UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

( Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Delaware		90-0182158
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3130 Fairview Park Drive, Suite 400, Falls Church, Virginia		22042
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 703-564-2967

None.

Common Stock, par value $0.0001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12-b2 of the Exchange Act. (Check one):

Large Accelerated filer o       Accelerated Filer o       Non-Accelerated Filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate market value of the common stock held non-affiliates of the registrant as of the close of business on June 30, 2005, was approximately $52.9 million based on the closing sale price of the registrant’s common stock, as reported on the Over the Counter Bulletin Board on that date.

As of March 15, 2006, there were 44,072,200 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE. None.

TABLE OF CONTENTS

Forward-Looking Statements					1
PART I — FINANCIAL INFORMATION
Item 1.		Business			1
Item 1A.		Risk Factors			5
Item 1B.		Unresolved Staff Comments			7
Item 2.		Properties			7
Item 3.		Legal Proceedings			7
Item 4.		Submission of Matters to a Vote of Security Holders			7
Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers
		of Equity Securities			7
Item 6.		Selected Financial Data			9
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			18
Item 8.		Financial Statements and Supplementary Data			18
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			44
Item 9A.		Controls and Procedures			44
Item 9B.		Other Information			45
Item 10.		Directors and Executive Officers of the Registrant			45
Item 11.		Executive Compensation			47
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			49
Item 13.		Certain Relationships and Related-Transactions			50
Item 14.		Principal Accountant Fees and Services			50
Item 15.		Exhibits and Financial Statements Schedules			50

  i

FORWARD-LOOKING STATEMENTS

Except for historical information, this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A. “Risk Factors.” You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances taking place after the date of this document.

Item 1. Business.

Spectrum Sciences & Software Holdings Corp. (the “Company” or “Spectrum Holdings”) is a premier technology and technical engineering solutions company focused on three primary target markets — national security, energy & environment, and transportation — with an emphasis on homeland security. The Company’s business offerings encompass business management services; procurement and acquisition support; design, engineering and construction; manufacturing technologies; border and transportation security; environmental management; information analysis; and infrastructure protection.

Spectrum Holdings was incorporated as Silva Bay International, Inc., a Delaware corporation, in August 1998. In April 2003, the Company changed its name from Silva Bay to Spectrum Sciences & Software Holdings Corp. in conjunction with the acquisition of Spectrum Sciences and Software, Inc. (“SSSI”), a Florida corporation. The Company began trading on the Over the Counter (“OTC”) Bulletin Board market in December 2003.

The Company acquired three companies during 2005: M&M Engineering, Ltd. (“M&M), Coast Engine and Equipment Company, Inc. (“CEECO”), and Horne Engineering Services, Inc. (“Horne”). The Horne acquisition was a merger that resulted in the management of Horne taking control of the Company effective June 2005. More information related to these mergers is included in Note 3 of our audited financial statements.

As a result of these acquisitions, the nature of the Company’s business has changed significantly, including our reportable segments. Before the acquisitions, the Company had three reportable segments: Management Services, Engineering and Information Technology, and Manufacturing. In 2005, these segments were consolidated into one segment, Security Solutions. Our current segments are consistent with how we manage the business and the products and services we offer.

Business Segments

The Company comprises four distinct operating companies that operate in five reportable segments: Security Solutions, Industrial and Offshore, Repair and Overhaul, Procurement Services, and Engineering Services. These segments are predominantly focused in the U.S. defense markets, with the exception of the Industrial and Offshore segment, which is primarily focused on the Canadian energy industry. Our goal is to be the vendor of choice in each of our selected markets. Financial information for each segment can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited financial statements in Item 8.

Security Solutions

Our Security Solutions segment specializes in the manufacturing of aircraft and munitions support equipment for the U.S. Department of Defense. The segment also specializes in the development of software for weapon system range safety (Safe Range) and the Secure Borders Initiative (Safe Borders) (formerly known as America’s Shield Initiative). The Security Solutions segment, which employs approximately 65 employees, is based

in Ft. Walton Beach, Florida. Most of the Company’s contracts in this segment are with the U.S. Defense Department.

