td>The Company licenses document security technologies and manufacturers and sells safety paper products.</td>
            </tr>

            <tr>
              <td><b><i>Film</i></b></td>

              <td>-</td>

              <td>The Company previously produced movies and distributed them through licensed distributors.</td>
            </tr>
          </table>

          <p>F-20</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <div align="left">
            <br clear="all">
             <b>NOTE 11. - SEGMENT INFORMATION (CONTINUED)</b>
          </div>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Approximate information concerning the Company's operations by reportable segment as of and for the year ended December 31, 2004 and 2003 is as follows.&nbsp; The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein:</p>

          <table border="0" cellspacing="0" cellpadding="0">
            <tr>
              <td valign="bottom" nowrap>
                <p><b>2004:</b></p>
              </td>

              <td width="10" valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <div align="center">
                  <b>Printing</b>
                </div>
              </td>

              <td width="10" valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <div align="center">
                  <b>Legal</b>
                </div>
              </td>

              <td width="10" valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <p align="center"><b>Document<br>
                 Security</b></p>
              </td>

              <td width="10" valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <p align="center"><strong>Film</strong></p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td width="10" valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <div align="center">
                  <b>Administrative</b>
                </div>
              </td>

              <td width="10" valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <p align="center"><b>Total</b></p>
              </td>

              <td valign="bottom">&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <hr noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <hr noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <hr noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <hr noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <hr noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td colspan="3" valign="bottom" nowrap>
                <hr noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Revenues from external customers</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">691,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">455,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 426,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 22,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 1,594,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Interest expense</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">16,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp; 8,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; - &nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 28,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Depreciation &amp; amortization</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">78,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 13,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 19,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 18,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 128,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Expenses settled via equity instruments</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 169,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 81,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 250,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>Goodwill impairment</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <div align="right">
                  81,000
                </div>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <div align="right">
                  81,000
                </div>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Operating (loss) profit</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">(145,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 10,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp; (663,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 22,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp; (948,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">(1,724,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Capital expenditures</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">343,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 330,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 145,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 818,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Identifiable assets</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">460,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">159,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 902,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 3,096,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 4,617,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p><b>2003:</b></p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom">&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Revenues from external customers</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">527,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">397,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 332,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 29,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 1,285,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Interest expense</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">7,500</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp; 7,500</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 15,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Depreciation &amp; amortization</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">72,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 33,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 105,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Expenses settled via equity instruments</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">2,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp; 2,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 647,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 139,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 790,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Operating (loss) profit</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">(134,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">(45,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp; (772,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 9,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp; (487,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">(1,429,000</p>
              </td>

              <td valign="bottom" nowrap>)</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Capital expenditures</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">20,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 20,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>
                <p>Identifiable assets</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">361,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">218,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp; 351,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -&nbsp;&nbsp;&nbsp;</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 4,970,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>$</td>

              <td valign="bottom" nowrap>
                <p align="right">&nbsp;&nbsp; 5,900,000</p>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>

            <tr>
              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>
                <hr align="right" size="4" noshade>
              </td>

              <td valign="bottom" nowrap>&nbsp;</td>

              <td valign="bottom" nowrap>&nbsp;</td>
            </tr>
          </table>

          <p align="left"><b>NOTE 12. - SUBSEQUENT EVENTS</b></p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the first quarter of 2005 the Company received $203,120 in proceeds from the exercise of warrants issued in connection with the 2003 private placement offering. The Company also received $1,250,000 in proceeds from the exercise of warrants issued in 2003. The warrants carried exercise prices of $5.00 and $2.50 per share respectively.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company has completed, effective February 25, 2005, the purchase of various legal ownership and economic interests in certain technology (patents and trade secrets) from 42 persons and entities. The technology related to these interests include patent rights and trade secrets in certain document anti-fraud and anti-counterfeiting technology. The Company was a partial owner or licensee of the technology prior to the completion of the transaction.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company expects to issue an aggregate of 583,106 shares of its common stock for the rights of the interest holders who accepted the offer. The value of the shares of common stock was determined based upon the price of common stock on earlier of the date that the interest holder delivered their acceptance of the offer to the Company or February 15, 2005. Based upon the closing price of the shares of 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 approximately $4,228,000.&nbsp; This value will be capitalized as contractual rights when the stock is issued.</p>

          <p>F-21</p>
          <hr noshade>

          <p><strong>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
          <br>
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS</strong></p>

          <div align="left">
            <br clear="all">
             <b>NOTE 12. - SUBSEQUENT EVENTS (CONTINUED)</b>
          </div>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In addition, the Company has entered into a definitive binding agreement with the Wicker Family which effectively provides that the Company has obtained the legal ownership of the same technology (including patent ownership rights) previously held by the Wicker Family. The members of the Wicker Family executing the agreement were The Estate of Ralph Wicker, Mary Wicker, Thomas Wicker, David Wicker, Christine Wicker, Kenneth Wicker and Michael Caton. Thomas Wicker serves as an officer and director of the Company, and his brother, David Wicker, is an officer of the Company.</p>

          <p align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The agreement with the Wicker Family provides that the Company will retain 70% of the future economic benefit derived from the exploitation of the technology, which may include licensing or royalty rights, patent or other infringement suits or enforcement actions, and the Wicker Family will receive 30% of such economic benefit, on a gross basis. The Wicker Family may not enter into any new assignments or licenses with respect to the technology. The Wicker Family members did not receive any material consideration related to this agreement.</p>

          <p>F-22</p>
          <hr noshade>

          <p><b>SIGNATURES</b></p>
        </div>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DOCUMENT SECURITY SYSTEMS, INC.</b></p>

      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>&nbsp;</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td>
            <p>/s/ Patrick White</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <p>Patrick White<br>
             Chairman, President, Chief Executive Officer,<br>
             and Chief Financial Officer</p>
          </td>
        </tr>
      </table>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.</p>

      <table border="0" cellspacing="0" cellpadding="0">
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          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td>
            <p>/s/ Patrick White</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <p>Patrick White<br>
             Chairman, President, Chief Executive Officer,<br>
             and Chief Financial Officer</p>
          </td>
        </tr>
      </table>
      <br>


      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td width="229">
            <p>/s/ Thomas Wicker</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <p>Thomas Wicker<br>
             Vice President and Director</p>
          </td>
        </tr>
      </table>
      <br>


      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td width="229">
            <p>/s/ Timothy Ashman</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <p>Timothy Ashman<br>
             Director</p>
          </td>
        </tr>
      </table>
      <br>


      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td width="229">
            <p>/s/ Alan E. Harrison</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <p>Alan E. Harrison<br>
             Director</p>
          </td>
        </tr>
      </table>
      <br>


      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td width="229">
            <p>/s/ Robert Fagenson</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <p>Robert Fagenson<br>
             Director</p>
          </td>
        </tr>
      </table>
      <br>


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        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">&nbsp;</td>
        </tr>

        <tr>
          <td>
            <p>March 31, 2005</p>
          </td>

          <td width="50">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td width="229">
            <p>/s/ Ira Greenstein</p>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td width="50">&nbsp;</td>

          <td>&nbsp;</td>

          <td width="229">
            <p>Ira Greenstein<br>
             Director</p>
          </td>
        </tr>
      </table>
      <br clear="all">
    </div>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>2
<FILENAME>dmc10ksb123104ex1021.htm
<DESCRIPTION>AGREEMENT
<TEXT>
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      <p align="right">Exhibit 10.21</p>

      <p align="center"><b><u>MARKETING AND DISTRIBUTION AGREEMENT</u></b></p>

      <p>This Agreement ("Agreement") is made and entered into as of the 19th day of January, 2005, (the "Effective Date") by and between the DOCUMENT SECURITY SYSTEMS, INC. ("DSS"), a corporation organized and existing under the laws of the State of New York with its primary business address at First Federal Plaza, Suite 1525, 28 East Main Street, Rochester, New York 14614 and BOISE WHITE PAPER L.L.C. with its primary business address at 1111 West. Jefferson Street, Boise, Idaho 83702 ("Boise"). DSS and Boise may sometimes be referred to herein individually as a "Party" and together as the the "Parties".</p>

      <p align="center"><b><u>Background</u></b></p>

      <p>WHEREAS, DSS is engaged in the business of designing and developing systems and products in the nature of security printing and has acquired and developed substantial technology and know-how useful for creating encoded images in paper products utilized in security printing, copying and scanning; and</p>

      <p>WHEREAS, Boise and its affiliates are engaged in the business of, among other things manufacturing, marketing, selling and distributing paper products, including security papers and office papers and desire to market and distribute the Products (as defined below); and</p>

      <p>WHEREAS, Boise wishes to acquire, and DSS is willing to grant, a limited exclusive right to market, sell and distribute the Products upon the terms and conditions contained herein;</p>

      <p>NOW, THEREFORE, the Parties, intending to be legally bound, agree as follows:</p>

      <p><b>1. Definitions.</b></p>

      <p><b>1.1</b> <i>"Afiliate"</i> shall mean any corporation, partnership or limited liability company of which more than 50% of the voting control and economic ownership is owned, directly, or indirectly, by a Party or which is, directly or indirectly, under common control.</p>

