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<SEC-DOCUMENT>0001167687-05-000031.txt : 20050516
<SEC-HEADER>0001167687-05-000031.hdr.sgml : 20050516
<ACCEPTANCE-DATETIME>20050516160825
ACCESSION NUMBER:		0001167687-05-000031
CONFORMED SUBMISSION TYPE:	10QSB
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20050331
FILED AS OF DATE:		20050516
DATE AS OF CHANGE:		20050516

FILER:

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

	FILING VALUES:
		FORM TYPE:		10QSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-32146
		FILM NUMBER:		05834496

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

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

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

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	THOROUGHBREDS USA INC
		DATE OF NAME CHANGE:	19861118
</SEC-HEADER>
<DOCUMENT>
<TYPE>10QSB
<SEQUENCE>1
<FILENAME>dmc10qsb033105.htm
<TEXT>
<html>
  <head>
    <title>dmc10qsb033105</title>
  </head>
  <body>
    <div>
      <p align="center"><font size="+2"><b>SECURITIES AND EXCHANGE COMMISSION</b></font><b><br>
       Washington, D.C. 20549<br>
      <br>
       FORM 10-QSB<br>
      <br>
       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF<br>
       THE SECURITIES EXCHANGE ACT OF 1934<br>
      <br>
       For the quarterly period ended</b> <b>March 31, 2005</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="250" height="80" src="dmc_logo.jpg" vspace="10"></p>
            </td>
          </tr>

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

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

          <tr>
            <td>
              <p align="center">(Exact name of small business issuer as specified in its charter)</p>
            </td>
          </tr>
        </table>
      </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>28 Main Street East, Suite 1525</b><br>
               <b>Rochester</b><b>,</b> <b>NY</b> <b>14614</b></p>
            </td>
          </tr>

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

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

      <div align="center">
        <br>


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

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

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

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

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

          <tr>
            <td>
              <p>As of May 10, 2005 (the most recent practicable date), there were 12,063,589 shares of the issuer's Common Stock, $0.02 par value per share, outstanding.</p>
            </td>
          </tr>

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

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

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

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

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

            <td>&nbsp;</td>

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

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

          <tr>
            <td valign="top" nowrap>
              <p><b>PART I</b></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><b>FINANCIAL INFORMATION</b></p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 1</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Financial Statements (Unaudited)</p>
            </td>

            <td>&nbsp;</td>

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

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

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Balance Sheets</p>
            </td>

            <td>&nbsp;</td>

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

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

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Statements of Operations</p>
            </td>

            <td>&nbsp;</td>

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

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

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Statements of Cash Flows</p>
            </td>

            <td>&nbsp;</td>

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

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

            <td>&nbsp;</td>

            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes to Financial Statements</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 2</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Management's Discussion and Analysis of Financial Condition and Results of Operations</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 3</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Controls and Procedures</p>
            </td>

            <td>&nbsp;</td>

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

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

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p><b>PART II</b></p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p><b>OTHER INFORMATION</b></p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 1</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Legal Proceedings</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 2</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Unregistered Sales of Equity Securities and Use of Proceeds</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 3</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Defaults upon Senior Securities</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 4</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Submission of Matters to a Vote of Security Holders</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 5</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Other Information</p>
            </td>

            <td>&nbsp;</td>

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

          <tr>
            <td valign="top" nowrap>
              <p>Item 6</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p>Exhibits and Reports on Form 8-K</p>
            </td>

            <td>&nbsp;</td>

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

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

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

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

          <tr>
            <td colspan="5" nowrap>
              <p><b>SIGNATURES</b></p>
            </td>
          </tr>
        </table>
      </div>

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

      <p align="center"><b>PART I<br>
       FINANCIAL INFORMATION</b></p>

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

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

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

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

            <td colspan="3" valign="bottom">
              <p align="center"><b>March 31,<br>
               2005</b><br>
               <b>(unaudited)</b></p>
            </td>

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

            <td colspan="3">
              <p align="center"><b>December 31,<br>
               2004</b></p>
            </td>
          </tr>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>3,635,384</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">2,657,865</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>228,058</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">381,923</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>85,301</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">62,494</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>38,270</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">64,158</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>3,987,013</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">3,166,440</p>
            </td>

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Restricted cash</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>304,426</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">300,000</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>409,669</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">380,971</p>
            </td>

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

          <tr>
            <td>
              <p><b>Equipment under capital lease, net</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>132,743</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">141,652</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>284,278</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">284,278</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>4,213,250</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">343,624</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>9,331,379</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">4,616,965</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>343,665</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">409,868</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>66,943</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">51,305</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>49,000</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">47,894</p>
            </td>

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

          <tr>
            <td>
              <p>&nbsp;&nbsp; Current portion of capital lease obligations</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>31,000</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">30,663</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>490,608</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">539,730</p>
            </td>

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Long term debt&nbsp;</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>205,366</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">218,226</p>
            </td>

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Long term capital lease obligations</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>110,506</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">118,267</p>
            </td>

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Commitments</b></p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;12,008,902&nbsp;shares issued and outstanding (10,926,818 in 2004)</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>240,178</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">218,536</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>18,400,784</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">13,074,847</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>(10,116,063</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">(9,552,641</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>8,524,899</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">3,740,742</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>9,331,379</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">4,616,965</p>
            </td>

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

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

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

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

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

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

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

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

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

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

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; See accompanying notes.</p>

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

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

      <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES</b></p>

      <p align="center"><b>CONSOLIDATED STATEMENTS OF OPERATIONS</b></p>

      <p align="center"><b>For the Three Months Ended</b></p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>&nbsp;</td>

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

            <td colspan="3" valign="bottom">
              <p align="center"><b>March 31,<br>
               2005<br>
               (unaudited)</b></p>
            </td>

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

            <td colspan="4" valign="bottom">
              <p align="center"><b>March 31,<br>
               2004<br>
               (unaudited)</b></p>
            </td>
          </tr>

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

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

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

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

            <td colspan="4" valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>
          </tr>

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

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

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

            <td valign="bottom">
              <p align="right"><b>433,200</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">332,463</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>225,984</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">206,115</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>207,216</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">126,348</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><strong>Operating expenses:</strong></p>
            </td>

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp; Selling, general and administrative</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>693,847</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">361,794</p>
            </td>

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp; Research and development</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>80,112</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">65,534</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>773,959</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">427,328</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>(566,743</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">(300,980</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>(7,199</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">(4,629</p>
            </td>

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>12,954</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">15,403</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>(560,988</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">(290,206</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p>Income taxes</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>2,434</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">700</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Net loss</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>(563,422</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">(290,906</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Net loss per share, basic and diluted</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>(0.05</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">(0.03</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Weighted average common shares outstanding</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>11,167,096</b></p>
            </td>

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

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

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

            <td valign="bottom">
              <p align="right">10,868,818</p>
            </td>

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

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

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

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

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

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

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

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

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

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

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

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

      <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; See accompanying notes.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-2</p>
          </td>
        </tr>
      </table>

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

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td colspan="10">
              <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC. AND SUBSIDIARIES<br>
              <br>
               Consolidated Statements of Cash Flows</b></p>

              <p align="center"><b>For the Three Months Ended</b></p>
            </td>
          </tr>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

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

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

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

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

            <td colspan="6" valign="bottom">&nbsp;</td>

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

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

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

            <td colspan="3" valign="bottom">
              <p align="center"><b>March 31,<br>
               2005</b><br>
               <b>(unaudited)</b></p>
            </td>

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

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

            <td colspan="3" valign="bottom">
              <p align="center"><b>March 31,<br>
               2004</b><br>
               <b>(unaudited)</b></p>
            </td>
          </tr>