The segment’s manufacturing operations, with revenue of $4.2 million, accounted for approximately 75% of the segment’s revenues in 2005. The main products of the manufacturing group are U.S. Navy containers and launch tubes, missile shipment and storage containers, and aircraft maintenance stands for military aircraft. The manufacturing group has devoted considerable time to diversifying the product mix to better address client needs. This has included successfully completing 12 “first-article” tests for new products, all of which were accepted by the end customers and which resulted in new work. The group is expanding its services into military aircraft specialty parts based on the successful first-article testing and the needs of the customers. The group is also participating in the Defense Department’s Mentor-Protégé program and Foreign Military Sales area with a small minority business in Alabama. This teaming arrangement may help provide additional work in the future under this program.

The pricing of raw materials, primarily steel and aluminum, has directly affected the manufacturing unit. The increased price of these materials has negatively impacted some of the longer-term manufacturing contracts. The group has worked to limit the impact of rising material prices by renegotiating contracts and including price-escalation clauses in new contracts.

The manufacturing group has patents and pending patents on several technologies, in addition to proprietary research on munitions assembly systems.

The primary competitors for the manufacturing group are smaller manufacturing companies with the bandwidth to support larger contracts. The market is fragmented, and the number of competitors on the manufacturing side has been decreasing. Competition is primarily based on product quality and service offerings combined with pricing. The ability to compete for defense contracts depends on the ability of a given manufacturer to pass the first-article testing for new products and past delivery performance on similar contracts. In sole-source provider contracts, it is incumbent on the procuring agency to re-open the bidding for contracts to be competitively bid.

The segment’s software group focuses primarily on modeling and simulation and the Safe Borders tracking software. The group has developed the technology to simulate the effect and impact of various weapon systems based on the weapons’ “footprints,” which allows targeting simulation and analysis. The greater focus, however, is on the Safe Borders software and its integration with the upcoming Secure Borders Initiative. This software allows the tracking and monitoring of border areas.

We have certain intellectual property rights surrounding our software coding for Safe Borders, including certain algorithms and processing procedures that are proprietary. The names “Safe Borders” and “Safe Range” are registered trade names of the Company.

Industrial and Offshore

M&M, which operates in the Industrial and Offshore segment and is based in St. John’s, Newfoundland, Canada, is a provider of a complete range of mechanical contracting and steel fabrication services to the industrial and offshore energy sector. Its business includes the manufacture and installation of structural steel products, including storage tanks, pipe spooling, tote tanks, and caisson systems for the offshore and mining industries, in addition to the manufacture and repair of pressure vessels. M&M also provides specialized welding services for the oil and mining industries. All services are provided in eastern Canada.

M&M’s business is seasonal, with most work being performed between April and October. This is consistent with the staffing levels of the group. M&M significantly augments its base staff of 23 employees with contracted union workers, which can bring total headcount to approximately 500 at the peak of business.

M&M has not suffered significantly from increased raw material prices due to the short-term nature of its contracts. Few of its contracts take longer than six months to complete.

The two most significant customers for M&M in 2005 were Inco and Deer Lake Power, which accounted for 44.7% and 18.6% of its 2005 sales, respectively. M&M’s operations also rely on a contract between Liannu LLP,

a joint venture between M&M and a native Canadian individual (Innu), and Voisey’s Bay Nickel Company, owners of the Voisey’s Bay nickel mine in Labrador, Canada. This contract, which provides the vast majority of the revenue for the joint venture, provided $3.8 million, (18.6%) in revenue during 2005. Voisey’s Bay is a subsidiary of Inco, which makes the total revenue from Inco-related companies 63.3% of the revenue for this segment.

The competitive environment is largely localized to the province of Newfoundland and Labrador, Canada, which is primarily due to the fact that Newfoundland is an island. In addition, since M&M operates in a unionized environment, there are many issues that make bidding for work outside the province difficult. However, M&M is the largest mechanical and industrial contractor in the region, and many large-scale industrial developments are currently under way or in the early stages of development. For example, there are currently three operating offshore oil developments off the coast of Newfoundland, each of which M&M has been involved with in terms of construction and ongoing maintenance. Plans are also under way to further develop the offshore oil and natural gas fields in the coming years. In addition, Newfoundland and Labrador is home to an oil refinery, pulp and paper mills, hydroelectric power generation, and the largest nickel mine site in the world (Voisey’s Bay). All of these markets have provided significant work to M&M in the past and are expected to provide additional work in the future.

Generally, work in the region is awarded on the basis of invitations to tender bids. M&M is well known in the area and, therefore, is invited to bid on virtually every major mechanical and industrial tender package that arises. The award of contracts largely depends on price, but customers will typically consider the Company’s reputation and ability to get the work done properly and on time. On occasion, M&M has been awarded contracts for which it was not the low bidder simply due to the fact that it is a “preferred” supplier for certain customers.