      <p><b>1.2</b> <i>"Boise"</i> shall mean, unless the context otherwise requires, Boise White Paper L.L.C. and its Affiliates, successors and permitted assigns.</p>

      <p><b>1.2</b> <i>"Boise Marks"</i> shall mean the name, logo, service marks, tradenames, trademarks, and other marks of Boise and its Affiliates, whether registered or not, including, without limitation the tradename "Boise Beware".</p>

      <p><b>1.3</b> <i>"Confidential Information"</i> shall have the meaning ascribed to such term in the Confidentiality Agreement dated as of February 27, 2004 between Boise Cascade Corporation and DSS.</p>

      <p><b>1.4</b> <i>"DSS Marks"</i> means the name, logo, service marks, tradenames, trademarks and other marks of DSS used in connection with the marketing of the Products, whether registered or not and shall include, without limitation, the tradename "AuthentiGuard" and otherwise as set forth on Exhibit E.</p>

      <p><b>1.5</b> <i>"End Users"</i> shall mean any person or entity utilizing or wishing to utilize the Products for its internal business purposes and not for redistribution, remarketing or reselling.</p>

      <p><b>1.6</b> <i>"Intellectual Property"</i> means, wherever existing in the world, (i) patents, whether in the form of utility patents, design patents or industrial designs, and all pending applications for registration thereof, (ii) trademarks, trade names, service marks, domain names, designs, logos, trade dress and trade styles, whether or not registered, and all pending applications for registration thereof, (iii) copyrights, whether or not registered, and all pending applications for registration thereof, (iv) inventions, research records, trade secrets, engineering specifications and drawings, technical information, formulas, (v) computer software and programs, and related flow charts, programmer notes, documentation, updates, and data, whether in object or source code form, and (vi) all other similar intellectual property rights, whether or not registered.</p>

      <p><b>1.7&nbsp;</b> <i>"Products"</i> shall mean all "Safety or Security" paper products of DSS as described on Exhibit A as may be amended from time to time, in writing, by the Parties.</p>

      <p><b>1.8&nbsp;</b> <i>"Territory"</i> shall mean the United States, Canada and Mexico.</p>

      <p><b>2.&nbsp;Sales, Distribution and Marketing Program for Products.</b></p>

      <p><b>2.1&nbsp;&nbsp;Sales and Distribution of Products.</b> DSS shall sell to Boise and Boise shall purchase from DSS, the Products as set forth on Exhibit A as may be amended or supplemented by the Parties from time to time in writing executed by both Parties. Boise shall have the limited exclusive right to market, sell and distribute the Products in the Territory. Boise may market, sell and distribute the Products in the Territory through, among other venues, direct sales efforts and office products wholesalers and through the Internet on the websites of Boise and/or its Affiliates and such other venues or distribution outlets as it deems necessary or desirable from time to time in its discretion.</p>

      <p><b>2.2&nbsp;Sales Reports and Reversion of Territory.</b> Boise shall deliver to DSS, on a quarterly basis, a written report of all sales of the Products which report shall (i) be due within 30 days of the end of each calender quarter during the term hereof commencing December 31, 2004 (ii) quantify the type of Products sold and (iii) set forth the amount of Products sold in each country in the Territory. In the event that the number of sheets of 8.5 by 11 Safety Paper sold in the Territories during the term of this agreement does not comport with the following schedules, then the Territory may modified by DSS to remove the country or countries which do not satisfy such minimum sales:</p>

      <p>A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; United States</p>

      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td width="100">&nbsp;</td>

          <td>Period</td>

          <td width="75">&nbsp;</td>

          <td>Amount (millions)</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending March 31, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending June 30, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending September 30, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending December 31, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending March 31, 2006</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending June 30, 2006</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>thereafter</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>
      </table>

      <p>B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Mexico and Canada</p>

      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td width="100">&nbsp;</td>

          <td>Period</td>

          <td width="75">&nbsp;</td>

          <td>Amount</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending March 31, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending June 30, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending September 30, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending December 31, 2005</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending March 31, 2006</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>quarter ending June 30, 2006</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>

        <tr>
          <td>&nbsp;</td>

          <td>thereafter</td>

          <td>&nbsp;</td>

          <td>* * * *</td>
        </tr>
      </table>

      <p>&nbsp;</p>
    </div>

    <div>
      <p><b>2.3&nbsp;Marketing Program.</b> Boise shall use its best efforts to promote and market the Products during the term of this Agreement. Boise may appoint sub-distributors, agents, or other representatives to market the DSS Products without the prior written consent of DSS but shall ensure that such persons do not sell or market the Products outside of the Territory or violate the terms of Sections 7 or 10 hereof.. Boise shall sell and market the Products utilizing the DSS marks in conjunction with its own proprietary marks, including the "Boise Beware" brand, and shall not market or sell the products without the DSS Marks. Boise and DSS shall complete a marketing plan to promote the sales and marketing of the Products. This marketing plan shall be completed within 60 days of the Effective Date and address, among other topics, specific areas for cooperation, pricing plans, timing, duration and level of marketing efforts and financial commitments for advertising, as well as "in store" promotional ef
forts.. Boise shall use reasonable efforts to update this marketing plan from time to time. Notwithstanding anything to the contrary in this Agreement, Boise shall spend a minimum of * * * * by January 19, 2006 for advertising the Products, including flyers, newspaper and trade magazine advertisements, and other promotional efforts, including attendance at trade shows and producing sales collateral and at least * * * * in each year thereafter that this Agreement is in effect. Such amounts shall be reduced pro rata to the date of termination in the event of early termination of this Agreement Boise shall provide a written summary of such expenditures to DSS on a semi- annual basis during each year of the term of this agreement.</p>

      <p>&nbsp;<b>2.4&nbsp;Exclusivity.</b> (A) Boise agrees that , it will not enter into any marketing or distribution relationship during the term of this Agreement with any other provider of products or services whereby Boise will market, sell or distribute any products which are either directly or indirectly competitive to the Products (a "Competitive Service"). Further, during the term of this Agreement and for a period of 18 months after termination hereof, regardless of the manner of termination of this Agreement, neither Boise nor any of its Affiliates shall, in connection with the sale of its Boise Beware products, or any similar products that compete directly with the Products and which are distributed, marketed or sold by or through Boise or its Affiliates, promote or utilize any competing technology which competes with the Intellectual Property of DSS.</p>

      <p>(B) In consideration of the Agreements by Boise set forth in paragraph (A) above, DSS hereby agrees that neither it nor any Affiliate shall enter into any marketing or distributorship agreement or arrangement with any third party in the Territory with respect to the Products or replacement products during the term of this Agreement; <u>provided, however,</u> DSS shall have the right to continue to market and sell Products to the entities appearing on Exhibit C ("Existing Market"). Notwithstanding the foregoing, nothing contained herein shall be deemed to prohibit DSS from marketing and selling the Products to End Users. Further, Boise and DSS mutually agree that both DSS and Boise shall have the right to market and sell custom printed Safety Paper.</p>

      <p><b>2.5&nbsp;Boise Responsibilities and Obligations.</b> For the term of this agreement Boise will actively promote the Products by, among other things:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; develop or integrate appropriate marketing and advertising materials regarding the Products;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; <b></b>publish, jointly with DSS or independently, press releases;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot;&nbsp;publish letters/mailings to customers; and<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; advertising in trade publications and attending trade shows.<br>
      <br>
       <b>2.6</b><b>&nbsp;DSS Responsibilities and Obligations.</b> For the term of this Agreement, DSS hereby agrees that:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; it shall not enter into any marketing or distribution agreement with any third party for sales of Product to End Users and/or the Existing Market in the Territory;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; it shall use commercially reasonably efforts to supply Boise with Products in a timely manner in the amount that Boise shall request from time to time and in the event that it cannot fully satisfy the order of Boise, it shall use commercially reasonable efforts to satisfy the order in full as promptly as possible and in the event an allocation of available Product is required by DSS, it shall allocate to Boise an amount equal to at least the pro rated amount relative to the percentage of Products sold by Boise as compared to the total orders for Products; and<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; it shall not sell the Products to non-End Users, other than the Existing Market, except with the prior written consent of Boise.<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; DSS, in the performance of this Agreement , shall comply with applicable federal, state, and local statutes, rules of law, ordinances, regulations, and regulatory orders, including, but not limited to, the Fair Labor Standards Act of 1938, as amended, Walsh-Healy Act, Robinson-Patman Act, applicable state Workers' Compensation laws, state and federal Occupational Safety and Health Acts, and all rules and regulations passed pursuant thereto, applicable to DSS, which are incorporated herein by this reference.<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> &middot; DSS shall cause its manufacturer(s) of the Products to implement and adhere quality controls to assure the Product Quality Standards as set forth on Exhibit D.</p>

      <p><b>3.&nbsp;Representations and Warranties</b></p>

      <p><b>3.1</b><b>&nbsp;</b> Boise warrants and represents to DSS that:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (A) This Agreement is the binding legal obligation of Boise and is enforceable according to its terms and shall be binding upon Boise&rsquo;s Affiliates;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (B) The execution, delivery, and performance of this Agreement will not result in any violation of any other agreement to which Boise is a party;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (C) Boise shall conduct its business for its own account, in its own name, and not as an agent, employee, or partner of DSS and shall conduct business in a manner that reflects favorably at all times on the Products and DSS&rsquo;s goodwill, Intellectual Property and reputation and make no false or misleading representations with regard to DSS, its affiliates or DSS&rsquo; Intellectual Property.</p>

