10QSB

FORM 10-QSB

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

|X| Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended September 30, 2006

OR

|_| Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission file number 0-21384

Digital Descriptor Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware	23-2770048
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification number)

2150 Highway 35, Sea Girt, New Jersey	08750
(Address of principal executive offices)	(Zip Code)

Registrant's Telephone number, including area code: (732) 359-0260

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. Yes |X| No |_|

State the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date.

Class of Common Stock	Outstanding at October 31, 2006
$.001 par value	9,568,806,013 Shares

Transitional Small Business Disclosure Format Yes |_| No |X|

Digital Descriptor Systems, Inc. and Subsidiary

Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

(Unaudited)

Condensed Consolidated Unaudited Financial Statements:

Condensed Consolidated Statements of Operations for the Nine and

Three Months Ended September 30, 2006 and September 30, 2005 (restated)

Condensed Consolidated Statements of Cash Flows for the

Nine Months Ended September 30, 2006 and September 30, 2005 (restated)

Notes to Condensed Consolidated Financial Statements (Unaudited)

Digital Descriptor Systems, Inc. and Subsidiary

CONDENSED CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 2006

(UNAUDITED)

ASSETS
	September 30
	2006
Current Assets
Cash and cash equivalents	$	182,007
Accounts receivable, less allowance of $75,584		882,091
Inventory		601,598
Prepaid expenses		6,625
Total Current Assets		1,672,321
Property and equipment, net of
accumulated depreciation		339,769
Other Assets
Deposits		1,730
Goodwill		4,054,998
Intangible assets, net of
accumulated amortization of		172,097
Deferred financing costs, net		164,272
Total Assets	$	6,405,187
LIABILITIES AND STOCKHOLDERS' (IMPAIRMENT)
Current Liabilities
Accounts payable	$	299,733
Accrued expenses		355,866
Accrued payroll expenses		34,537
Accrued interest		1,330,448
Deferred income		196,290
Convertible debentures current		3,826,624
Derivative liabilities		7,851,689
Total Current Liabilities		13,895,187
Note payable		3,500,000
Convertible debentures		1,653,127
Total Liabilities		19,048,314
Shareholders' deficit
Preferred stock, $.001 par value
1,000,000 shares authorized, -0- issued and outstanding		-0-
Common stock, par value $.001; authorized 9,999,000,000 shares;
9,568,806,218 issued and outstanding		9,568,806
Additional paid-in capital		9,146,597
Accumulated deficit		(31,358,530	)
Total Shareholders' (Impairment)		(12,643,127	)
Total Liabilities and Shareholders' (Impairment)	$	6,405,187
The accompanying notes are an integral part of these condensed consolidated financial statements.

Digital Descriptor Systems, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (RESTATED)

(UNAUDITED)

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	30-Sep-06			30-Sep-05			30-Sep-06			30-Sep-05
				(Restated)						(Restated)
INCOME
Net Sales	$	1,300,203		$	1,118,922		$	3,404,896		$	2,143,310
Cost of Revenue		291,038			296,024			918,918			788,185
Gross Profit		1,009,165			822,898			2,485,978			1,355,125
OPERATING EXPENSES
General and administrative		591,711			635,911			1,687,637			1,411,364
Sales and marketing		89,472			22,903			307,521			101,973
Research		29,143			25,725			82,797			77,331
Total Operating Expenses		710,326			684,539			2,077,955			1,590,668
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)		298,839			138,359			408,023			(235,543	)
OTHER (EXPENSE)
Interest		(246,042	)		(369,570	)		(2,180,547	)		(1,122,913	)
Amortization of deferred financing cost		(30,320	)		(37,225	)		(100,166	)		(114,590	)
Amortization of debt discount		(323,029	)		(355,752	)		(969,087	)		(1,399,482	)
Change in fair market value of derivative liability		36,539			1,311,782			(1,292,617	)		25,991
Depreciation and Amortization		(27,114	)		(18,699	)		(68,720	)		(43,629	)
Other income and expenses		(664	)		0			(10,611	)		0
Total Other Income (Expense)		(590,630	)		530,536			(4,621,748	)		(2,654,623	)
Income (Loss) before provision for income taxes		(291,791	)		668,895			(4,213,725	)		(2,890,166	)
Provision for income taxes		0			24,613			.0.			25,393
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES		(291,791	)	$	644,282			(4,213,725	)	$	(2,915,559	)
NET INCOME(LOSS) PER BASIC AND DILUTED SHARES		(0	)		0			(0	)		(0	)
Weighted average shares of common stock
Outstanding, basic and diluted		9,500,865,354			771,728,982			7,092,272,425			478,591,460
The accompanying notes are an integral part of these condensed consolidated financial statements.

Digital Descriptor Systems, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED September 30, 2006 AND 2005 (RESTATED)

(UNAUDITED)

	Nine Months Ended September 30,
	2006			2005
				(Restated)
Net (loss)	$	(4,213,724	)		(2,915,559	)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		53,656			59,116
Stock issued for services		0			30,000
Amortization of deferred financing costs and debt discounts related
to the beneficial conversion feature of debentures
Amortization of deferred financing cost		100,166			114,590
Amortization of debt discount		960,087			1,399,482
Amortization of benefical interest		1,917,074			365,725
Change in fair market value of derivatives		1,292,617			(25,991	)
Bad debt expense
Changes in operating assets and liabilities:
(Increase) in inventory		(187,447	)		(19,862	)
(Increase) Accounts receivable		(270,668	)		(561,511	)
(Increase) Prepaid expense, deposits and other assets		(2,359	)		(4,300	)
Accounts payable		74,736			189,376
(Decrease) Increase Accured expenses		9,212			452
Accured interest		162,019			748,213
(Decrease) Deferred Income		(9,173	)		(9,250	)
Net cash (used in) operating activities		(113,804	)		(629,519	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase fixed assets					(104,512	)
Purchase assets from CGM Security Solutions					(1,500,000	)
Net cash (used in) investing activities					(1,604,512	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of financing costs					(502,041	)
Due to officer and director					(13,830	)
Net cash (used in) financing activities					(515,871	)
NET (DECREASE) IN
CASH AND CASH EQUIVALENTS	$	(113,804	)	$	(2,749,902	)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD		295,811			3,080,336
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	182,007		$	330,434
The accompanying notes are an integral part of these condensed consolidated financial statements.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