Repair and Overhaul

The Repair and Overhaul segment provides services to the maritime industry, predominantly for on-board ship repair of HVAC and refrigeration systems, welding services, and custom flooring, insulation, and machinery installations. The group has also performed extensive work replacing navigation towers destroyed by Hurricane Katrina. This unit is based out of Port Canaveral, Florida and employs approximately 20 people.

The competitive environment of the segment is fairly limited, with the major competitor of the Company being Standard Marine. Many contract awards are issued with minimal competitive bidding; past performance is a key component of award decisions. The major clients of this segment are the U.S. Coast Guard, Disney Cruise Lines, Rinker Cement, and the U.S. Navy.

Procurement Services

The Procurement Services segment provides procurement consulting services consisting of providing staffing and procurement expertise in executing all phases of the procurement cycle from proposal preparation to closeout. We also perform material procurement for acquisition support contracts. We provide staffing to reinforce capabilities, meet surge requirements, or prepare for inspections/audits of contracts and subcontracts. We assist in supplementing client staff domestically and internationally for short periods or for sustained operations. Staffing is often task-organized to meet specific procurement requirements, such as purchasing, subcontracting, or lower-tier subcontract management. We provide buyers, subcontract administrators and compliance professionals. We support clients using our own purchasing system, or we can use the client’s purchasing system to meet government or commercial mission needs. The segment is based out of our corporate headquarters in Falls Church, Virginia, and employs 26 people.

The volume of business is primarily from the support of major infrastructure construction or logistics projects, such as disaster relief, peacekeeping, nation building and military operations. This has been particularly true in 2005 as a result of events in Iraq and Hurricane Katrina. Most of our revenue in this segment has come from two clients, and our ability to retain these clients is based on our performance.

The industry is fairly fragmented for procurement outsourcing, with many small companies competing. The competition for new work primarily centers on past performance, the experience required for the procurement at hand, and price. The ability to quickly deploy the right staff to meet specific procurement requirements is key to success in this business.

Engineering Services

The Engineering Services segment focuses on providing engineering, environmental science, and occupational safety and health services to a predominantly governmental client base. This work is primarily focused in the areas of U.S. national security, energy and environment, and occupational safety and health. This is a service-based segment that relies on its people to maintain the reputation of the Company to expand operations and improve our marketability. The Company has been successful in recruiting top-level candidates to staff open client-focused positions. The applicant pool for the expertise we need appears to be sufficiently deep to meet our needs. This segment is primarily based out of our Falls Church, Virginia, headquarters and employs approximately 100 people.

The national security work is primarily focused on adjunct staffing and management studies on behalf of the U.S. Army Corps of Engineers, U.S. Customs and Border Protection and the U.S. Army Chemical Materials Agency. In addition to the staffing and management studies, we provide engineering and design services to the U.S. Air Force for base security upgrades. This is a very large, competitive market segment with some of the largest businesses and institutions in the country competing, in addition to numerous small and emerging businesses. Success is dependant on high performance, expert personnel, intimate knowledge of the organizations being served, and strong relationships with the clients and our private sector partners. This market sector is dependant on the federal budget cycle, federal expenditures, and related priorities.

The energy and environment market place is dominated by several large contractors, including Bechtel National and Battelle, with many small and emerging companies competing as well. The competition for new work is focused on having the specific technical capabilities, as well as the longstanding relationships and existing contracts that enable incumbents on projects to expand their services. The services we provide include engineering, environmental sampling and remediation, policy development and support, outreach, cultural and natural resources studies, underwater capping of contaminated river sediments, and environmental compliance support to federal entities.

Our occupational health and safety work is predominantly with the Department of Transportation, with our two major clients being the Transportation Security Administration and the Federal Aviation Administration. The services we perform include client staff augmentation, policy development and implementation, hazard assessment, and investigation services to assess hazardous conditions and compliance with policies and to make improvements to those policies. Successful competition in this area depends primarily on past performance and customer relationships. No single competitor of the Company dominates the industry.

Backlog

The Company is reporting two types of backlog: funded and unfunded. These classifications differ significantly in terms of their expected value to the Company and the expected realization of these amounts. The funded backlog, as shown in the table below, includes all contracts that have been awarded and funded by the client, in most cases a governmental entity. Funded contracts are subject to changes in work scope, delays in project startup, and cancellation by the client. The unfunded backlog comprises contract awards that, at present, have no funding or confirmed orders on which to rely. An example of this would be GSA schedule awards that are indefinite delivery/indefinite quantity awards. While these contracts have the potential to generate revenue, the amount, timing and certainty of those revenues are unknown.