      <p><b>3.2&nbsp;</b> DSS warrants and represents to Boise that:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (A)&nbsp; This Agreement is the binding legal obligation of DSS and is enforceable according to it terms and shall be binding upon DSS Affiliates;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (B) The execution, delivery, and performance of this Agreement will not result in any violation of any other agreement to which DSS is a party;<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (C) DSS shall conduct its business for its own account, in its own name, and not as an agent, employee, or partner of Boise and shall conduct business in a manner that reflects favorably at all times on the Products, Boise and Boise&rsquo;s goodwill and reputation and make no false or misleading representations with regard to Boise or its Affiliates.</p>

      <p><b>4.&nbsp;&nbsp;Pricing and Payment Terms.</b></p>


  <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>
    The prices to be paid by Boise to DSS for the Products shall be determined
    in accordance with Exhibit B annexed hereto, as may be amended or supplemented
    from time to time. DSS shall have the right, upon prior notice to Boise, to
    increase the prices for the Products, including increases related to, without
    limitation, costs of raw materials upon *** prior notice. Payments of purchase
    price shall be net cash ** days or ** percent cash discount for payment **.
    Amounts overdue shall incur interest charges after 45 days at the rate of
    ** per annum on the amount outstanding. Upon failure by Boise to pay amounts
    due, DSS shall have the right, at its option and without prejudice to other
    remedies available to it, to suspend further shipments and deliveries to Boise
    and no forbearance, course of dealings or prior payments shall affect this
    right of DSS. Notwithstanding the foregoing, in the event of a good faith
    dispute by Boise of an invoice term or amount, DSS shall not have the right
    to suspend shipments and deliveries hereunder without a good faith attempt
    by the Parties to mutually resolve the dispute and without 30 days prior written
    notice.</p>

      <p><b>5.&nbsp;Shipment and Delivery Terms; Packaging Terms; Quality Claims and Product Returns.</b></p>

      <p><strong>5.1 Shipment and Delivery Terms.</strong> Boise shall deliver written purchase orders to DSS in form and substance acceptable to the Parties from time to time. Products shall be shipped F.O.B. Henrietta, New York to Boise&rsquo;s Regional Servicenters or other warehouses designated by Boise as Boise shall notify DSS in any purchase orders. Boise shall bear the cost of all carrier charges to its Regional Servicenters or other warehouses designated by Boise. Boise hereby acknowledges that depending upon the type and amount of Product ordered, delivery time may be as long as approximately six weeks. In addition, custom image designs requested by Boise may require additional delivery time and will require minimum order levels.</p>

      <p><strong>5.2&nbsp;Packaging Terms.</strong> Within 30 days of the date hereof, the Parties shall mutually agree upon packaging standards for the initial Products including co-branding requirements for labels and packaging, appearance of tradenames, trademarks and other information to be placed upon the Product packaging, and the size of packaging.</p>

      <p><strong>5.3&nbsp;Quality Claims and Product Returns.</strong> (A) Boise shall maintain written records in reasonable detail of all shipments of Product which are claimed to be non-performing or defective ("Deficiency Claim") by Boise (or its customers), which records shall include (i) the relevant information from packaging labels to identify the lot run and (ii) a description of the claimed defect or non-performance of the Products. Boise shall provide DSS with a copy of such records in writing ("Deficiency Notice"). Within seven (7) business days of receipt of a Deficiency Notice, DSS shall provide a written response to Boise of its intended action with respect to the Deficiency Claim. In the event that DSS cannot correct the Deficiency Claim within a reasonable time and such Deficiency Claim is the result of either (A) a failure of the Product to perform in accordance with the Product description on Exhibit A or (B) does not satisfy the Quality Controls on Exhibit D, then Boise shall return the d
efective Product to DSS at DSS&rsquo; expense and DSS shall replace the defective Product at no extra cost or expense to Boise.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (B) In the event of a dispute between the Parties as to the nature of the Deficiency Claim under paragraph (A) above, the Parties shall meet within 10 business days to attempt to resolve the dispute. In the event that within an additional 10 business days the Parties are unable to mutually agree upon a satisfactory resolution, the Parties will submit the dispute to the Rochester Institute of Technology ("RIT") which shall act as arbiter for determining the nature of the Deficiency Claim (or any other third party acceptable to both Parties if RIT declines to accept such appointment). The decision of RIT shall be final and binding upon the Parties. The costs of RIT to resolve the dispute shall be borne by the Party that loses the dispute.</p>

      <p><strong>6.&nbsp;</strong> <b>Inspection and Audit Rights.</b> During the term of this Agreement and for one (1) year thereafter, DSS shall have the right, upon reasonable advance notice, to inspect Boise&rsquo;s records and facilities with respect to its compliance with this Agreement. Boise will make its facilities (hereafter "Facilities") available to DSS and its representatives upon reasonable notice and during normal business hours. During the term of this Agreement and for one (1) year thereafter, Boise shall have the right, upon reasonable advance notice, to inspect DSS&rsquo; records and facilities with respect to its compliance with this Agreement. DSS will make its facilities (hereafter "Facilities") available to Boise and its representatives upon reasonable notice and during normal business hours.</p>

      <p><strong>7.</strong> <b>License to Marks.</b> (a) Subject to Boise&rsquo;s compliance with all of the terms and conditions of this Agreement, DSS hereby grants to Boise a non-transferable, limited (to the extent expressly set forth herein) license to use the DSS Marks solely for purposes of the marketing and promotional activities for the Products contemplated by this Agreement. Boise acknowledges that, without the prior approval of DSS, Boise shall not create a unitary or composite mark based on or incorporating a DSS Mark. Boise shall not use any DSS Marks or any other trademarks, service marks, trade names, logos or symbols of DSS in any corporate, business or trading name of Boise or any other entity or any other identification associated with Boise or any other entity, including any trading or "ticker" symbol associated with Boise&rsquo;s or any other entity&rsquo;s securities, or in any offering, circular, prospectus or other corporate marketing material without DSS&rsquo;s prior written approv
al, which DSS may grant or withhold in its discretion. Boise agrees to comply with such specific standards for use of DSS Marks as DSS may, in its reasonable discretion, establish and modify from time to time in writing and provide to Boise. All use by Boise of DSS Marks, including, without limitation, any DSS Marks contained in Boise&rsquo;s advertising, shall be subject to prior written approval of DSS. Once DSS has approved a specific use of a mark, Boise may continue such specific use or cease and resume such specific use without additional approvals from DSS until such approval is revoked in writing or this Agreement is terminated. Unless otherwise expressly provided herein, the rights granted to Boise in connection with DSS Marks in this Section 7 shall be royalty-free; provided, however, that to the extent that any royalty shall be deemed by applicable tax law to exist by virtue of this Agreement, Boise will be responsible for any taxes associated therewith.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (b)&nbsp;<i>Reservation of Rights; Limitations on Use.</i> Boise acknowledges and agrees that: (i) DSS Marks are and shall remain the sole property of DSS; (ii) nothing in this Agreement shall convey to Boise any right of ownership in DSS Marks; (iii) Boise shall not now or in the future contest the validity of DSS Marks; and (iv) Boise shall not in any manner take any action that would impair the value of, or goodwill associated with, such marks. Boise acknowledges and agrees that all use of DSS Marks by Boise shall inure to the benefit of DSS. Boise agrees to promptly notify DSS of any unauthorized use of the DSS Marks by third parties promptly as such use shall come to Boise&rsquo;s attention. DSS shall have the sole right and discretion to bring proceedings alleging infringement of DSS Marks or unfair competition against such third parties and to defend proceedings brought or threatened against DSS or Boise based on use of
 DSS Marks. Boise shall take such steps as DSS may reasonably request, at DSS&rsquo; expense, to assist DSS in protecting DSS&rsquo;s rights in DSS Marks. Except as set forth in this Section 7, Boise will not, without first obtaining DSS&rsquo;s prior written approval of such proposed use, use the DSS Marks for any purpose (including use in connection with any products, promotions or advertisements), it being understood that this shall not restrict Boise from referring to the relationship between the Parties to the extent required by law in connection with financial disclosure, regulatory or similar requirements. Upon request of DSS, Boise shall promptly cease any unauthorized use of the DSS Marks and upon termination of this Agreement, shall have a period of 120 days to discontinue the use of DSS marks in connection with the sale of Products in inventory.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (c) Subject to DSS&rsquo; compliance with all of the terms and conditions of this Agreement, Boise hereby grants to DSS a non-transferable, limited (to the extent expressly set forth herein) license to use the Boise Marks solely for purposes of the marketing and promotional activities for the sale of Products by DSS to Boise as contemplated by this Agreement. The terms and conditions of DSS use of the Boise Marks shall be the same as those set forth in clause (a) and (b) above as Boise has agreed with respect to the DSS Marks.</p>