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

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

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

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

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

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

          <tr>
            <td>
              <p><b>Cash flows from operating activities:</b></p>
            </td>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp; Net loss</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>(563,422</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">(290,906</p>
            </td>

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp; Adjustments to reconcile net loss to net cash<br>
               &nbsp;&nbsp;&nbsp;&nbsp; used by operating activities:</p>
            </td>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Depreciation and amortization expense</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>46,696</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">19,037</p>
            </td>

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Stock issued for services</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>3,840</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (Increase) decrease in assets:</p>
            </td>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>153,865</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">33,150</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>(22,807</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">18,378</p>
            </td>

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>25,888</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Increase (decrease) in liabilities:</p>
            </td>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accounts payable</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>15,638</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

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

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

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

            <td valign="bottom">
              <p align="right"><b>(7,434</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">14,469</p>
            </td>

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

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

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p><b>Net cash used by operating activities</b></p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>(347,736</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">(205,872</p>
            </td>

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

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

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p><b>Cash flows from investing activities:</b></p>
            </td>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

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

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Purchase of fixed assets</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>(66,387</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">(102,910</p>
            </td>

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Purchase of royalty rights</p>
            </td>

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

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

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

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">(90,000</p>
            </td>

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

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Purchase of patents and contractual rights</p>
            </td>

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

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

            <td valign="bottom">
              <p align="right"><b>(2,909</b></p>
            </td>

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

            <td colspan="2" valign="bottom">&nbsp;</td>

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

            <td valign="bottom">
              <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <b></b>
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p><b>Net cash used by investing activities</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>(69,296</b></p>
            </td>

            <td valign="bottom">
              <p><b>)</b></p>
            </td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(192,910</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p><b>Cash flows from financing activities:</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Repayment of line of credit</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;-</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(5,048</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Repayment of long term debt</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>(11,754</b></p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(6,060</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Increase in restricted cash</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>(4,426</b></p>
            </td>

            <td valign="bottom">
              <p><b>)</b></p>
            </td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Repayment of capital lease obligations</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>(7,424</b></p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;-</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Issuance of common stock, net</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>1,418,155</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; -</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <b></b>
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p><b>Net cash provided&nbsp;(used) by financing activities</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>1,394,551</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(11,108</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <b></b>
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Net increase (decrease) in cash and cash equivalents</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>977,519</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">(409,890</p>
            </td>

            <td valign="bottom">
              <p>)</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>Cash and cash equivalents - beginning of period</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>2,657,865</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">5,115,722</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <b></b>
                <hr size="2" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>
              <p>Cash and cash equivalents - end of period</p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right"><b>$</b></p>
            </td>

            <td valign="bottom">
              <p align="right"><b>3,635,384</b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$</p>
            </td>

            <td valign="bottom">
              <p align="right">4,705,832</p>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="right">
                <hr size="4" width="100%" noshade color="gray" align="right">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td colspan="2" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="4" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>

            <td>&nbsp;</td>
          </tr>
        </table>
      </div>

      <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;See accompanying notes.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-3</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p align="center"><strong>DOCUMENT SECURITY SYSTEMS, INC.</strong><b><br>
       <strong>NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS</strong><br>
       <strong>March 31, 2005</strong><br>
       <strong>(Unaudited)</strong></b></p>

      <p><b>1.&nbsp;&nbsp;&nbsp;&nbsp; Basis of Presentation</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc. consolidated financial statements include the accounts of Document Security Systems, Inc. and its wholly-owned subsidiaries Lester Levin, Inc. d/b/a Patrick Printing and d/b/a The LegalStore.com; Thomas M. Wicker Enterprises, Inc.; and Document Security Consultants, Inc., as well as its 51% owned subsidiary, Imperial Encryption, Inc. There are no unconsolidated subsidiaries. All significant inter-company balances and transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year presentation.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-QSB and therefore do not include some information and notes necessary to conform with annual reporting requirements. In the opinion of management, the information furnished in this Form 10-QSB reflects all adjustments necessary for a fair statement of the financial position as of March 31, 2005 and results of operations and cash flows for the three-month periods ended March 31, 2005 and 2004. All such adjustments are of a normal recurring nature.&nbsp; Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in our December 31, 2004 Annual Report on Form 10-KSB and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report.</p>

      <p><b>2.&nbsp;&nbsp;&nbsp;&nbsp; Other Intangible Assets</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company's intangible assets consist primarily of patents.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company has substantially 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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company issued an aggregate of 541,460 shares of its common stock for the rights of the interest holders who accepted the offer. 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 $3,925,585.</p>


  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On an
    ongoing basis, Document Security Systems, Inc. submits formal and provisional
    patent applications with the United States, Canada and countries included
    in the Patent Cooperation Treaty (PCT), totaling approximately 100 foreign
    countries including Europe, Australia, Japan, South Africa, and China.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-4</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p><b>3.&nbsp;&nbsp;&nbsp;&nbsp; Common Stock&nbsp;</b></p>

      <p>&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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company
    also issued 541,460 shares to acquire various legal ownership and economic
    interests in certain technology, as described in Note 2. The Company relied
    upon Section 4(2) of the Securities Act of 1933, as amended, for an exemption
    from registration of these shares.</p>

      <p><b>4.&nbsp;&nbsp;&nbsp;&nbsp; Stock Options</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company accounts for employee stock options using the intrinsic value method prescribed by APB 25. Accordingly, the "disclosure only" provisions of SFAS No.123 and 148 for these options are presented.</p>


  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the
    quarter ended March 31, 2005, the Company granted two employees and four non-executive
    directors a total of 72,500 options to acquire 72,500 shares of common stock.
    The options are exercisable at $7.14 per share and expire the later of five
    years from the date of grant or date of vesting. Of the options granted, 32,500
    vested immediately and the remaining 40,000 options vest over two years. The
    options issued to directors were issued under the Non-Executive Director Option
    Plan.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No employee compensation expense for stock options was recorded in the three-month periods ended March 31, 2005 and 2004.&nbsp; SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure" requires the Company to disclose in its interim consolidated financial statements the impact if the Company had elected to recognize compensation cost on the fair value of the options granted, as prescribed by SFAS 123.&nbsp; The impact on the net loss and net loss per share for the three months ended March 31, 2005 and 2004 is presented below.</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="3" valign="bottom" nowrap> <p align="center"><strong>2005</strong></p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td colspan="3" valign="bottom" nowrap> <p align="center"><strong>2004</strong></p></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>&nbsp;</td>
        <td valign="bottom" nowrap> <p><strong><i>per share</i></strong></p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p><strong><i>per share</i></strong></p></td>
      </tr>
      <tr>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
      </tr>
      <tr>
        <td valign="bottom" nowrap> <p>Net loss as reported</p></td>
        <td width="20" valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(563,422)</p></td>
        <td width="20" valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(0.05)</p></td>
        <td width="20" valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(290,606)</p></td>
        <td width="20" valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(0.03)</p></td>
      </tr>
      <tr>
        <td valign="bottom"> <p>Fair value method compensation expense, net of
            tax</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">&nbsp;(189,148)</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">(0.02)</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">(20,600)</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">0.00</p></td>
      </tr>
      <tr>
        <td valign="bottom">&nbsp;</td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <div align="center">
            <hr size="2" width="100%" noshade color="gray" align="center">
          </div></td>
      </tr>
      <tr>
        <td valign="bottom" nowrap> <p>Pro forma net loss</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(752,570)</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(0.07)</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(311,206)</p></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap> <p align="right">$(0.03)</p></td>
      </tr>
      <tr>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap><hr size="4" width="100%" noshade color="gray" align="center"></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap><hr size="4" width="100%" noshade color="gray" align="center"></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap><hr size="4" width="100%" noshade color="gray" align="center"></td>
        <td valign="bottom" nowrap>&nbsp;</td>
        <td valign="bottom" nowrap><hr size="4" width="100%" noshade color="gray" align="center"></td>
      </tr>
    </table>
      </div>