(Dollars shown in 000’s)

		2006				2007				2008+				Total
Security Solutions		$	1,579			$	—			$	—			$	1,579
Repair and Overhaul			141				—				—				141
Engineering Services			12,696				3,992				—				16,688
Procurement Services			16,335				—				—				16,335
Total Funded Backlog		$	30,751			$	3,992			$	—			$	34,743

The amount of unfunded backlog as of March 15, 2006, is approximately $123 million.

The Industrial and Offshore segment has no backlog due to the short-term nature of work in the segment.

Environmental Matters

Our operations include the use and disposal of hazardous materials. The Company never takes title to hazardous materials. We are subject to various federal, state, and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, and the maintenance of a safe workplace. We believe that we are in compliance with environmental laws and regulations and that we have no known liabilities under environmental requirements that would have a material adverse impact on our business, results of operations, or financial condition. Over the past three years, we have not incurred any material costs relating to environmental compliance.

Item 1A. Risk Factors.

The Company is subject to several risk factors that could have a direct and material impact on the operations of the Company. These risk factors are described below.

We may not receive the full amount of our contract awards.

The Company receives many government contract awards that include both funded and unfunded amounts. While the Company believes that most contracts will become fully funded and executed, there are occasions where the final executed amount of the contract may be substantially less than the contract award. Congress often appropriates funds for our clients on an annual basis, even though our contracts may call for services over a number of years. As a result, Congress may elect not to fund a particular contract in future years. Additionally, the funded amounts on contracts may not be fully recognized as revenue if the priorities of the contract-issuing agencies change and funding is re-appropriated for other uses.

Increased raw material prices may adversely affect contract profitability.

The Company has experienced significant increases in both steel and aluminum raw material prices. Continued increases in the price of raw materials could have a negative impact on the profitability of the Company. Many of our contracts in our manufacturing operations are fixed-price contracts and are not automatically re-priced when raw material costs increase. We aggressively pursue our contract rights to receive compensation for these increased costs, where available, but not all contracts have price-adjustment clauses that allow the Company to recover such cost increases.

Loss of bonding may adversely impact our Canadian operations.

The Company has obtained bonding in Canada through posting a cash deposit with a Canadian surety company. This was the only option available for securing adequate bonding for M&M to continue its operations. The loss of such bonding could have a material adverse impact on the revenues and related profitability of M&M. The Company is currently seeking non-cash secured bonding. Failure to obtain such bonding could adversely affect the Company through reduced revenue and profit.

Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

Our revenue and operating results could vary significantly from quarter to quarter. In addition, we cannot predict with certainty our future revenue or results of operations. As a consequence, our operating results may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include, without limitation, the following:

•

Fluctuations in revenue earned on contracts;

	•		Commencement, completion, or termination of contracts during any particular quarter;
	•		Variable purchasing patterns under GSA schedule contracts and agency-specific indefinite delivery/indefinite quantity contracts;
	•		Provision of services under a share-in-savings or performance-based contract;
	•		Additions and departures of key personnel;
	•		Strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments, or changes in business strategy;
	•		Contract mix, the extent of use of subcontractors, and the level of third-party hardware and software purchases for customers;
	•		Changes in presidential administrations and senior federal government officials that affect the timing of procurements;
	•		Changes in policy or budgetary measures that adversely affect government contracts in general;
	•		The seasonality of our business; and
	•		Changes in the volume of material procurements we perform.

Reductions in revenue in a particular quarter could lead to lower profitability in that quarter because a relatively large amount of our expenses are fixed in the short-term. We may incur significant operating expenses during the startup and early stages of large contracts and may not receive corresponding payments or revenue in that same quarter. We may also incur significant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and administration approval in a timely manner.

Our business commitments require our employees to travel to potentially dangerous places, which may result in injury to our employees.

Our business involves providing services that require our employees to operate in various countries around the world, including Iraq. These countries may be experiencing political upheaval or unrest, and in some cases war or terrorism. Certain senior-level employees or executives may, on occasion, be part of the teams deployed to provide services in these countries. As a result, it is possible that certain of our employees or executives will suffer injury or bodily harm in the course of these deployments. It is also possible that we will encounter unexpected costs in connection with additional risks inherent with sending our employees to dangerous locations, such as increased insurance costs, as well as the repatriation of our employees or executives for reasons beyond our control. These problems could cause our actual results to differ materially from those anticipated.