      <p><b>8.&nbsp;&nbsp;Term and Termination</b></p>

      <p><b>8.1&nbsp;&nbsp;Term.</b> This Agreement shall commence on the Effective Date set forth above and shall continue in effect for an initial term of two years from the Effective Date, unless sooner terminated in accordance with this Section. At the end of the initial two year term, this Agreement shall automatically renew for successive one year terms unless terminated by either Party on not less than 90 days prior written notice or pursuant to Section 8.2.</p>

      <p><b>8.2&nbsp;Termination.</b> (a) This Agreement shall automatically terminate, unless waived in writing, on the first occurrence of (i) either party becoming insolvent or unable to pay its debts as they become due, making or proposing an assignment for the benefit of creditors, proposing a moratorium upon or composition of its debts, or commencing or having filed against it any bankruptcy, reorganization or insolvency proceeding, which are not dismissed within 60 days from filing; or (ii) a material breach or default by one party provided that the nondefaulting party shall have first given 30 days' prior written notice listing the specific acts or inactions constituting said breach or default and provided further that the defaulting party shall not have been able to satisfactorily remedy the specified breach or default within the said 30-day period.</p>

      <p align="left"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (b) Notwithstanding the foregoing, DSS may terminate this Agreement immediately upon written notice if<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (i)&nbsp;Boise or any Affiliate violates any of its obligations herein regarding confidentiality, trademarks, copyrights, or any other of DSS&rsquo;s rights or interests in its Intellectual Property or violates the terms of the Confidentiality Agreement dated as of February 27, 2004 between DSS and Boise Cascade Corporation or<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (ii)<b>&nbsp;&nbsp;</b> Boise violates the provisions of Section 2.4(A) hereof. <b>Further, in the event that Boise has not satisfied the minimum sales amounts provided in Section 2.2(A) hereof, DSS shall have the right, at its option, to terminate this Agreement upon 90 days prior written notice to Boise at anytime after 18 months of the date of this Agreement.</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (c) Boise may terminate this Agreement immediately upon written notice if (i) DSS or any Affiliate violates any of its obligations herein regarding confidentiality, trademarks, copyrights, or any other of Boise&rsquo;s rights or interests in Boise&rsquo;s Intellectual Property or violates the terms of the Confidentiality Agreement dated as of February 27, 2004 between DSS and Boise Cascade Corporation or (ii) DSS violates the provisions of Section 2.3(B) hereof.</p>
    </div>

    <div>
      <p><b>8.3&nbsp;Effect of Termination.</b> Upon the expiration or termination of this Agreement, (a) each party shall return the other&rsquo;s Confidential Information in its possession or control and (b) all licenses granted by one party to the other pursuant to this Agreement shall immediately terminate, and each party shall promptly discontinue all use of the other party&rsquo;s Marks and/or Intellectual Property. Sections 6, 7.9,10,11,12 and 13 will survive the expiration or termination of this Agreement for any reason. Further, In the event of termination of this Agreement, Boise shall have the right for a period of not in excess of 120 days from the date of termination, to continue to sell all remaining Product then held by it.</p>

      <p><b>9.&nbsp;&nbsp;</b> <b>Confidentiality.</b></p>

      <p><b>9.1&nbsp;Obligations.</b> The Parties hereby agree to be bound, each for itself and on behalf of its Affiliates, that they shall be bound by the terms and conditions of the Confidentiality Agreement between DSS and Boise Cascade Corporation dated as of February 27, 2004, by which Boise expressly agrees to be bound by the terms thereof as if it were an original party thereto. Further, notwithstanding anything to the contrary in the Confidentiality Agreement, the non-disclosure period set forth in Section 10 thereof shall be deemed to be five years from the later of (i) the term as set forth in Section 10 of such agreement or (ii) five years from the date of the last sale of Products hereunder. Notwithstanding the foregoing, either party may make disclosures as required or requested by a court of law or any governmental entity or agency, including but not limited to disclosures required by the Securities and Exchange Commission of the United States or any similar authority in any other country, pro
vided that such party provides the other with reasonable prior notice to enable such party to seek confidential treatment of such information.</p>

      <p><b>9.2&nbsp;Exclusions.</b> The restrictions on the use and disclosure of Confidential Information shall be determined in accordance with the Confidentiality Agreement.</p>

      <p><b>9.3&nbsp;Injunctive Relief.</b> Each Party acknowledges that a breach or threatened breach of this Section 9 would cause irreparable harm to the non-breaching party, the extent of which would be difficult to ascertain. Accordingly, each party agrees that, in addition to any other remedies to which a party may be legally entitled, the non-breaching Party shall have the right to seek immediate injunctive or other equitable relief in the event of a breach of this Section 9 by the other Party or any of its Affiliates, directors, officers, employees or agents.</p>

      <p><b>10.&nbsp;</b> <b>Intellectual Property Rights.</b></p>

      <p><b>10.1&nbsp;DSS Proprietary Rights.</b> Except as expressly set forth in this Agreement, all rights or licenses with respect to the DSS Intellectual Property (including any improvements or modifications), or other trade secrets and know-how are reserved to DSS. Boise acknowledges that the DSS Intellectual Property and Products contain substantial trade secrets of DSS, and Boise agrees to employ reasonable security precautions to maintain the confidentiality of such trade secrets. Without limiting the generality of the foregoing, the licenses granted under Section 7 granted by DSS to Boise under this Agreement shall be with respect to the sale, distribution and marketing of Products only. Boise shall have no right to any DSS Intellectual Property and Boise shall not, and shall not permit any third party to, manufacture, reverse engineer, produce, use, license, sell or otherwise distribute, modify, reproduce, or exploit DSS&rsquo; Intellectual Property or any products derived therefrom.</p>

      <p><b>10.2&nbsp;Boise Proprietary Rights.</b> Except as expressly set forth in this Agreement, all rights or licenses with respect to the Boise Intellectual Property (including any improvements or modifications), or other trade secrets and know-how are reserved to Boise. DSS acknowledges that the Boise Intellectual Property contains substantial trade secrets of Boise, and DSS agrees to employ reasonable security precautions to maintain the confidentiality of such trade secrets. Without limiting the generality of the foregoing, the licenses granted under Section 7 granted by Boise to DSS under this Agreement shall be with respect to the sale, distribution and marketing of Products only. DSS shall have no right to any Boise Intellectual Property and DSS shall not, and shall not permit any third party to, manufacture, reverse engineer, produce, use, license, sell or otherwise distribute, modify, reproduce, or exploit Boise Intellectual Property or any products derived therefrom.</p>

      <p><b>11.&nbsp;&nbsp;</b> <b>LIMITATION OF LIABILITY.</b></p>

      <p><b>SUBJECT TO INDEMNIFICATION OBLIGATIONS CONTAINED IN THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY LOSS WHICH COULD HAVE BEEN PREVENTED BY COVER, OR FOR ANY SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES WHATSOEVER, INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS, LOSS OF BUSINESS OPPORTUNITIES, OR LOSS OF GOODWILL, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OCCURRING.</b></p>

      <p><b>12.&nbsp;</b> <b>DISCLAIMER OF WARRANTIES.</b></p>

      <p><b>EXCEPT AS PROVIDED IN THIS SECTION 12, THE PRODUCTS TO BE SOLD TO BOISE HEREUNDER ARE PROVIDED ON AN "AS IS" BASIS AND DSS MAKES NO WARRANTIES, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE, WHETHER ARISING BY COURSE OF DEALING OR PERFORMANCE, CUSTOM, USAGE IN THE TRADE OR PROFESSION OR OTHERWISE, WITH RESPECT TO ANY SUCH PRODUCTS, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS SPECIFICALLY SET FORTH IN THIS SECTION 12, ALL SUCH WARRANTIES, EXPRESS OR IMPLIED, ARE HEREBY DISCLAIMED.</b></p>

      <p>DSS hereby warrants to Boise that (i) it is the owner or the lawful licensee, without encumbrance of its Intellectual Property as utilized in the Products (ii) the Products shall conform to the descriptions set forth on Exhibit A and the Quality Standards on Exhibit D and (iii) the Products shall be of the same quality as sold by DSS directly to End Users and/or the Existing Market.</p>

      <p><b>13.</b><b>&nbsp;&nbsp;Indemnification.</b></p>

      <p><b>13.1 Intellectual Property Indemnity.</b> DSS shall indemnify and hold harmless Boise from any losses, liability, damages, fines penalties and expenses (including the cost of assisting in the defense and reasonable attorney fees) arising out of or resulting from any allegation or charge that the marketing, manufacture or sale of any Product by Boise hereunder constitutes an infringement of any patent, copyright, trade secret, or other intellectual property right of any third party. DSS shall, at any time up to 90 days after it is finally adjudicated that such infringement exists or prior to the effective date of a court injunction, at no expense to Boise, minimize Boise's damage or liability by the following:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (i) Altering the Product to make it non-infringing, provided that such altered non-infringing Product shall fulfill substantially the same function as it fulfilled prior to such alteration,</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (ii) Exchanging non-infringing Product which shall fulfill substantially the same function for the infringing Product,</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (iii) Obtaining a settlement or license permitting Boise's use of any infringing Product, or</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> (iv) Removing the infringing Product and purchasing non-infringing Product at Boise's purchase price plus the costs of transportation, installation and removal.</p>