  <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The fair
    value of each option grant is estimated on the date of grant using the Black-Scholes
    option pricing model. Following are the weighted average assumptions used
    for valuing the options granted during the three months ended March 31, 2005:</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td>
              <p>Expected dividend yield</p>
            </td>

            <td width="20">&nbsp;</td>

            <td>
              <p align="right">0</p>
            </td>

            <td valign="bottom">
              <p>%</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>Expected stock price volatility</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p align="right">80</p>
            </td>

            <td valign="bottom">
              <p>%</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>Risk-free interest rate</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p align="right">4.0</p>
            </td>

            <td valign="bottom">
              <p>%</p>
            </td>
          </tr>

          <tr>
            <td>
              <p>Expected life of options</p>
            </td>

            <td>&nbsp;</td>

            <td>
              <p align="right">60</p>
            </td>

            <td valign="bottom">
              <p>&nbsp;months</p>
            </td>
          </tr>
        </table>

    <br>
  </div>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0" width="100%">
          <tr>
            <td>
              <p align="center">F-5</p>
            </td>
          </tr>
        </table>
      </div>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company intends to adopt SFAS 123(R) using the "modified prospective" transition method beginning with our first quarter of 2006. Under this method, awards that are granted, modified, or settled after December 15, 2005, will be measured and accounted for in accordance with SFAS 123(R). In addition, beginning in our first quarter of 2006, expense must be recognized in the earnings statement for unvested awards that were granted prior to the adoption of SFAS 123(R). The expense will be based on the fair value determined at grant date under SFAS 123, "Accounting for Stock-Based Compensation." The following table summarizes existing agreements and their expected pretax impact on earnings:</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0" width="626">
          <tr>
            <td valign="bottom" nowrap>&nbsp;</td>

            <td rowspan="2" valign="bottom">
              <p align="center"><strong>Pre FAS</strong> <b><br>
            <strong>123(R)</strong><br>
               <strong>Adoption</strong></b></p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td colspan="6" valign="bottom" nowrap>
              <p align="center"><strong>Post Effective Date<br>
               (December 15, 2005)</strong> <b><br>
               <strong>Requisite Service Recognition by Year</strong></b></p>
            </td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="center"><b>2005</b></p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="center"><b>2006</b></p>
            </td>

            <td width="20" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="center"><b>2007</b></p>
            </td>

            <td width="20" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="center"><b>2008</b></p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Agreements containing service<br>
               &nbsp;&nbsp;&nbsp;inception dates within the year</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">7</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">3</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">2</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Shares expected to vest</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">42,500</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">30,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">20,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Expected pretax cost</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">$297,365</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$72,145</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>


        <td valign="bottom" nowrap> <p align="right">$ 0</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$ 0</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Per share amounts</p>
            </td>

            <td valign="bottom" nowrap>
              <p align="right">$0.03</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$Nil</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$Nil</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$Nil</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The calculation of compensation cost for share-based payment transactions after the effective date of SFAS 123(R) may be different from the calculation of compensation cost under SFAS 123, but such differences have not yet been quantified.</p>

      <p><b>5.&nbsp;&nbsp;&nbsp;&nbsp; Earnings/Loss per Share</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other potential shares outstanding would be anti-dilutive. If the Company had generated earnings during the three months ended March 31, 2005 and 2004, it would have added 608,177 and 483,091 common equivalent shares, respectively, to the weighted average shares outstanding to compute the diluted weighted average shares outstanding.</p>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-6</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p><b>6.&nbsp;&nbsp;&nbsp;&nbsp; Segment Information</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The Company's businesses are organized, managed and internally reported as four segments. The segments are determined based on differences in products, internal reporting and how operational decisions are made. There are no material transactions between segments. A summary of the four segments is as follows:</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="6">
          <tr>
            <td>
              <p align="right"><strong>Printing</strong></p>
            </td>

            <td valign="top">
              <p>Provide commercial printing and copying services to the metropolitan Rochester, New York area</p>
            </td>
          </tr>

          <tr>
            <td>
              <p align="right"><strong>Document Security</strong></p>
            </td>

            <td valign="top">
              <p>License, manufacture and sale of document security technologies and safety paper products</p>
            </td>
          </tr>

          <tr>
            <td>
              <p align="right"><strong>Legal and Office Supplies</strong></p>
            </td>

            <td valign="top">
              <p>Specialty legal supplies to lawyers and law firms located throughout the United States</p>
            </td>
          </tr>

          <tr>
            <td>
              <p align="right"><strong>Film</strong></p>
            </td>

            <td valign="top">
              <p>Previously produced movies and distributed them through licensed
            distributors</p>
            </td>
          </tr>
        </table>
      </div>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Approximate information concerning the operations by reportable segment for the three months ended March 31, 2005 and 2004 is as follows. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results shown.</p>

      <div align="center">
        <table border="0" cellspacing="0" cellpadding="0">
          <tr>
            <td valign="bottom" nowrap>
              <p><b>2005:</b></p>
            </td>

            <td width="20" valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Printing</strong></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Legal</strong></p>
            </td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Document</strong> <b><br>
               <strong>Security</strong></b></p>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Film</strong></p>
            </td>

            <td width="20" valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Administrative</strong></p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td width="20" valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <p align="center"><strong>Total</strong></p>
            </td>

            <td valign="bottom">&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">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</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">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <div align="center">
                <hr size="2" width="100%" noshade color="gray" align="center">
              </div>
            </td>

            <td valign="bottom">&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p>Revenues from external customers</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$155,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$125,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$153,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <p align="right">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 0</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">$&nbsp;&nbsp; 433,000</p>
            </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>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(42,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">5,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(133,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(397,000</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(567,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </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>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" 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="bottom" nowrap>&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>
          </tr>

          <tr>
            <td valign="bottom" nowrap>
              <p><b>2004:</b></p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">&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>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">168,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">111,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">53,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">0</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">332,000</p>
            </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>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(44,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">5,000</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(132,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom">
              <p align="right">0</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(130,000</p>
            </td>

            <td valign="top">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>

            <td valign="bottom" nowrap>&nbsp;</td>

            <td valign="bottom">&nbsp;</td>

            <td valign="bottom" nowrap>
              <p align="right">(301,000</p>
            </td>

            <td valign="bottom" nowrap>
              <p>)</p>
            </td>
          </tr>
        </table>

    <br>
  </div>

      <table border="0" cellspacing="0" cellpadding="0" width="100%">
        <tr>
          <td>
            <p align="center">F-7</p>
          </td>
        </tr>
      </table>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p><b>ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</b></p>