Unfavorable government audit results could force the Company to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.

A significant portion of our revenue comes from payments made by the U.S. government on prime contracts and subcontracts. The costs of these contracts are subject to audit by the Defense Contract Audit Agency (DCAA). Disallowance of these contract costs by the DCAA could adversely affect the Company’s financial statements. Management periodically reviews its estimates of allowable and unallowable costs based on the results of government audits and makes adjustments as necessary.

If the government discovers improper or illegal activities, by the Company or its employees, the Company may be subject to civil and criminal penalties and administrative sanctions, including contract termination, forfeiture of profits, suspension of payments, fines, and suspension or disbarment from conducting future business with the government. In addition, the Company could suffer serious harm to its reputation if allegations of impropriety were made against it, whether or not true. The Company is not aware of any instances of improper or illegal activities of its employees.

Horne is the only subsidiary subject to incurred costs at this time. Horne is current on its DCAA audits through 2002 and has not had any significant audit findings in any recent DCAA audit.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

As of March 15, 2006, the Company’s headquarters were located in administrative offices leased by the Company in Falls Church, Virginia. Information about the Company’s key operating facilities is set forth below:

Segment		Location		Leased/Owned		Usage
Security Solutions		Ft. Walton Beach, FL		Owned		Manufacturing
		Ft. Walton Beach, FL		Leased
Industrial and Offshore		St. John’s, Newfoundland		Owned		Manufacturing
Repair and Overhaul		Port Canaveral, FL		Leased		Fabrication

The facilities for Procurement Services and Engineering Services include general office space that is either leased by the Company or provided to the Company by clients.

The two facilities for our Security Solutions segment are fully utilized. Accordingly, we are evaluating alternatives to expand our operations in Ft. Walton Beach, Florida in order to increase revenue. The Company’s other facilities for manufacturing and fabrication appear sufficient to meet its needs at this time. However, should we be successful in winning any large contract awards, we may need to increase our facility space.

Item 3. Legal Proceedings.

Information regarding legal proceedings involving the Company is included in Note 17 to the Company’s consolidated financial statements under the heading “Legal Matters” in Part II, Item 8 of this report, which is incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of the Company’s shareholders during the fourth quarter of 2005.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market Performance of Common Stock, Stockholders of Record and Dividends on Common Stock. The common stock of the Company is listed on the OTC Bulletin Board electronic quotation system and trades under the symbol “SPSC.” The common stock was first traded on December 5, 2003, under such symbol. The following table sets forth the high and low bids quotation for our stock for each quarterly period beginning in 2004 as reported on the OTC Bulletin Board.

		High				Low
2004
First Quarter		$	2.81			$	1.60
Second Quarter		$	4.02			$	0.70
Third Quarter		$	1.55			$	0.58
Fourth Quarter		$	1.69			$	1.14
2005
First Quarter		$	2.60			$	1.45
Second Quarter		$	2.36			$	1.00
Third Quarter		$	1.63			$	0.91
Fourth Quarter		$	1.17			$	0.57

There were approximately 100 stockholders of record on March 15, 2006. A significant number of the outstanding shares that are beneficially owned by individuals or entities are registered in a street name. The Company believes there are approximately 11,000 beneficial owners of its common stock as of March 15, 2006.

The Company has never paid any cash dividends and has no current intention to pay a dividend in the foreseeable future.

(b) Equity Compensation Plans. The following table summarizes our equity compensation plans as of December 31, 2005:

Number of

Number of securities

securities to

remaining available for

be issued upon

future issuance under

exercise

Weighted-average

equity compensation

of outstanding

exercise price of

plans (excluding

options,

outstanding options,

securities

warrants and rights

warrants and rights

reflected in column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

0

$

0

1,000,000

(1)

Equity compensation plans not approved by security holders

5,837,800

(2)

$

1.80

3,041,000

(3)

Total

5,837,800

4,041,000

2004 Non-Statutory Stock Option Plan

The 2004 Non-Statutory Stock Option Plan was adopted by the Board of Directors on March 11, 2004. The plan was intended to advance the interests of the Company by encouraging and enabling eligible employees, non-employee directors, consultants and advisors to acquire proprietary interests in the Company, and by providing the participating employees, non-employee directors, consultants, and advisors with an additional incentive to promote the success of the Company. Under this plan, a maximum of 10,000,000 shares of the Company’s common stock, par value $0.0001, were authorized for issue. Options issued under this plan would expire one year from the date of issue.

Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan

The Amended and Restated Number 1 2004 Non-Statutory Stock Option Plan was adopted by the Board of Directors on April 16, 2004. This restated plan took the same form as the 2004 Non-Statutory Stock Option Plan with the exception that the maximum number of options shares authorized under this plan was increased to 30,000,000 shares of the Company’s common stock, par value $0.0001.

Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan

The Amended and Restated Number 2 2004 Non-Statutory Stock Option Plan was adopted by the Board of Directors on November 15, 2004. This restated plan took the same form as the earlier plans, except that it amended the expiration date on future stock options issued from one year to three years and likewise extended the expiration date of any options issued pursuant to such prior stock option plans. No additional options shares were authorized under this amended plan.

Item 6. Selected Financial Data (Dollars shown in $000’s except per share data).

		2005				2004				2003				2002				2001
Revenue		$	53,698			$	11,134			$	13,330			$	12,261			$	11,877
Income (loss) from Continuing Operations			(4,492	)			(40,618	)			381				(79	)			438
Per share of Common Stock-basic & diluted			(0.11	)			(1.21	)			0.02				(0.00	)			0.02
Net Income (loss)			(3,986	)			(40,307	)			206				(611	)			232
Per share of Common Stock-basic & diluted			(0.09	)			(1.20	)			0.01				(0.03	)			0.01
Total Assets			49,404				31,212				4,634				5,128				6,123
Long-term Debt			2,814				—				2,456				2,006				2,114
Shareholder Equity			35,097				28,621				(889	)			(1,176	)			(473	)
EBITDA			(1,566	)			(38,878	)			732				(158	)			757
Adjusted EBITDA		$	(1,566	)		$	(38,878	)		$	732			$	340			$	757

The financial information above is reflective of the operations since 2000. Prior to April 2003, Spectrum Holdings’ predecessor company, Silva Bay International, Inc., was a non-reporting entity that had no financial activity. The information shown above for the years 2001 and 2002 is for SSSI, which the Company acquired on April 3, 2003.

The Company uses certain measures of performance that are not required by, or presented in accordance with generally accepted accounting principles (GAAP). Specifically, the Company uses non-GAAP financial measures, EBITDA and Adjusted EBITDA. These measures should not be considered as an alternative to income from operations, net income, net income per share, or any other performance measure derived in accordance with GAAP.

EBITDA represents net income before interest, taxes, non-cash stock option awards to employees or directors, depreciation, and amortization. We use EBITDA to facilitate operating performance comparisons from period to period. We believe EBITDA facilitates company-to-company comparisons by excluding potential differences caused by variations in capital structures (affecting interest expense), taxation, and the age and book depreciation of facilities and equipment (affecting depreciation expense), which may vary from company to company. We also use EBITDA to evaluate and price potential acquisition candidates.

In addition to EBITDA, we use a measure called Adjusted EBITDA, which we define as EBITDA that excludes the effects of discontinued operations, cumulative effects of accounting changes, and other non-operating items that represent non-recurring events. Our management does not view these types of charges as indicative of the status of our operations.

EBITDA Reconciliation
(Dollars shown in 000’s)

		2005				2004				2003				2002				2001
Net Income (loss)		$	(3,986	)		$	(40,307	)		$	206			$	(611	)		$	232
Depreciation/Amortization			715				176				139				149				183
Interest expense (income)			(20	)			(125	)			295				304				328
Tax expense (benefit)			325				(21	)			92				—				—
Options issued to employees/directors			1,400				1,399			$	—				—				—
EBITDA		$	(1,566	)		$	(38,878	)			732			$	(158	)		$	743
Cumulative effect of accounting change			—				—				—				91				—
Loss from discontinued operations			—				—				—				407				—
Adjusted EBITDA		$	(1,566	)			(38,878	)		$	732			$	340			$	743

Quarterly Financial Data
(Dollars shown in 000’s except per share amounts)

		2005
		Q1				Q2				Q3				Q4
Revenue		$	2,543			$	11,796			$	16,820			$	22,539
Gross Profit			394				1,675				2,084				2,819
Net Income (loss)			(1,745	)			(1,058	)			(57	)			(1,126	)
Basic & diluted earnings per share		$	(0.05	)		$	(0.03	)		$	(0.00	)		$	(0.03	)

		2004
		Q1				Q2				Q3				Q4
Revenue		$	3,597			$	3,419			$	3,009			$	1,109
Gross Profit			322				364				166				(906	)
Net Income (loss)			(13,581	)			(26,682	)			(690	)			646
Basic & diluted earnings per share		$	(0.70	)		$	(0.73	)		$	(0.02	)		$	0.02

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The financial and business analysis below provides information that the Company believes is relevant to an assessment and understanding of the Company’s consolidated financial position, results of operations, and cash flows. This financial and business analysis should be read in conjunction with the consolidated financial statements and related notes.