      <p><strong>13.2&nbsp;</strong> <b>General Indemnity.</b> (A) Both parties shall indemnify and hold the other harmless from and against any and all losses, liability, damages, fines, penalties, and expenses (including the cost of assisting in the defense and reasonable attorney fees, collectively, "Claims") to the extent such Claims arise out of or result from the fault, negligence or willful misconduct of, or other breach of duty or violation of this Agreement by, the indemnifying party or its employees, agents, representatives, contractors or partners.</p>

      <p><strong>13.3</strong><b>&nbsp;Indemnification Procedure.</b> In the event a party is entitled to indemnification under Subsections 13.1 or 13.2 above, the indemnifying party shall assume the defense of the other at the indemnifying party's expense against any such charge or Claim. The party seeking indemnification shall promptly notify the indemnifying party of such charge or Claim, and furnish the indemnifying party reasonable assistance and information available to the indemnified party pertinent to the charge or Claim. The indemnified party shall, however, have the right to be represented in suc h matters by counsel of its own selection acting at its own expense. The indemnifying party shall be entitled to settle any such charge or Claim to the extent such settlement involves the payment of money damages only, which payment will be solely the indemnifying party's responsibility under this indemnity.</p>

      <p><b>14.&nbsp;&nbsp;Miscellaneous.</b></p>

      <p><b>14.1 Force Majeure.</b> Should any circumstance beyond the reasonable control of any Party occur which delays or renders impossible the performance of its obligations under this Agreement on the dates herein provided for, such obligation shall be postponed for such time as such performance necessarily has had to be suspended or delayed on account thereof. In either such event, the Parties shall promptly meet to determine an equitable solution to the effects of any such event, provided that any Party who fails because of force majeure to perform its obligations hereunder will upon the cessation of the force majeure take all reasonable steps within its power to resume with the least possible delay compliance with its obligations. Neither Party shall be liable for any delay or other failure of performance because of force majeure. Events of force majeure shall include, without limitation, war, revolution, invasion, insurrection, riots, mob violence, sabotage or other civil disorders, fires, floods o
r other acts of God or nature, utility failures, strikes or other labor disputes, acts, laws, regulations or rules of any government or governmental agency and any other similar cause or event beyond the reasonable control of the Party, the obligations of which are affected thereby. Where only a portion of DSS&rsquo; capacity to perform is impaired by an event of force majeure, DSS shall make a fair allocation of its remaining production among the various customers then under contract for similar goods during the period.</p>

      <p><b>14.2&nbsp;Law Compliance and Cooperation.</b> The Parties agree to cooperate in good faith to seek to comply with all applicable laws and regulations as they apply to the activities of this Agreement and to cooperate in good faith and to use best efforts to carry out the purposes of this Agreement, including without limitation, to cooperate in connection with any public inquiries or proceedings relating to this Agreement.</p>

      <p><b>14.3&nbsp;Notices.</b> All notices and requests in connection with this Agreement are effective as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid, certified or registered, return receipt requested, and addressed as follows:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> if to DSS:</p>
    </div>

    <div>
      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> First Federal Plaza<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Suite 1525<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> 28 East Main Street<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Rochester, NY 14614</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Attn.: Chief Executive Officer</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> If to Boise:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Boise Paper Solutions<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> 591 Supreme Drive<br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Bensenville, IL 60106-1162<br>
      <br>
       <b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> Attn.: Vince Phelan</p>

      <p>or to such other address as a party may designate pursuant to this notice provision.</p>

      <p><b>14.4&nbsp;Jurisdiction and Venue.</b> All suits arising from or relating to this Agreement or the performance or breach thereof shall be brought exclusively in the appropriate federal or state courts located in New York, New York. Each party hereto hereby waives, on behalf of itself and its Affiliates, any and all defenses based upon lack of personal jurisdiction or lack of venue.</p>

      <p><b>14.5&nbsp;Governing Law.</b> This Agreement shall be governed by and construed in accordance with the laws of the State of New York.</p>

      <p><b>14.6&nbsp;&nbsp;Assignment.</b> Neither Party may assign or transfer control of this Agreement or any rights and/or obligations hereunder without the other Party's prior written approval; provided, however, (i) either Party may assign the Agreement to an Affiliate following 10 days prior notice to the non-assigning Party or (ii) either Party may assign this Agreement to a successor in interest in the event of a merger, consolidation or sale of assets (or similar transaction) provided the proposed assignee agrees in writing to be bound by the terms hereof; provided further, under no circumstances shall Boise have the right to assign this Agreement to any entity which competes with DSS in the business of (i) marketing or selling of paper products used in security printing or (ii) document anti-counterfeit technology. Any attempted assignment, sub-license, transfer, encumbrance, conveyance or other disposal in violation hereof shall be void and shall constitute a material default and breach of this 
Agreement.</p>

      <p><b>14.7&nbsp;Construction.</b> If for any reason a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, to be unenforceable, the affected provision of the Agreement will be enforced to the maximum extent permissible so as to affect the intent of the Parties, and the remainder of this Agreement will continue in full force and effect. This Agreement has been negotiated by the Parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party.</p>

      <p><b>14.8&nbsp;Waiver.</b> The failure of either party at any time to require the performance by the other party of its obligations under the terms or provisions of this Agreement shall in no way affect the right of that party to later enforce such provisions nor shall the waiver by either party of any breach of any of the terms or conditions of this Agreement be taken to be a waiver of any subsequent breach of any such term or condition, or as a continuing waiver of such term or condition. No waiver of any term or condition of this Agreement shall be valid or binding on a Party unless the same shall have been mutually assented to in writing by all Parties.</p>
    </div>

    <div>
      <p><b>14.8&nbsp;Headings.</b> The headings in this Agreement are intended for convenience of reference and shall not affect its interpretation.</p>

      <p><b>14.9&nbsp;No Joint Venture.</b> This Agreement does not involve the creation of either a wholly-owned subsidiary of either Party or an agency relationship or partnership funded in any ratio by the Parties. The Parties do not intend that any agency or partnership relationship be created between them by this Agreement. Neither Party has the right or authority to enter into contracts on the other Party&rsquo;s behalf. In the performance of all work, each Party is an independent contractor with the sole right to supervise, manage, control and direct the performance of the details of said work to be performed by it.</p>

      <p><b>14.10 Press Releases.</b> Neither party shall disclose the terms of this Agreement to any third party, other than its Affiliates, successors, permitted assigns, financial or legal advisors or make any announcements regarding the nature of the relationship between the parties without the prior approval of the other party, except that a party may disclose the terms of this Agreement where required by law, provided that such party uses reasonable effort to obtain confidential treatment or similar protection to the fullest extent available to avoid public disclosure of the terms of this Agreement. A party required by law to make disclosure of the terms of this Agreement will promptly notify the other party and permit the other party to review and participate in the application process seeking confidential treatment. The Parties hereby expressly agree to prepare and release a mutually acceptable press announcement describing the execution of this Agreement within 10 days of the execution hereof.</p>

      <p><b>14.11&nbsp;Modification; Entire Agreement.</b> This Agreement may be modified only by a written amendment executed by duly authorized officers or representatives of both parties. Other than the matters covered by the Confidentiality Agreement between DSS and Boise which is intended by the Parties to remain in full force and effect except as expressly modified hereby in Section 9.1, this Agreement and any exhibits or schedules attached hereto constitute the complete and exclusive statement of the agreement between the parties and supersedes all proposals, oral or written, and all other prior or contemporaneous communications between the parties relating to the distribution of the DSS Products as of the date of this Agreement.</p>

      <p><b>14.11&nbsp;Due Authorization; Further Assurances.</b> The individuals executing this Agreement on behalf of Boise and DSS do each hereby represent and warrant that they are duly authorized by all necessary action to execute this Agreement on behalf of their respective principals. The Parties shall each perform such acts, execute and deliver such instruments and documents, and do all such other things as may be reasonably necessary to accomplish the transactions contemplated in this Agreement.</p>

      <p><b>14.15&nbsp;Compliance with Certain OSHA Standards.</b> If the Products sold hereunder are subject to the OSHA <u>Hazard</u> Communication Standard, 20 CFR Part 1910, or to such other state hazard communications laws, regulations, or standards as OSHA may have approved (the "Standard"), DSS shall provide Boise with a complete and accurate Material Safety Data Sheet for each of the Products sold hereunder and shall label each of the Products as required by the Standard. DSS's failure to supply such Sheet or to so label the Products shall be deemed to constitute DSS's warranty, representation, and covenant that each of the Products sold hereunder is exempt from the Standard.</p>

      <p><b>14.16&nbsp;Compliance with California Proposition 65.</b> DSS warrants that all Products sold by Boise hereunder in the State of California will not, under normal conditions of shipment, storage, or use, cause any person to be exposed to a chemical which is a carcinogen or a reproductive toxin listed under the California Safe Drinking Water and Toxic Enforcement Act of 1986 in quantities which would require that a warning be given prior to such exposure under the Act.</p>
    </div>

    <div>
      <p><b>14.17&nbsp;Counterparts.</b> This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Further, either Party shall be entitled to rely upon a facsimile signature of the other Party as due execution hereof.</p>