      <p><b><i>FORWARD-LOOKING STATEMENTS</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "1995 Reform Act").&nbsp; Document Security Systems, Inc. desires to avail itself of certain "safe harbor" provision of 1995 Reform Act and is therefore including this special note to enable us to do so.&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 in our other public filings, including those contained in our Form 10-KSB for the year ended December 31, 2004 and
 those described herein that could cause actual results to differ materially from the results anticipated in the forward-looking statements.</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 provide document security technology to security printers, corporations and governments. 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, coupons, homeland security manuals, consumer product and pharmaceutical packaging, tickets and school transcripts.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Beginning in the first quarter of 2005, Boise White Paper LLC ("Boise") began distributing our branded safety paper 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. Based our advanced patented technologies, we believe we are one of the leading providers of safety paper. Much of our efforts in the first quarter of 2005, were concentrated on preparing for the official launch of our distribution agreement with Boise White Paper LLC. We educated and trained the Boise employees, as well as our own, about our AuthentiGuard Safety Paper technology. We developed, in cooperation with Boise personnel, a marketing program including special packaging designs. We received addi
tional significant orders in the first quarter of 2005 and are preparing to build inventories for sales to OfficeMax and CopyMax stores throughout the country. Our Safety Paper is manufactured for us by a third-party supplier. We believe we have set in place the logistic infrastructure to optimize our relationship with the Boise and OfficeMax organizations. We are also developing new lines of security paper, which employ new technology for use with documents requiring a very high level of security such as birth certificates and stock certificates, to be considered for distribution by Boise or other strategic partners in the paper distribution sector.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We intend to further 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; Our company generates additional revenue 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; During the first quarter of 2005, we invested over $80,000 in research and development, which is in addition to the $422,000 we spent in 2004. 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. Also in 2004 we 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, acquisition of new patents, and the purchase of associated economic rights. In the first quarter of 2005, we continued to consolidate our patent and technology portfolio by acquiring various economic and patent ownership interests for approximately $3.9 million, which we paid for through the issuance of 541,460 shares of our common stock. We believe we now have the appr
opriate level of technology ownership rights 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; Our goal is to use the technologies we have developed in 2003 and 2004 to produce revenue during fiscal 2005. These advanced technologies protect original documents as well as identify counterfeits. Large security printers and packaging companies are testing our technology and we anticipate that our technologies will be embedded on pharmaceutical packaging, consumer product packaging, checks, and currencies.&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have made significant marketing advances by consolidating our products under the new AuthentiGuard brand, which we believe will be much more recognizable in the future. Our marketing expenses in the first quarter of 2005 increased to more than $91,000 and we expect to continue to expend funds to develop and establish our brand name.</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 significant additional and ongoing revenue.&nbsp;In order to enforce our rights, we may be required to commence litigation against persons or companies or even governments who we believe are using our technology on an unauthorized basis.&nbsp; Our goal is to produce revenue through licensing agreements and the sale of our products and we intend to attain such agreements with unauthorized users of our technology; however, we may deem it necessary to commence suit when appropriate.&nbsp; Although enforcement of technology right can be expensive and time consuming we expect to spend an increased amount of funds during the 2005 fiscal year on these matters.</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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We continued to reinforce our existing industry relationships and we remained active in introducing our organization and our new technologies to various industries and government agencies at the major tradeshows in the United States and internationally. We expanded our sales organization and even more importantly our service personnel to assure our current and future customers of our ability to provide future support for their post-sale service requirements. Our sales initiative is focused on major national and international corporations that have a long-term need for the new technologies that have resulted from our research efforts. We have been developing our technology to integrate and make our format compatible with widely used digital document formats. We expect that much of our future sales volume will be derived from the sale and licensing of these technologies.</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 various usage or annual fixed-cost pricing models. We have become much more selective in approving licensees for our technologies. We will only entertain licensing arrangements with major firms.&nbsp;As an alternative, however, to the licensing of our anti-counterfeiting for certain products, we are considering the possibility of manufacturing ourselves and branding particular products embedded with our technology.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Internationally, during the first quarter of 2005, we dispatched a team of our employees to South Africa. The purpose of our trips was to educate employees of and expedite the technology installations with major consumer product companies that are interested in utilizing our latest technologies to prevent the counterfeiting of their branded products.</p>

      <p><b><i>Results of Operations for the Three Months Ending</i></b> <b><i>March 31, 2005 and</i></b> <b><i>March 31, 2004</i></b><i>&nbsp;</i></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes in this quarterly report and in our annual report on Form 10-KSB for the year ended December 31, 2004.</p>

      <p><b>Sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the fiscal quarter ending March 31, 2005, we had net sales of $433,200. This represents an increase of $100,737, or 30.3%, over sales of $332,463 for the comparable quarter ended March 31, 2004. The increase in sales resulted primarily from our document security business segment.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net sales from our core business segment, document security, were approximately $153,000 in the quarter ending March 31, 2005, which is an increase of approximately $100,000 over the core sales for the quarter ending March 31, 2004 of $53,000. Although we had a period-to-period increase of 185%, we still consider these sales to be nominal, as we are in the start-up phase of basically a new business for us, for which we have recently received capital to continue our research and develop our product line. The increase in net core sales can be attributed to the early orders under our distribution and marketing contract with Boise White Paper, LLC.&nbsp; We continue to concentrate our efforts on procuring orders of significant size and duration from companies of national and international scope. There is no assurance that we will be able to enter into any definitive agreements with such companies. We expect the bulk of our sales in the f
uture to be generated from our newly developed technologies.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Sales from our commercial printing business segment provide us the means to have access to a working research and development facility and be able to offset the costs of our research. We are not actively soliciting additional printing sales unless they are related to our core anti-counterfeiting technology business. Our sales in the quarter ending March 31, 2005 from our printing segment totaled approximately $155,000, compared to sales in the 2004 period of approximately $168,000. The $13,000 decrease was caused by a timing change in recording a significant re-order from a long-standing customer. In 2004 that sale was booked in the first fiscal quarter but in 2005, we expect to recognize the sale in the 2<sup>nd</sup> fiscal quarter.&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 consider our legal forms and supplies business segment as a non-core part of our company and have attempted to simplify its operation by emphasizing e-commerce sales. Although the sales of this segment, $125,000 in the March 2005 quarter, remain significant as to our total sales, we do not expect that to be the case in the future. Our first quarter 2004 sales from our legal supplies business were approximately $111,000. Although our legal and office supplies business is an important outlet for sales of our basic safety paper, we are continuing to evaluate our various options as to our ultimate plan for this division.&nbsp;</p>

      <p><b>Costs of sales</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Costs of sales for the three months ended March 31, 2005 increased $19,869, or approximately 9.6%, to $225,984 from $206,115 for the three months ended March 31, 2004. This percentage increase in costs was proportionately lower than the overall increase of sales, 30.3%, primarily because in our document security segment, as sales increase, from minimum production levels, per unit cost decreases.</p>

      <p><b>Gross profit</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Gross profit for the fiscal quarter ended March 31, 2005 increased $80,868, or approximately 64%, to $207,216 as compared to the gross profit of $126,348 reported in the comparable fiscal quarter of 2004. The increase resulted primarily from the 30.3% increase in sales, which was offset by the 9.6% increase in costs of sales. As we move from the early stage of our development in the document security business, we expect that reported profit margins may vary considerably from period to period.</p>