The following discussion and certain other sections of this report contain statements reflecting the Company’s views about its future performance and constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These views involve risks and uncertainties that are difficult to predict and, accordingly, the Company’s actual results may differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors, including changes in general economic conditions and competitive market conditions; price pressures; relationships with key customers; and other factors discussed in Part I, Item 1A, “Risk Factors,” and the sections entitled “Executive-Level Overview” and “Critical Accounting Estimates” below, may affect the Company’s performance. The Company undertakes no obligation to publicly update any forward-looking statements as a result of new information, future events, or otherwise.

Executive-Level Overview

The Company grew and changed dramatically in 2005 as a result of mergers and acquisitions. The Company now has four wholly owned subsidiaries — SSSI, M&M, CEECO, and Horne — and five business segments. In addition to expanding its market base and business offerings, the Company installed a new management team, placed top

priority on issues of corporate governance, implemented changes to make operations more efficient and internal controls sound, and created a platform for well-managed, sustainable growth.

The Company’s Security Solutions business segment is represented by SSSI. Located in Fort Walton Beach, Florida, SSSI is now focused on manufacturing critical, customized equipment components for the Department of Defense. We have installed an experienced management team to oversee operations, augmented our financial and contract capability, identified high-technology equipment that will make us more profitable, and instituted improved pricing and cost-control procedures. Because of strong business relationships and successful first-article work this past year, we expect revenue in 2006 to be almost twice what is was last year. Among its upcoming projects, SSSI will be building a new Advanced Medium-Range Air-to-Air Missile (AMRAAM) container for the U.S. Air Force and serving as the Air Force’s container repair center, manufacturing spare parts and equipment to support the AMRAAM program, and supporting the requirement to install an additional seat in the C-130 Aircraft.

The Industrial and Offshore business segment is represented by M&M and its wholly owned subsidiary, M&M Offshore Limited. Based in St. John’s, Newfoundland, M&M provides services to the industrial and energy industry in eastern Canada. In 2005, M&M accounted for 38 percent of Spectrum Holdings’ operational revenue and contributed $735,000 of operating profit. Operationally, however, M&M is a challenge to integrate into the Spectrum Holdings family because of its geographic location and distinct corporate culture and because it is subject to a completely separate set of laws and regulations. Therefore, we are assessing strategic alternatives for the M&M subsidiary. M&M’s revenues have been fairly consistent from year to year, and we expect this to continue. For reasons of climate, M&M’s operations are seasonal and backlog rarely carries over from year to year.

The Repair and Overhaul segment, represented by CEECO, is headquartered in Port Canaveral, Florida. CEECO has a solid, niche-market business model serving government and industrial customers in Florida and the U.S. Gulf Coast area. CEECO has been helping the Coast Guard to rebuild portions of the waterway navigation system in the Mississippi River Delta damaged by Hurricane Katrina. CEECO posted $2 million in revenue in 2005 and is poised for at least a 25-percent increase in 2006. The main drivers of this growth are expected to be ship repair, refurbishment and replacement operations, production of buoys for the Coast Guard, and contracts designed to improve U.S. long-term maritime safety and communications security.

The Procurement Services segment is managed from Horne’s headquarters in Falls Church, Virginia, but also provides services at client sites elsewhere in the United States and abroad. Although it was a part of the Company for only two-thirds of the year and its profit margins were below the overall average for our operations, the Procurement Services business segment has proven to be an efficient and growing revenue generator, providing 30 percent of our total 2005 revenue, contributed $992,000 of our total 2005 operating profit, and strong cash flow. This segment’s success has resulted from our strong relationships with several major contractors, the in-house expertise we have developed, and our ability to staff up rapidly to meet customer requirements both nationally and internationally. We expect the revenue for this group to grow substantially during 2006. The demand for procurement work is directly related to the level of major infrastructure reconstruction activity, and significant fluctuations in this demand could materially affect the Company’s revenue.