      <p><b>14.18&nbsp;Mutuality of Obligations.</b> All debts and obligations of Boise and DSS (and their respective Affiliates) to each other are mutual and subject to setoff.</p>

      <p>IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized officer or representative as of the date first above written.</p>

      <p>BOISE WHITE PAPER. L.L.C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; DOCUMENT SECURITY SYSTEMS, INC.<br>
       By:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; By:<br>
       Name:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Name: Patrick White<br>
       Title:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Title: Chief Executive Officer</p>
    </div>
    <hr noshade>

    <div>
      <p>Exhibit A</p>

      <p>Product descriptions as of January 19, 2005</p>

      <p>&nbsp;&nbsp; 1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; General Safety Paper Description:</p>

      <p>"Safety Paper" or "Security Paper" shall mean 60 pound opaque offset smooth paper printed in a flat tint, with hidden alert words embedded in the background tint such as "VOID," "COPY," or "UNAUTHORIZED COPY," or bar codes, logos, or other custom images that appear when a handheld verifier is placed on the paper or when the document is copied, scanned, faxed or reproduced in any form utilizing industry standard copiers, desktop scanners or facsimile machines. The appearance of the hidden words after reproduction of the document is intended to alert document recipients that they are looking at a non-original document. The paper is manufactured and marketed by DSS utilizing the "AuthetiGuard Pantagraph 4000" technology.</p>

      <p>The Safety Paper shall satisfy <u>one or more</u> of the following performance standards:</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> 1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Hidden words show with a viewer OR</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> 2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Hidden words appear when copied on a Black &amp; White Copier OR</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> 3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Hidden words appear when copied on a Color Copier OR</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b> 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Hidden words appear when scanned on a desktop scanner and appear on the desktop monitor</p>

      <p>2. Exclusion from Definition. For purposes of the agreement by DSS not sell Product pursuant to Section 2.4(b) the term "Product" does not include custom printed Safety Paper with secondary visable color such as words, symbols, borders, artwork or similar features.</p>
    </div>

    <div>
      <p>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; SKU Descriptions</p>

      <p>See Exhibit C</p>

      <p><b>DSS will not be responsible for failures, malfunctions or improper functioning of copiers, scanners and similar machines or machines that have been adjusted by the user to perform out of industry recognized normal manufacturers authorized specifications, all of which may affect the efficacy of the DSS Intellectual Property.</b></p>
    </div>
    <hr noshade>

    <div>
      <p>Exhibit B&nbsp;Pricing Terms<br>
      </p>

      <table border="0" cellspacing="0" cellpadding="4">
        <tr>
          <td valign="bottom">
            <p><font size="2"><b><u>Item Description</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="center"><font size="2"><b># of Sheets<br>
             <u>Per case</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="center"><font size="2"><b><u>Configuration</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="left"><font size="2"><b><u>Paper Description</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="center"><font size="2"><b>Paper<br>
             <u>Dimensions</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="center"><font size="2"><b>Price per<br>
             <u>Sheet (1)</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="center"><font size="2"><b>Price per<br>
             <u>Case (1)</u></b></font></p>
          </td>

          <td valign="bottom">
            <p align="center"><font size="2"><b>Promotion<br>
             <u>Allowance</u></b></font></p>
          </td>
        </tr>

        <tr>
          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>

          <td valign="bottom"><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Retail "Medical"&nbsp;</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Green "void" on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">81/2" X 11"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Retail "Prescription"</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Green "void" w/ perforation on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">81/2" X 11"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Retail "Legal"</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Gray "copy" on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">81/2" X 11"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Retail "Business"</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Teal "unauthorized copy" on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">81/2" X 11"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Economy Pack</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Blue "void" on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">81/2" X 11"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Economy Pack</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Blue "void" w/perforation on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">81/2" X 11"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>

          <td>
            <div align="center">
            </div>
          </td>
        </tr>

        <tr valign="bottom">
          <td>
            <p><font size="2">Press Sheets</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p><font size="2">Blue "void" on 60# opaque offset smooth paper printed on one side</font></p>
          </td>

          <td>
            <p><font size="2">25" X 38"</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>

          <td>
            <p align="center"><font size="2">&nbsp;* * * *</font></p>
          </td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <p><font size="2">(1)&nbsp; * * * * &nbsp;(same color and word) and an overall</font></p>
          </td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <p><font size="2">order quantity of at least * * * *</font></p>
          </td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td>
            <p><font size="2">() Custom image designs&nbsp; * * * *</font></p>
          </td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>

          <td><font size="2">&nbsp;</font></td>
        </tr>

        <tr valign="bottom">
          <td colspan="8">
            <p><font size="2">[ * Certain information on this page has been omitted and filed separately with the Commission.&nbsp; Confidential treatment has been requested with respect to the omitted portions.]</font></p>
          </td>
        </tr>
      </table>
    </div>
    <br clear="all">

    <div>
      <hr noshade>

      <p>Exhibit C&nbsp;Existing Market</p>

      <p>Chicago Water Mark<br>
       Micro Format<br>
       Duke University Medical Center Coupons Inc.<br>
       WH Farwell Company</p>
    </div>
    <hr noshade>
    Exhibit D<br clear="all">

    <div>
      <p>Quality Standards</p>

      <p>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Product Quality</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; DSS and its paper manufacturers shall implement to such quality controls as may be necessary to satisfy the following criteria:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Products shall be free of print defects that would interfere with the pantograph pattern or the hidden word;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Products shall be free of hickeys or print voids;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; C.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Packages shall contain accurate sheet counts</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; D.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Packages shall reflect the DSS Marks and Boise Marks and otherwise be satisfactory to the Parties.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; E.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; A label will be affixed to each shrink wrapped package of Boise Beware Safety paper. This label will contain a code which will consist of all of the pertinent information to the lot run. For instance, paper description, press utilized, date of production, press man, inspector, pulled sample sheets filed, etc. The information from this label code will be maintained by the manufacturer and available to Boise and or DSS when requested. The purpose of this label is to trace, track and research any quality issues arising from customer returns.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; F.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All finished product is inspected before being shipped to the customer or going to stock.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; G.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The quality requirements are identified on the job ticket and the final inspection report. Inspection records include the number of units accepted, date of inspection and identification of the inspector.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; H.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Final Inspection sample is a minimum of 20 random pieces and the acceptance criteria is zero rejects.</p>
    </div>

    <div>
      <p align="left">&nbsp;</p>
      <hr noshade>

      <p align="left">Exhibit E</p>

      <p align="left">DSS Marks</p>
    </div>
  </body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>3
<FILENAME>dmc10ksb123104ex1026.htm
<DESCRIPTION>AGREEMENT
<TEXT>
<html>
  <head>
    <title>dmc10ksb123104ex1026</title>
  </head>

  <body>
    <div>
      <hr noshade>

      <p align="right">Exhibit 10.26</p>

      <p align="center"><b>EMPLOYMENT AGREEMENT</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This <b>EMPLOYMENT AGREEMENT</b> (the "<b><i>Agreement</i></b>") is effective as of June 11, 2004&nbsp; (the "<b><i>Effective Date</i></b>"), between <b>DOCUMENT SECURITY SYSTEMS, INC.</b>, a New York corporation with an office at 36 West Main Street, Rochester, New York 14614 ("<b><i>Company</i></b>") and <b>Thomas M. Wicker</b>, who resides at <u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</u> , New York&nbsp;&nbsp; 14506 ("<b><i>Executive</i></b>").</p>

      <p align="center"><b><i>R E C I T A L S :</i></b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS</b>, Company is in the business of developing, licensing and selling anti- counterfeiting technology and products;</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; WHEREAS</b>, Executive has served as the Company's Vice President and Chief Technology Officer since approximately August 5, 2002; and</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>WHEREAS</b>, Company desires to continue the engagement of Executive as the Chief Technology Officer and Executive wishes to continue serving in such capacity on the terms and conditions set forth below.</p>