      <p><b>Expenses</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Operating expenses</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Operating expenses for the three months ended March 31, 2005 increased $319,520 or 81.1% to $773,959 from $427,328 in the three months ended March 31, 2004. The difference between the expenses of the two periods was the result of increases in selling, general and administrative of $332,053 and research and development expenses of $14,578 as explained more fully below.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Selling, general and administrative&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Selling, general and administrative expenses increased $332,053, or approximately 92% from $361,794 in the March 2004 quarter to $693,847 in the March 2005 quarter. This increase reflects additional expenses associated with building 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>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Payroll expenses</b> - total payroll expense increased 73% or approximately $77,000 from $104,693 in the first quarter of 2004 to $181,844 in the first quarter of 2005. The increase was caused by a combination of contractual requirements and an increase in staff size, which positions us to handle the expected growth in our core anti-counterfeiting operations.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Marketing expenses -</b> increased more than 7% or $6,257 from $85,115 in Q1 2004 to $91,372 in 2005. The increase of this expenditure is due to our efforts in creating brand name recognition for our document security technology products.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Professional fees -</b> increased $137,000 from $87,709 in the 2004 quarter to $224,999 in the corresponding first quarter of 2005. This more than 150% increase was primarily a response to expenses required for enhanced corporate governance. Included in the 2005 quarter were expenses for audit, securities and general corporate legal fees, and legal fees in connection with the litigation referred to below in <i>Part II Item 1- Legal Proceedings</i>.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Depreciation expense -</b> as part of selling, general and administrative expenses increased approximately 7.6% or $4,689 from $19,037 in the 2004 quarter to $23,726 in the 2005 quarter. In the first quarter of 2005, approximately $23,000 of additional depreciation was included in costs of sales.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Other selling, general and administrative</b> <b>expenses</b> - in the first quarter of 2005, totaled $171,906 compared to $65,240 in 2004. Major items comprising this increase include rent, $11,000; payroll taxes, $11,000; and travel, $33,000.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Research and development</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; For the three months ended March 31, 2005, we incurred research and development expenses of $80,112, which is an increase of approximately 22% or $14,578 over the expenditure of $65,534 in the comparable 2004 quarter. This increase is indicative of our focus on improving our existing technologies and developing new technologies.&nbsp;&nbsp;</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Interest income and expense&nbsp;</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the first fiscal quarter of 2005, we had interest income of $12,954, which compares to interest income of $15,403 in the first quarter of 2004. Interest expense increased $2,570 from $4,629 in the 2004 quarter to $7,199 in the like 2005 quarter.</p>

      <p><b>Net loss</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Net loss, which is after taxes increased $272,516 to $563,422 in the quarter ending March 31, 2005, as compared to a net loss of $290,906 in the quarter ending March 31, 2004. The increase in the loss was the result of an increase, in 2005 over 2004, of selling, general and administrative expenses of $332,053; an increase in research and development expenses of $14,578; a reduction of interest income (net of interest expense) of $5,019 and an increase of state income taxes of $1,734, all of which were offset by an increase of gross profit of $80,868.</p>

      <p><b>Loss per share</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Basic net loss per common share increased to $0.05 for the quarter ended March 31, 2005 from $0.03 for the quarter ended March 31, 2004. The "basic net loss per share" is computed by dividing the net loss, by the weighted average common shares outstanding. In the 2005 quarter, the weighted average of common shares outstanding was 11,167,096 compared to 10,868,818 in the comparable 2004 quarter.</p>

      <p><b>LIQUIDITY AND CAPITAL RESOURCES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the first quarter of 2005, our cash position was enhanced by the exercise of outstanding warrants for the purchase of 540,624 shares of our common stock. We received approximately $1,453,000 upon issuance of the new shares.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; At March 31, 2005, we had cash and cash equivalents of $3,635,384, which was an increase of $977,519 over the $2,657,865 cash we had at December 31, 2004 and a decrease of $1,070,448 from March 31, 2004's cash balances of $4,705,832. The increase during the quarter reflects the proceeds from warrant exercises described in the preceding paragraph.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Total current assets at March 31, 2005 were $3,987,013 compared to $3,166,440 at the end of year 2004 and $4,705,832 at March 31, 2004. Our current liabilities at March 31, 2005 were $490,608 and $539,730 at December 31, 2004. As of March 31, 2004, our current liabilities were $525,223. Our working capital, which is the difference between our current assets and current liabilities, ended the March 31, 2005 quarter at $3,496,405 compared to $2,626,710 at the end of 2004 and $4,404,081 at March 31, 2004. The ratio of our current assets to our current liabilities, referred to as our current ratio, was 8.1:1, at March 31, 2005 compared to 5.9:1, at the 2004 year-end and 9.4:1, at March 31, 2004.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Off-Balance Sheet Arrangements</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We do not have any off-balance sheet arrangements.<b>&nbsp;</b></p>

      <p><b>CASH FLOW&nbsp;</b></p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Operating Activities</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We did not generate cash from operations in the first three months of fiscal year 2005. During that period, our operating activities used cash in the amount of $347,736. This compares to the results of the three months ending March 31, 2004 when our operating activities used $205,872, in cash.&nbsp;</p>

      <p>The increase in cash used in operations of approximately $142,000 was primarily attributed to the increase in the loss of approximately $273,000 offset by the increase of non-cash charges for depreciation and amortization of $28,000, and for services paid with stock in lieu of cash of $4,000, plus cash provided by changes in working capital components of $99,000.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Our net loss in the three months ending March 31, 2005 was $563,422, and included non-cash charges for depreciation and amortization of $46,696 and for services paid with stock in lieu of cash of $3,840.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Investing Activities</b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the three months ending March 31, 2005, we expended approximately $66,000 for the acquisition of software to be integrated in our website. In the first three months of 2004, we spent approximately $103,000 for the acquisition of fixed assets, of which $80,000 was for equipment and $23,000 for leasehold improvements at our new corporate offices. This decrease of approximately $37,000 in capital expenditures is in line with our business plan, which concentrates on developing the marketing infrastructure for our document security business segment.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the three months ended March 31, 2005, we invested approximately $2,900 in cash for new patent filings, and in the first quarter of 2004, we capitalized a total of $90,000 in connection with the termination of royalty payment obligations related to certain patents from members of the Wicker family and others.</p>

      <p><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Financing Activities<i>&nbsp;</i></b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We have been able to pursue our business plan primarily from the receipt of cash from financing activities. We have funded our cash needs since entering the document security business by issuing our securities. During the three months ended March 31, 2005, we raised approximately $1,453,000, from the exercise of outstanding warrants, $1,250,000 of which was received by a warrant exercise by IDT Venture Capital Corporation and $203,000 received from investors in our 2003 private placement. The proceeds from the exercise of the warrants of approximately $1,453,000 were added to our general funds and will be used for working capital as we continue to increase sales in our core business. We believe that we have sufficient cash for our needs for at least the next 12 months.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In order to support our existing and proposed operations, we may need additional financing. Although we have outstanding warrants to purchase our common stock, with exercise prices below the current market price, there is no assurance that all or any of the warrants will be exercised. If the warrants are not exercised, we may be required to raise funds, by borrowing or selling stock, to meet our cash needs and there is no guarantee that, at that time, we will be able to raise additional funds, or if we are able to, it would be at terms acceptable to us.</p>

      <p><b>INFLATION</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the three months ending March 31, 2005 and March 31, 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. Please refer to our annual report on Form-10KSB for the year ended December 31, 2004 for an in depth discussion of our critical accounting policies.</p>

      <p><b>ITEM 3 - CONTROLS AND PROCEDURES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. This evaluation was accomplished under the supervision and with the participation of our chief executive officer, chief financial officer/ principal accounting officer who concluded that our disclosure controls and procedures are effective to ensure that all material information required to be filed in the quarterly report on Form 10-QSB has been made know to them. As of March 31, 2005, and the date of this Report, Patrick White served as our Chief Executive Officer and Chief Financial Officer (which duties include that of principal accounting officer). There have been no significant or material changes in our internal controls over financial reporting or in other factors which have materially affected or that are reasonably likely to materially affect our internal controls over financial report
ing.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.</p>

      <div align="center">
        <hr size="2" width="100%" noshade color="gray" align="center">
      </div>