The Engineering Services segment, also represented by Horne, consolidates all our non-manufacturing engineering operations. With work performed at Horne facilities and customer sites, this segment focuses on providing engineering, environmental remediation, and occupational safety and health services. Although part of Spectrum Holdings for only two-thirds of 2005, Engineering Services accounted for 17 percent of the Company’s revenue and contributed $340,000 of operating profit. The software engineering group that is responsible for the Safe Range and Safe Borders programs was transferred from the Security Solutions segment to the Engineering Services segment at the beginning of 2006. We expect revenues in this business segments to grow substantially during 2006.

The business synergy created by the merger with Horne has resulted in some exciting prospects for the Company. At this time, we are pursuing roles on four large-scale contracts related to homeland security, environmental restoration, critical infrastructure, and emergency preparedness: the multi-billion-dollar Integrated Wireless Network (IWN) procurement collaborative effort by the Departments of Justice, Homeland Security, and the Treasury; the SBInet component of U.S. Customs and Border Protection’s Secure Borders Initiative; the $3

billion Kuwait Environmental Remediation Program for remediating and restoring water and other natural resources damaged during Iraq’s 1991 invasion of Kuwait; and a major infrastructure program for a confidential client.

Except for the Industrial and Offshore segment associated with M&M, the Company is largely dependent on the amount of U.S. government contracting in the areas of homeland security, environmental management, infrastructure reconstruction, and munitions management. Significant changes to the spending levels in these areas may have a direct impact on the operations of the Company. Absent such changes, however, management expects the Company’s organic growth to be in the range of 15 to 20 percent. Success in winning any one of the “breakthrough” contracts that we currently are pursuing could spur a significantly greater growth rate for the Company.

Accretive acquisitions will also be part of our growth strategy. We continue to keep an eye out for like-minded companies that will enable us to expand our core capabilities and market reach. Of particular interest would be technology-oriented companies with core competencies in areas such as geospatial intelligence systems, disease surveillance data modeling, and mission-centered human resource management systems.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. On an ongoing basis, we evaluate our estimates and assumptions, including those related to long-term contracts, product returns, bad debts, inventories, fixed asset lives, income taxes, environmental matters, litigation and other contingencies. We base our estimates and assumptions on historical experience and on various factors that are believed to be reasonable under the circumstances, including current and expected economic conditions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from our estimates under different assumptions or conditions.

We believe that the following critical accounting estimates, among others, require us to make significant estimates and judgments in the preparation of our financial statements:

Revenue Recognition

The Company’s principal method of revenue recognition is percentage-of-completion for longer term fixed-price contracts and cost plus fee on reimbursable and time-and-materials contracts. This methodology is used by all segments with the exception of Repair and Overhaul, which utilizes the completed contract method for revenue recognition. There is no material difference in the results of using completed contract method versus percentage-of completion method due to the short-term nature of the Repair and Overhaul contracts.

Revenue on fixed-price contracts is generally recognized using the percentage-of-completion method based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract, which the Company believes is the best measure of progress toward completion. Estimates of costs to complete include material, direct labor, overhead, and allowable general and administrative expenses for our government contracts. These cost estimates are reviewed and, as necessary, revised on a contract-by-contract basis. If, as a result of this review, we determine that a loss on a contract is probable, then the full amount of estimated loss is charged to operations in the period it is determined that it is probable a loss will be realized from the full performance of the contract. Significant management judgments and estimates, including, but not limited, to the estimated costs to complete projects, must be made and used in connection with the revenue recognized in any accounting period.

Management believes the above methods and criteria are the best available measures of progress for such contracts. Because of the inherent uncertainties in estimating costs and revenues, it is reasonably possible that the estimates used will change in the future.

The Company performs equipment and material procurement contracts as a subcontractor. These contracts require the Company to acquire large dollar items for federal governmental entities through prime contractors. The Company recognizes revenues under these contracts on a gross basis when the goods are shipped to the end user. The Company uses the gross method of revenue recognition, as prescribed under EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” as the Company is the primary obligor in the transaction and is obligated to pay the supplier for work performed regardless of whether the customer accepts the work. The Company is responsible for the acceptability of the product and has the latitude and negotiability to determine both the suppliers and the price in the transaction. The customer has the right of return. Although the Company does not take title to the goods, the Company conducts all business under these contracts as a stand-alone entity using its own financial, staffing, and facility resources. The Company is compensated for the material purchases at a fixed fee percentage.

Net Operating Loss Carry-Forwards

We have not recogniz