      <p align="center"><b><i>P R O V I S I O N S :</i></b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; NOW, THEREFORE</b>, in consideration of the mutual promises and covenants set forth herein, the parties agree as follows:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Employment; Duties</u></i></b>.&nbsp; Company hereby agrees to employ Executive as its Vice President and Chief Technology Officer.&nbsp; The Executive hereby accepts such employment.&nbsp; Executive will report to Company's Board of Directors and will perform those duties and have such authority and powers as are customarily associated with the positions of Chief Technology Officer and Vice President, including, without limitation, leading the Company's research and development efforts, writing and assisting the Company and its patent counsel with patent applications, protecting trade secrets, assisting and advising clients with implementation of the Company's technology and such other duties and responsibilities as the Chief Executive Officer&nbsp; and/or Board of Directors may reasonably request.&nbsp; The Executive shall report to the Chief Executive Officer of the Compa
ny.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Term</u></i></b>.&nbsp; The term of this Agreement shall commence on the Effective Date and shall continue for (3) three years from the Effective Date unless otherwise terminated as provided herein (together with any Renewal Term, as hereafter defined, shall be referred to as the "<b><i>Term</i></b>"). This Agreement shall automatically be extended for successive one (1) year terms pursuant to the terms and conditions of this Agreement (each, a "<b><i>Renewal Term</i></b>"), unless otherwise terminated by written notice from one party to the other no less than sixty (60) days prior to the end of the Term or any subsequent Renewal Term.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Compensation</u></i></b>.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Annual Salary</u>.&nbsp; In consideration for the services rendered by Executive on behalf of Company during the Term of this Agreement, Company shall pay Executive, commencing on the Effective Date, an annual salary equal to $72,500, payable in accordance with Company's regular payroll practices.&nbsp; Effective as of the January 1 of each year during the Term, Executive's annual salary shall be increased as determined by Company's Board of Directors, but in no event less than ten percent (10%) annually from the prior year's annual salary.&nbsp; All forms of compensation referred to in this Agreement are subject to reduction to reflect applicable federal and state withholding and payroll taxes.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Bonuses</u>.&nbsp; Executive shall be eligible to receive a cash bonus, based upon the Company's financial performance and as determined in the discretion of Company's Board of Directors, or the Compensation Committee thereof.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Stock Options</u>.&nbsp; The Executive shall be eligible to participate in the Company's 2003 Employee Stock Option Plan ("Incentive Plan").&nbsp; Any grant of options shall be subject to approval by the Board of Directors or the Compensation Committee&nbsp; and shall be subject to the terms and conditions of the Incentive Plan and applicable rules and regulations of the Internal Revenue Service.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Benefits</u></i></b>.&nbsp; In addition to the compensation set forth above, Company shall provide Executive with the following benefits:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive and Executive's family, as applicable, shall be entitled to participate in all employee benefit plans and programs from time to time whenever sponsored by Company, including, without limitation, any group disability, life, major medical and accidental death and dismemberment insurance plans and/or benefits and profit sharing, retirement or pension plans to the full extent available to any of the Company's other employees through the Term of this Agreement.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall be entitled to four (4) weeks of vacation each year that he is employed hereunder during which vacation his annual salary shall be paid in full.&nbsp; Any vacation not taken by Executive shall carryover into the succeeding year or in accordance with the Company's executive employee policies in effect from time to time.&nbsp; All unused and accrued vacation shall be paid to Executive (or Executive's estate) upon Executive's termination of employment.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company shall provide Executive with up to 5 days of paid sick leave each year; unused sick days shall not carryover into the succeeding year.&nbsp; Company also shall provide Executive with holiday pay, as provided by Company to its other executives.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Expenses</u></i></b>.&nbsp; Executive will be entitled to be paid or reimbursed for all expenses incurred by Executive in connection with Executive's responsibilities to Company, including, without limitation, administrative, travel, lodging, food, and entertainment.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Confidential Information</u></i></b>. Executive shall not, during the Term, disclose, except as required or necessary in the course of his employment by Company or as otherwise authorized by Company, any Confidential Information (as defined herein).&nbsp; "<b><i>Confidential Information</i></b>" shall mean any information existing as of the date of this Agreement, or thereafter developed, in which Company has a proprietary interest, including, but not limited to, information relating to its patents, technology, research and development, technical data, trade secrets, know-how, products, services, finances, operations, sales and marketing, customers and customer information, licenses, orders for the purchase or sale of products, personnel matters and/or other information relating to Company, whether communicated orally, electronically or in writing, or obtained by <b></b>Exec
utive as a result of his employment, or through observation or examination of the Company's business.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><u>Non-Competition Covenant; Non Solicitation Covenant</u></b>&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the term of his employment and for a period of the longer of (i) one year thereafter or (ii) the period of time that Executive is receiving any severance payments under Section 9(b)(ii) hereof, Executive agrees that he will not directly or indirectly engage in any business, that sells or develops software, manufactures or distributes products or provides services in the anti- counterfeiting and document security businesses or that are engaged in businesses that the same as those sold or provided by Company at such time.&nbsp; The Company shall have the option to make Severance Payments to Executive in accordance with Section 9(b)(ii), if in its determination, such payments are necessary or advisable to enforce the restrictions provided in this Section 7(a).</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Notwithstanding anything herein to the contrary, Executive shall not be prevented or limited from (i) investing in the stock or other securities of any corporation whose stock or securities are publicly owned and regularly traded on any public exchange, (ii) serving as a</p>

      <p>director, officer or member of professional, trade, charitable and civic organizations, or (iii) passively investing (not to exceed being a beneficial owner of more than 3% of the outstanding Common Stock)&nbsp; his assets in such a form and manner as will not conflict with the terms of this Agreement and will not require services (whether as consultant, an officer, employee or director) on the part of Executive in the operation of the business of the entities in which such investments are made.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (c)&nbsp; In furtherance of the foregoing, Executive shall not, during the aforesaid period of non-competition, directly or indirectly, in connection with any business involved in the manufacture, development and/or distribution of anti-counterfeiting technology and document security businesses, or any business similar to the business in which the Company was engaged, or in the process of developing during Executive's tenure with the Company, solicit any customer or employee of the Company who was a customer or employee of the Company during the tenure of his employment.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (d) If any court shall hold that the duration of non-competition or any other restriction contained in this Section 7 is unenforceable, it is our intention that same shall not thereby be terminated but shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable or, in the alternative, such judicially substituted term may be substituted therefor.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Termination of Agreement.</u></i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement shall terminate upon the occurrence of the following events;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement shall terminate upon Executive's death.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; the Company may terminate this Agreement upon Executive's "total disability" ("Disability"), which shall mean his incapacity due to physical or mental illness or disability, which renders him absent, or unable to perform, his duties hereunder on a full time basis for a period of six (6) months, whether consecutive or cumulative, within any twelve (12) month period.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company may terminate this Agreement for "Good Cause" as defined below upon thirty (30) days prior written notice to Executive, which notice shall specify the reason(s) for termination.&nbsp; For purposes of this Agreement, "<b><i>Good Cause</i></b>" means (i) willful disobedience by the Executive of a material and lawful instruction of the Board of Directors or Chief Executive Officer of the Company; (ii) conviction of the Executive of any misdemeanor involving fraud or embezzlement or similar crime or any felony; (iii) an order is entered by the Securities and Exchange Commission, a state regulatory agency&nbsp; or an exchange on which the Company's securities are traded finding that Executive has violated the securities laws; (iv)&nbsp; breach by the Employee of any material term, condition or covenant of this 
Agreement; (v)&nbsp; fraud or&nbsp; gross negligence in the performance of his duties to the Company; or (vi)&nbsp; excessive absences from work, other than for illness or Disability, in the case of breach which is capable of being cured, is not cured within thirty (30) days after Company has provided Executive with written notice thereof.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive may terminate this Agreement upon sixty (60) days prior written notice to the Company.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement may be terminated upon the mutual agreement of Company and Executive.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Obligations Following Termination of Agreement</u></i></b>.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If this Agreement is terminated pursuant to Section 8, the Company shall have no obligation to pay any Severance Payments (as defined below) or benefits to Executive; provided, however, Company shall be obligated to pay Executive (or in the case of his death, his spouse, estate or representative) all unpaid salary, earned bonuses, vacation and other benefits accrued through the date of termination of this Agreement and shall provide such other benefits, such as health insurance continuation coverage under COBRA, as may be required by law.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If this Agreement is terminated by Company without "Good Cause" as defined in Section 8:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall be paid all unpaid salary, earned bonuses, vacation and other benefits accrued through the date of termination and shall receive such other benefits, such as health insurance continuation coverage under COBRA, as may be required by law;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall receive as severance payment an amount equal to eighteen (18) months of Executive's annual salary at the rate in effect as of the date of Executive's termination, payable at Executive's sole discretion in either a lump sum at the time of termination or on normal pay dates in accordance with the Company's pay policies in effect prior to the termination date.&nbsp; In addition, for the eighteen (18) month period immediately after the termination of this Agreement, Company shall continue to provide and pay the premium for the health insurance provided to Executive (and his family, if applicable) immediately prior to the termination of this Agreement (collectively, the payments under this clause (ii) are referred to as "Severance Paym
ents");</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Executive shall not be required to mitigate damages of the amount of any salary continuation payments provided for under this Section by seeking other employment or otherwise, nor shall the amount of any payments provided for under this Section be reduced by any compensation earned by Executive as the result of employment by another employer or by any self employment after the date of termination;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (iv)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All options for Company capital stock granted to Executive pursuant to the Incentive Plan including, without limitation, Executive's Stock Options, or otherwise, that remain unvested shall immediately vest, and Executive shall have a period of 90 days following termination to exercise his vested options, subject to the provisions of the Incentive Plan and applicable IRS regulations.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Upon the termination of this Agreement for any reason, any and all restrictions (other than restrictions which are the result of applicable federal securities laws and regulations and those restrictions which Executive has entered into with a third party on a contractual basis) on the transfer of shares of Company's capital stock then owned by Executive (which shall include any and all option shares unvested at the time of the termination) shall be terminated as of the date of termination of this Agreement.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 10.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Indemnification.</u></i></b> Company shall, to the maximum extent permitted by law, indemnify Executive against all expenses, including, without limitation, reasonable attorneys' fees, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of Executive's employment by Company.&nbsp; Company shall, to the maximum extent permitted by law, advance to Executive any expenses incurred in defending any such proceeding.&nbsp; Company agrees to obtain Directors and Officers Liability insurance, and to include Executive in the coverage of this policy.&nbsp; In addition, Company agrees to amend its Certificate of Incorporation and/or Bylaws, as necessary, to authorize Company to indemnify Executive as set forth in this Section 10.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Work-for Hire</u></i></b>.&nbsp; Except as otherwise may be agreed by the Company in writing, in consideration of the employment of Employee by the Company, and free of any additional obligations of the Company to make additional payment to Employee, Employee agrees to irrevocably assign to the Company any and all inventions, software, manuscripts, documentation, improvements or other intellectual property whether or not protectible by any state or federal laws relating to the protection of intellectual property, relating to the present or future business of the Company that are developed by Employee prior to the termination of his employment with the Company, either alone or jointly with others, and whether or not developed during normal business hours or arising within the scope of his/her duties of employment.&nbsp; Employee agrees that all such inventions, software, manuscripts, do
cumentation, improvement, trade secrets or other intellectual property shall be and remain the sole and exclusive property of the Company and shall be deemed the product of work for hire.&nbsp; Employee hereby agrees to execute such assignments and other documents as the Company may consider appropriate to vest all right, title and interest therein to the Company and hereby appoints the Company Employee's attorney-in-fact with full powers to execute such document itself in the event employee fails or is unable to provide the Company with such signed documents.&nbsp; This provision does not apply to an invention for which no equipment, supplies, facility, or intellectual property or trade secret information of the Company was used and which was developed entirely on Employee's own time, unless (a) the invention relates (i) to the business of the Company, or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by Employee for the
 Company.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b><i><u>Miscellaneous</u></i></b>.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; shall constitute the entire agreement between the parties hereto and supersedes all prior agreements, written or oral, concerning the subject matter herein, including, without limitation, Sections 3 and 4 of the Agreement dated as of July 31, 2002 between the Company and the Executive&nbsp; and there are no oral understandings, statements or stipulations bearing upon the effect of this Agreement which have not been incorporated herein.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; may be modified or amended only by a written instrument signed by each of the parties hereto.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; shall bind and inure to the benefit of the parties hereto and their respective heirs, successors and assigns.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (iv)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; may not be assigned by either party without a written agreement signed by all parties hereto.&nbsp; Any assignment not signed by all parties is null and void.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If any provision of this Agreement shall be held invalid or unenforceable by competent authority, such provision shall be construed so as to be limited or reduced to be enforceable to the maximum extent compatible with the law as it shall then appear.&nbsp; The total invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement shall be construed in accordance with and governed by the laws of the State of New York without reference to conflict of laws principles.&nbsp; Any litigation involving this Agreement shall be adjudicated in a court with jurisdiction located in Monroe County, New York and the parties irrevocably consent to the personal jurisdiction and venue of such court.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; All notices and other communications under this Agreement must be in writing and must be given by personal delivery or first class mail, certified or registered with return receipt requested, and will be deemed to have been duly given upon receipt if personally delivered, five (5) days after mailing, if mailed, to the respective persons named below:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If to Company:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc.<br>
       &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 36 West Main Street<br>
       &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Rochester, New York 14614</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If to Executive:<br>
      </p>