      <p align="center"><b>PART II<br>
       OTHER INFORMATION</b></p>

      <p><b>ITEM 1 - LEGAL PROCEEDINGS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; There were no significant developments during the first fiscal quarter of 2005 in connection with our intellectual property litigation against Adler Technologies and Andrew McTaggert. This litigation, commenced by us in January 2003, is described in our Form 10-KSB Annual Report for the year ended December 31, 2004 regarding intellectual property. The case is in the late stage of discovery and it is still too soon to determine how the various issues raised by the lawsuit will be resolved. There can be no assurance that we will be successful in our suit against Adler and McTaggert or that Adler's counterclaims will not be upheld. If Adler is successful in all of its counterclaims, we may be adversely affected in our ability to market certain technology.&nbsp;&nbsp;&nbsp;&nbsp;</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;Patent enforcement will be critical and a high-priority project for our company in the current fiscal year.&nbsp; These enforcement activities may include the commencement of lawsuits or arbitrations or similar actions both in the United States and abroad.&nbsp; There can be no assurance that we will be successful in these efforts.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; We are not a party to any other proceedings, which may have a material effect upon our operations or financial condition.</p>

      <p><b>ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the quarter ended March 31, 2005, we issued 540,624 shares of our common stock pursuant to the exercise of common stock purchase warrants. Proceeds from the exercise of the warrants were $1,453,000. Of the shares issued upon the exercise of warrants, 500,000 were issued at $2.50 per share, in accordance with the warrant purchase agreement, to IDT Venture Capital Corporation and 40,624 were issued at $5.00 per share to various warrant holders who acquired their warrants as part of our 2003 private placement of common stock and warrants. The shares issued pursuant to the exercise of the warrants have been registered with the Securities and Exchange Commission under a registration statement on Form S-3 declared effective in August 2004.</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 cost of the acquisition of the interests from the interest holders
    was approximately $3,925,000. The value of the shares issued was based upon
    the closing price of the shares of our common stock on the American Stock
    Exchange on February 15, 2005, which 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>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In the
    quarter ended March 31, 2005, we granted two employees and four non-executive
    directors a total of 72,500 options to acquire 72,500 shares of common stock.
    The options are exercisable at $7.14 per share and expire the later of five
    years from the date of grant or date of vesting. Of the options granted, 32,500
    vested immediately and the remaining 40,000 options vest over two years. The
    options issued to directors were issued under the Non-Executive Director Option
    Plan and the other options were granted under our Employee Stock Option Plan.</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Further, we did not purchase any shares of our capital stock during the quarter ended March 31, 2005.</p>

      <p><b>ITEM 3 - DEFAULTS UPON SENIOR SECURITIES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; None</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; No matters were submitted to a vote of our security holders during the fiscal quarter ended March 31, 2005.</p>

      <p><b>ITEM 5 - OTHER INFORMATION</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; During the first quarter of 2004, we acquired the economic and ownership interests of persons who owned some of the technology that we use in our business.&nbsp;&nbsp; As previously disclosed in our filings with the SEC, we entered into the document security business when we purchased certain companies and technology that was owned or partially owned by members of the Ralph Wicker family.&nbsp; Historically, the Wicker family had sold or licensed pieces of their patents to third persons, or obtained funds by selling economic interests in the licensing proceeds.&nbsp; We believe that obtaining these economic and ownership interests will enhance our licensing efforts and our ability to protect our company from competitors.&nbsp;Please see <i>Item 3.02 of our Report on Form 8-K,</i> which was filed on March 2, 2005.</p>

      <p><b>ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K</b> &nbsp;</p>

      <p>(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Exhibits</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Exhibit 10.1 - Form of 2004 Non-executive Director Plan Option Non-qualified Stock Option Agreement</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Exhibit 31.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer</p>

      <p>(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Reports on Form 8-K</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On January 25, 2005, we reported on Form 8-K, under Item 1.01, on our blank safety paper distribution agreement with Boise White Paper LLC.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; On March 2, 2005, we reported on Form 8-K, under Items 1.01 and 3.02, on our purchase of various legal and economic interests in certain technology in exchange for unregistered shares of our common stock.</p>

      <p align="center"><b>SIGNATURES</b></p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In accordance with the requirements of the Exchange Act, the registrant caused this report on Form 10-QSB to be signed on its behalf by the undersigned, thereunto duly authorized.</p>

      <table border="0" cellspacing="0" cellpadding="0">
        <tr>
          <td width="50">&nbsp;</td>

          <td width="107">&nbsp;</td>

          <td width="31">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <p><b>DOCUMENT SECURITY SYSTEMS, INC.</b></p>
          </td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td width="107">&nbsp;</td>

          <td width="31">&nbsp;</td>

          <td>&nbsp;</td>

          <td>&nbsp;</td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td width="107">
            <p>May&nbsp;16, 2005</p>
          </td>

          <td width="31">&nbsp;</td>

          <td>
            <p>By:&nbsp;</p>
          </td>

          <td>
            <p>/s/ Patrick White</p>
          </td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td width="107">&nbsp;</td>

          <td width="31">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <div align="center">
              <hr size="2" width="100%" noshade color="gray" align="center">
            </div>
          </td>
        </tr>

        <tr>
          <td width="50">&nbsp;</td>

          <td width="107">&nbsp;</td>

          <td width="31">&nbsp;</td>

          <td>&nbsp;</td>

          <td>
            <p>Patrick White<br>
             President, Chief Executive Officer and<br>
             Acting Chief Financial Officer/Principal Accounting Officer</p>
          </td>
        </tr>
      </table>


  <div align="center"> </div>

      <div align="center"> </div>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>dmc10qsb033105ex101.htm
<TEXT>
<html>
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    <title>dmc10qsb033105ex101</title>
  </head>
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    <div>
      <hr noshade>

      <p align="right">Exhibit 10.1</p>

      <p align="center"><b>DOCUMENT SECURITY SYSTEMS, INC.<br>
      </b> <b>2004 NON-EXECUTIVE DIRECTOR PLAN OPTION<br>
      </b> <b>NON-QUALIFIED STOCK OPTION AGREEMENT</b></p>

      <p>Name:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br>
       Date of Grant: January 2, 2005&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br>
       Option No.:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&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>
       Number of Options:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<br>
       Exercise Price Per Share:&nbsp;&nbsp; $7.14</p>

      <p align="center">_______________</p>

      <p>We are pleased to notify you that in accordance with the terms of the 2004 Non-Executive Director Stock Option Plan (the "Plan") of DOCUMENT SECURITY SYSTEMS, INC. (the "Company") a stock option to purchase 5,000 shares of the Common Stock $.02 par value per share of the Company has been granted to you under the Plan.&nbsp; This option may be exercised only upon the terms and conditions set forth below.&nbsp; The following is a brief summary of the Plan and this Option is subject to all of the terms and conditions of the Plan.</p>

      <p>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Purpose of Option</u></p>

      <p>The purpose of the Plan under which this stock option has been granted is to enable the Company to attract and retain the services of qualified independent persons to serve on the Company's Board of Directors by providing an opportunity to acquire a proprietary interest in the Company.</p>

      <p>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Acceptance of Option Agreement</u></p>

      <p>Your acceptance of this stock option agreement will indicate your acceptance of and your agreement to be bound by its terms and the terms of the Plan.&nbsp; It imposes no obligation upon you to purchase any of the shares subject to the option.&nbsp; Your obligation to purchase shares can arise only upon your exercise of the option in the manner set forth in paragraph 4 hereof.&nbsp;&nbsp; This stock option agreement shall be subject in all respects to the terms and conditions of the Plan and in the event of any question or controversy relating to the terms of the Plan, the decision of the Board of Directors shall be final.&nbsp; In addition, this Option is subject to the Internal Revenue Code rules and regulations of the Internal Revenue Service, as applicable (sometimes referred to as the "Code"). &nbsp;</p>

      <p>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>When Option May Be Exercised; Vesting</u></p>

      <p>Except as otherwise provided herein, <b>this option shall be exercisable at any time prior to the Expiration Date</b>, as hereafter defined and except as provided in Sections 7 and 8&nbsp; hereof.&nbsp; This option may not be exercised for less than ten shares at any one time (or the remaining shares then purchasable if less than ten) and expires at 5:00 pm (eastern standard time) on the fifth anniversary of the date of grant provided above (the "Expiration Date") whether or not it has been duly exercised, unless sooner terminated as provided in paragraphs 7,&nbsp; 9 or 13 hereof.</p>

      <p>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Exercise Procedure</u></p>

      <p>This option is exercisable by a written notice signed by you and delivered to the Company at its executive offices, signifying your election to exercise the option.&nbsp; The notice must state the number of shares of Common Stock you are exercising under this option and must contain a statement by you (in the form annexed to this option) that such shares are being acquired by you for investment and not with a view to their distribution or resale (unless a Registration Statement covering the shares purchasable has been declared effective by the Securities and Exchange Commission).</p>

      <p>Payment shall be either (i) in cash, or by certified or bank cashier's check payable to the order of the Company, free from all collection charges; (ii)&nbsp; by delivery of shares of Common Stock of the Company already owned by the optionee for at least six months prior to the date of exercise, which Common Stock shall be valued at fair market value on the date of exercise; or (iii) by a combination of the methods of payment specified in (i) and (ii) above.</p>

      <p>&nbsp;For purposes of this Section 4, the fair market value per share of stock surrendered for exercise shall be: (i) if the Common Stock is traded on a national securities exchange or on the NASDAQ National Market System ("NMS"), the per share closing price of the Common Stock on the principal securities exchange on which they are listed or on NMS, as the case may be, on the date of exercise (or if there is no closing price for such date of exercise, then the last preceding business day on which there was a closing price); or (ii) if the Common Stock is traded in the over-the-counter market and quotations are published on the NASDAQ quotation system (but not on NMS), the closing bid price of the Common Stock on the date of exercise as reported by NASDAQ (or if there are no closing bid prices for such date of exercise, then the last preceding business day on which there was a closing bid price); or (iii) if the Common Stock is traded in the over-the-counter market but bid quotations are not publishe
d on NASDAQ, the closing bid price per share for the Common Stock as furnished by a broker-dealer which regularly furnishes price quotations for the Common Stock.</p>

      <p>If notice of the exercise of this option is given by a person or persons other than you, the Company may require, as a condition to the exercise of this option, the submission to the Company of appropriate proof of the right of such person or persons to exercise this option.</p>

      <p>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Issuance of Shares</u></p>

      <p>Certificate for shares of the Common Stock so purchased will be issued as soon as practicable.&nbsp; The Company, however, shall not be required to issue or deliver a certificate for any shares until it has complied with all requirements of the Securities Act of 1933, the Securities Exchange Act of 1934, any stock exchange on which the Company's Common Stock may then be listed and all applicable state laws in connection with the issuance or sale of such shares or the listing of such shares on said exchange.&nbsp;</p>

      <p>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>No Rights as Shareholder.</u>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p>

      <p>Until the date that the conditions to exercise are, in the Company's sole determination, satisfied, you (or such other person as may be entitled to exercise this option) shall have none of the rights of a shareholder with respect to Common Stock upon exercise of this option.</p>

      <p>7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Termination of Directorship and Options</u></p>

      <p>Nothing in this option agreement shall entitle you to continue to serve as a director. If your service as a member of the Board of Directors of the Company is terminated for any reason other than by death or retirement, this option shall lapse and expire the earlier of seven (7) months&nbsp; from the date such termination or the Expiration Date; provided, however, in the event that the directorship is terminated prior to the date that the option may be first exercised as set forth in Section 3 hereof, the option shall be exercisable commencing on the date of termination until a date which is seven (7) months after termination.&nbsp;&nbsp;</p>

      <p>8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Acceleration of Options</u></p>

      <p>Notwithstanding any contrary installment period with respect to this option and unless the Board of Directors determine otherwise, this outstanding option shall become exercisable in full for the aggregate number of shares covered thereby in the event: (i) the Board of Directors (or, if approval of the stockholders is required as a matter of law, the stockholders of the Company) shall approve (a) any con&shy;solidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) t
he adoption of any plan or proposal for the liquidation or dissolution of the Com&shy;pany; or (ii) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (a) shall purchase any Common Stock (or securities convertible into the Company's Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board of Directors, or (b) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of Directors
 (calculated as provided in paragraph (d) of such Rule 13(d)(3) in the case of rights to acquire the Company's Securities); or (iii) during any period of two consecutive years or less, individuals who at the beginning of such period constitute the entire Board of Directors shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least a majority of the directors then still in office.&nbsp; Notwithstanding the foregoing,&nbsp; if the acceleration of this option, either alone or together with other payments which the holder has the right to receive from the Company, would constitute an "excess parachute payment" as defined in Section 280G of the Code , such acceleration shall be reduced to the largest amount as will result in no portion of the acceleration under this Section 8 being subject to the excise tax imposed by Section 4999 of the Code.</p>

      <p>9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Death</u></p>

      <p>If you die while serving as a member of the Board of Directors of the Company, any option which was exercisable by you at the date of your death may be exercised by your legatee or legatees under your Will, or by your personal representatives or distributees, within one year from the date of your death, but in no event after the Expiration Date.</p>

      <p>10.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Non-Transferability of Option</u></p>

      <p>This option shall not be transferable except by will or the laws of descent and distribution, and may be exercised during your lifetime only by you.&nbsp; Notwithstanding the foregoing, any proposed transfer shall be subject to the Internal Revenue Code, the rules and regulations promulgated thereunder and the federal securities laws and regulations.</p>

      <p>11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Adjustments Upon Changes in Capitalization</u></p>

      <p>If at any time after the date of grant of this option, the Company shall, by stock dividend, split-up, combination, reclassification or exchange, or through merger or consolidation, or otherwise, change its shares of Common Stock into a different number or kind or class of shares or other securities or property, then the number of shares covered by this option and the price of each such share shall be proportionately adjusted for any such change by the Board of Directors whose determination shall be conclusive.&nbsp; Any fraction of a share resulting from any adjustment shall be eliminated through the payment of cash based upon the fair market value (determined in accordance with the definition in Section 4) of the Common Stock.</p>

      <p>13.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Withholding</u>.&nbsp; The Company shall have the power and the right to deduct or withhold, or require an Optionee to remit to the Company as a condition precedent for the fulfillment of any Option Exercise, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of the exercise of Options. Whenever Shares are to be issued or cash paid to a Optionee upon exercise of an Option, the Company shall have the right to require the Optionee to remit to the Company, as a condition of exercise of the Option, an amount sufficient to satisfy federal, state and local withholding tax requirements at the time of exercise. &nbsp;</p>

      <p>14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <u>Tax Treatment.</u></p>

      <p>This option is not intended to qualify for "non-qualified stock option" treatment under the provisions of Section 422A of the Internal Revenue Code of 1986, as amended from time to time.&nbsp; You are urged to consult with your individual tax advisor prior to exercising this option.&nbsp; As a condition to the exercise of this option, you agree to notify the Company promptly upon the sale or other disposition of the shares of Common Stock you received upon exercise of this option.</p>

      <p>Sincerely yours,</p>

      <p>DOCUMENT SECURITY SYSTEMS, INC.</p>

      <p>By:_________________________</p>

      <p>Name: Patrick White<br>
       Title: Chief Executive Officer</p>

      <p>Corporate Seal</p>

      <p>_____________________________</p>

      <p>Secretary</p>
      <br clear="all">

      <hr noshade>

      <p align="center">OPTION EXERCISE FORM</p>

      <p>TO:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Document Security Systems, Inc.<br>
       First Federal Plaza<br>
       Suite 1525<br>
       28 East Main Street<br>
       Rochester, NY 14614</p>