      <p>Any party may change such party's address for notices by notice duly given pursuant to this Section.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the event of litigation to enforce the terms and conditions of this Agreement, the losing party agrees to pay the substantially prevailing party's costs and expenses incurred including, without limitation, reasonable attorneys' fees.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (f)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Company agrees that it will indemnify and hold Executive harmless to the fullest extent permitted by applicable law from and against any loss, cost, expense or liability resulting from or by reason of Executive's employment hereunder, whether as an officer, executive, agent, fiduciary, director or other official of Company, except to the extent of any expenses, costs, judgments, fines or settlement amounts which result from conduct which is determined by a court of competent jurisdiction to be knowingly fraudulent or to constitute some other type of willful misconduct.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (g)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; This Agreement may be executed simultaneously in one or more counterparts, each one of which shall be deemed an original, but all of which together shall constitute one and the same instrument.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (h)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Failure of either party at any time to require performance of any provision of this Agreement shall not limit the party's right to enforce the provision, nor shall any waiver of any breach of any provision be a waiver of any succeeding breach of any provision or a waiver of the provision itself for any other provision.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; If any provision of this Agreement, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is held invalid, shall not be affected thereby.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (j)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The parties acknowledge that the Company has been represented in this transaction by its counsel, Goldstein &amp; Digioia LLP that the Thomas Wicker has <b>not</b> been represented in this transaction by the Company's counsel, and Thomas Wicker has been advised that it is important for him to seek separate legal advise and representation in this matter.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>IN WITNESS WHEREOF</b>, the parties have executed this Agreement on the day and year first above written.</p>

      <p><b>COMPANY</b>:&nbsp;&nbsp; <b>Document Security Systems, Inc.</b></p>

      <p>By: <u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br>
      </u> Name: Patrick White<br>
       Title:&nbsp;&nbsp; Chief Executive Officer</p>

      <p><b>Executive</b>:</p>

      <p>Thomas A. Wicker</p>
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<TYPE>EX-21.0
<SEQUENCE>4
<FILENAME>dmc10ksb123104ex210.htm
<DESCRIPTION>SUBSIDIARIES OF REGISTRANT
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    <p align="right">Exhibit 21.0</p>

    <p align="center"><b>SUBSIDIARIES OF REGISTRANT</b></p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc. acknowledges that the following corporations are subsidiaries of the Registrant:</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Consultants, Inc. (New York) (100%)<br>
     &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Thomas M. Wicker Enterprises, Inc. (New York) (100%)<br>
     &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Lester Levin, Inc. (New York) (100%)<br>
     &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Imperial Encryption, Inc. (New York) (51%)</p>
  </body>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>dmc10ksb123104ex231.htm
<DESCRIPTION>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
<TEXT>
<html>
  <head>
    <title>dmc10ksb123104ex231</title>
  </head>

  <body>
    <hr noshade>

    <p align="right">Exhibit 23.1</p>

    <p align="center"><strong>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</strong></p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We consent to the incorporation by reference in Registration Statement No. 333-116317 of Document Security Systems, Inc and Subsidiaries on Form S-3 of our report, dated March 21, 2005, on the consolidated financial statements as of and for the year ended December 31, 2004, appearing in this Annual Report on Form 10-KSB of Document Security Systems, Inc and Subsidiaries for the year ended December 31, 2004.</p>

    <p><br>
     FREED MAXICK &amp; BATTAGLIA, CPAs, PC</p>

    <p>Buffalo, New York<br>
     March 30, 2005<br>
    </p>
  </body>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>6
<FILENAME>dmc10ksb123104ex311.htm
<TEXT>
<html>
  <head>
    <title>dmc10ksb123104ex311</title>
  </head>

  <body>
    <hr noshade>

    <p align="right">Exhibit 31.1</p>

    <p align="center"><b>CERTIFICATION PURSUANT TO</b></p>

    <p align="center"><b>18 U.S.C. SECTION 1350,</b></p>

    <p align="center"><b>AS ADOPTED PURSUANT TO</b></p>

    <p align="center"><b>SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002</b></p>

    <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; CERTIFICATION</b></p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; I, Patrick White, Chief Executive Officer, President and Acting Chief</p>

    <p>Financial Officer of Document Security Systems, Inc. certify that:</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 1. I have reviewed this annual report on Form 10-KSB of Document Security Systems, Inc.</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2. Based on my knowledge, this annual 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 report;</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; c) presented in this report conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and</p>

    <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 6. I have indicated in this report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.</p>


<p>Date: March 31, 2005</p>

    <table border="0" cellspacing="0" cellpadding="0">
      <tr>
        <td>/s/ Patrick White</td>
      </tr>

      <tr>
        <td>
          <hr width="100%" noshade>
        </td>
      </tr>

      <tr>
        <td>
          <p>Patrick White<br>
           Chief Executive Officer, President and<br>
           Acting Principal Financial Officer</p>
        </td>
      </tr>
    </table>
  </body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>7
<FILENAME>dmc10ksb123104ex321.htm
<TEXT>
<html>
  <head>
    <title>dmc10ksb123104ex321</title>
  </head>

  <body>
    <div>
      <hr noshade>

      <p align="right">Exhibit 32.1</p>

      <p align="center"><b>CERTIFICATION PURSUANT TO</b></p>

      <p align="center"><b>18 U.S.C. SECTION 1350,</b></p>

      <p align="center"><b>AS ADOPTED PURSUANT TO</b></p>

      <p align="center"><b>SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In connection with the Annual Report of Document Security Systems, Inc.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>(the "Company") on Form 10-KSB for the year ending December 31, 2004 as filed</p>

      <p>with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick White, President, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (2)&nbsp; The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.</p>


  <p>Date: March 31, 2005</p>

      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td>/s/ Patrick White</td>
        </tr>

        <tr>
          <td>
            <hr width="100%" noshade>
          </td>
        </tr>

        <tr>
          <td>
            <p>Patrick White<br>
             Chief Executive Officer, President and<br>
             Acting Principal Financial Officer</p>
          </td>
        </tr>
      </table>

      <p>&nbsp;</p>
    </div>
  </body>
</html>

</TEXT>
</DOCUMENT>
<DOCUMENT>
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<SEQUENCE>8
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end
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