      <p>Attn: Chief Financial Officer</p>

      <p>Gentlemen:</p>

      <p>The undersigned holder hereby irrevocably elects to exercise the right to purchase _________ shares of Common Stock covered by this Option Agreement according to the conditions hereof and herewith makes full payment of the Exercise Price of such shares as follows (PLEASE CHOOSE FORM OF PAYMENT).</p>

      <p>___.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Cash Purchase</b>.&nbsp; The undersigned hereby elects to pay the exercise price in cash, and encloses a CERTIFIED CHECK OR BANK CASHIER'S CHECK (or has wired payment) in the amount of $____________.</p>

      <p>___.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <b>Cashless Exercise</b>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The undersigned hereby delivers _________ shares of Common Stock of Document Security Sytems, Inc. in accordance with Section 4 of the Option Agreement.&nbsp; The undersigned represents that he/she has owned the shares being delivered&nbsp; for at least six months prior to the date of exercise.</p>

      <p>___.&nbsp; <b>Combination of Cash and Cashless</b>.&nbsp; The undersigned hereby elects to pay the exercise price in cash and stock, and encloses a CERTIFIED CHECK BANK CASHIER'S CHECK&nbsp; (or has wired payment) in the amount of $____________ and hereby delivers _________ shares of Common Stock of Document Security Sytems, Inc. in accordance with Section 4 of the Option Agreement.&nbsp; The undersigned represents that he/she has&nbsp; owned the shares being delivered&nbsp; for at least six months prior to the date of exercise.</p>

      <p>The undersigned understands and agrees that the Company shall have the power and the right to deduct or withhold, or require a Optionee to remit to the Company as a condition precedent for the fulfillment of any Option exercise, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of this Option. Whenever Shares are to be issued or cash paid to a Optionee upon exercise of an Option, the Company shall have the right to require the Optionee to remit to the Company, as a condition of exercise of the Option, an amount sufficient to satisfy federal, state and local withholding tax requirements at the time of exercise.</p>

      <p>Further, the undersigned hereby covenants and agrees to promptly notify the Company of the sale of any Shares during the one year period commencing on the date hereof.</p>

      <p>The Shares are being acquired by the undersigned for investment purposes, and not with a view to their distribution or resale unless otherwise permitted under law.</p>

      <p>Kindly deliver to the undersigned a certificate representing the Shares as follows.</p>

      <p>INSTRUCTIONS FOR DELIVERY</p>

      <p>Name:&nbsp; ______________________________</p>

      <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (please type or print in block letters)</p>

      <p>Address:&nbsp; ____________________________</p>

      <p>____________________________________</p>

      <p>____________________________________</p>

      <p>Social Security No.: ____________________</p>

      <p>Dated: ______________________________</p>

      <p>Signature ____________________________</p>

      <p>Print Name:___________________________</p>
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<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>3
<FILENAME>dmc10qsb033105ex311.htm
<TEXT>
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<title>dmc10qsb033105ex311</title>
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<div align="center">
  <hr size="2" width="100%" noshade color="gray" align="center">
</div>
<p align="right">Exhibit 31.1</p>
<p align="center"><b>CERTIFICATION PURSUANT TO<br>
  18 U.S.C. SECTION 1350,<br>
  AS ADOPTED PURSUANT TO<br>
  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002</b></p>
<p align="center"><b><u>CERTIFICATION</u></b></p>
<p>I, Patrick White, Chief Executive Officer, President and Acting Chief Financial
  Officer of Document Security Systems, Inc. certify that:</p>
<p>1. I have reviewed this quarterly report on Form 10-QSB of Document Security
  Systems, Inc.</p>
<p>2.&nbsp;Based on my knowledge, this quarterly report does not contain any untrue
  statement of a material fact or omit to state a material fact necessary to make
  the statements made, in light of the circumstances under which such statements
  were made, not misleading with respect to the period covered by this quarterly
  report;</p>
<p>3. Based on my knowledge, the financial statements, and other financial information
  included in this report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this report;</p>
<p>4. I am responsible for establishing and maintaining disclosure controls and
  procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
  registrant and have:</p>
<p>(a) Designed such disclosure controls and procedures, or caused such disclosure
  controls and procedures to be designed under my supervision, to ensure that
  material information relating to the registrant, including its consolidated
  subsidiaries, is made known to me by others within those entities, particularly
  during the period in which this report is being prepared;</p>
<p>(b) Evaluated the effectiveness of the registrant's disclosure controls and
  procedures and presented in this report my conclusions about the effectiveness
  of the disclosure controls and procedures, as of the end of the period covered
  by this report based on such evaluation; and</p>
<p>(c) Disclosed in this report any change in the registrant's internal control
  over financial reporting that occurred during the registrant's most recent fiscal
  quarter&nbsp; that has materially affected or is reasonably likely to materially
  affect, the registrant's internal control over financial reporting; and</p>
<p>5. I have disclosed, based on our most recent evaluation of internal control
  over financial reporting, to the registrant's auditors and the audit committee
  of the registrant's board of directors (or persons performing the equivalent
  functions):</p>
<p>(a)&nbsp;all significant deficiencies and material weaknesses in the design
  or operation of internal control over financial reporting which are reasonably
  likely to adversely affect the registrant's ability to record, process, summarize
  and report financial information; and</p>
<p>(b) any fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrant's internal control over financial
  reporting.</p>
<p>Date: May 16, 2005</p>
<table border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td> <p>/s/ Patrick White</p></td>
  </tr>
  <tr>
    <td> <hr size="2" width="200" noshade color="gray" align="left"> </td>
  </tr>
  <tr>
    <td> <p>Patrick White, President<br>
        &nbsp;&nbsp; Chief Executive Officer and<br>
        &nbsp;&nbsp; Acting Chief Financial Officer/Principal Accounting Officer</p></td>
  </tr>
</table>
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</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>4
<FILENAME>dmc10qsb033105ex321.htm
<TEXT>
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<head>
<title>dmc10qsb033105ex321</title>
</head>
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<div align="center">
  <hr size="2" width="100%" noshade color="gray" align="center">
</div>
<p align="right">Exhibit 32.1</p>
<p align="center"><b>CERTIFICATION PURSUANT TO<br>
  18 U.S.C. SECTION 1350,<br>
  AS ADOPTED PURSUANT TO<br>
  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</b></p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; In connection
  with the Quarterly Report of Document Security Systems, Inc. (the "Company")
  on Form 10-QSB for the three months ending March 31, 2005 as filed with the
  Securities and Exchange&nbsp;Commission on the date hereof (the "Report"),&nbsp;I,
  Patrick White, President,&nbsp;certify,&nbsp;pursuant&nbsp;to 18 U.S.C. Section
  1350,&nbsp;as&nbsp;adopted pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002, that:</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (1)&nbsp;
  The Report fully complies with the requirements of Section 13(a) or 15(d) of
  the Securities Exchange Act of 1934; and</p>
<p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; (2)&nbsp;
  The information contained in the Report fairly presents, in all material respects,
  the financial condition and result of operations of the Company.</p>
<p>Date: May 16, 2005</p>
<table border="0" cellspacing="0" cellpadding="0">
  <tr>
    <td> <p>/s/ Patrick White</p></td>
  </tr>
  <tr>
    <td> <hr size="2" width="200" noshade color="gray" align="left"> </td>
  </tr>
  <tr>
    <td> <p>Patrick White<br>
        Principal Executive Officer and<br>
        Acting Chief Financial Officer/Principal Accounting Officer</p></td>
  </tr>
</table>
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`
end
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