Note 1 - Organization and Basis of Presentation

The unaudited interim financial information included has been prepared by Digital Descriptor Systems, Inc (the “Company”) without audit, pursuant to the rules and regulations of the Security and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2005 audited consolidated financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed consolidated financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.

The management of the Company believes that the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the operations for the periods presented.

Note 2 - Description of Business

Digital Descriptor Systems, Inc., incorporated in Delaware in 1994, develops, assembles and markets computer installations consisting of hardware and software, which capture video and scanned images, link the digitized images to test and store the images and text on a computer database and transmit this information to remote locations. The principal product of the Company is the Compu-Capture Law Enforcement Program, which is marketed to law enforcement agencies and jail facilities and generates the majority of the Company's revenues. Substantially all of the Company's revenues are derived from governmental agencies in the United States.

CGM is a manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products.

Note 3 - Summary of Significant Accounting Policies

Significant accounting policies followed by the Company in the preparation of the accompanying condensed consolidated financial statements are summarized below:

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Revenue Recognition

The Company derives revenue from the sale of hardware, software, post customer support, and other related services. Post customer support includes telephone support, bug fixes, and rights to upgrades. Other related services include basic training.

The Company recognizes revenue upon delivery of the product to the end-user, when the fee is determinable and collectibility is probable. Revenue allocable to post customer support is recognized on a straight-line basis over the period which the service is to be provided. Revenue collected for future services is recorded as deferred income and totaled $196,290 and $205,463, respectively, for the Nine Months ended September 30, 2006 and 2005. Revenue allocable to other services is recognized as the services are provided.

Software Development Costs

All costs incurred in the research and development of new software products and costs incurred prior to the establishment of a technologically feasible product are expensed as incurred. Research and development of software costs were $ 82,797and $ 77,331, respectively, for the Nine Months ended September 30, 2006 and 2005.

Cash and Cash Equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include time deposits, certificates of deposits, restricted cash, and all highly liquid debt instruments with original maturities or three months or less.

Accounts Receivable

Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. Accounts receivable are stated at the amount billed to the customer. Accounts receivable, net of depreciation was $ 882,991 and $ 630,040, respectively, for the Nine Months ended September 30, 2006 and 2005.

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amount that will not be collected. Management reviews all accounts receivable balances that exceed 90 days from invoice date and based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance for doubtful accounts was $75,584 and 45,584, respectively, for the Nine Months ended September 30, 2006 and 2005.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

Income Taxes

The Company provides for income taxes under the liability method. Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Such differences result from differences in the timing of recognition by the Company of net operating loss carry forwards, certain expenses, and differences in the depreciable lives and depreciation methods for certain assets.

Accounting for Stock Options

Financial Accounting Standards Board issued Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation" which provides companies with a choice to follow the provisions of SFAS 123 in determination of stock-based compensation expense or to continue with the provisions of Accounting Principles Board Opinion No. 25 (APB 25). The Company has elected to follow the provisions of APB 25. Under APB 25, if the exercise price of the Company stock options equals or exceeds the market price of the underlying Common Stock on the date of grant, no compensation expense is recognized. The effect of applying SFAS 123 to the Company's stock-based awards results in net loss and net loss per common share that are disclosed on a pro forma basis in Note 7.

Net Loss Per Common Share

Basic loss per share is calculated by dividing the net loss by the weighted average common shares outstanding for the period. Diluted loss per share is calculated by dividing the net loss by the weighted average common shares outstanding of the period plus the dilutive effect of common stock equivalents. Common stock equivalents were not included in the computation of diluted earnings per share when the Company reported a loss because to do so would be antidilutive for the periods presented.

Concentration of Credit Risk

Financial instruments which potentially subject the company to a concentration of credit risk principally consist of cash and accounts receivable. Concentration of credit risk, with respect to accounts receivable, is limited due to the Company's credit evaluation process. The Company does not require collateral from its customers. The Company sells its principal products to end users and distributors principally in the United States.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and convertible debentures approximates their fair value based on the liquidity of these financial instruments and based on their short-term nature.

Reclassification

Certain amounts at September 30, 2005 have been reclassified to conform to the presentation of the September 30, 2006 amounts.

Note 4 - Impact of Recent Accounting Pronouncements

In December of 2004 the FASB issued a revision to Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees as provided in Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with selling, Goods or Services." This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans. The revisions of this statement did not have a material impact upon the Company's condensed consolidated financial statements.

The Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.  Goodwill represents the excess of the cost of the Company’s acquired subsidiaries or assets over the fair value of their net assets at the date of acquisition.  Under Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is no longer subject to amortization over its estimated useful life; rather, goodwill is subject to at least an annual assessment for impairment applying a fair-value based test. 

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

Note 5 - Convertible Debentures

Based on the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion features of it convertible debentures were required to be accounted for as derivatives. The imbedded derivative feature was bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change. For further discussion, see footnote #12 regarding restatement.

During May 2001, the Company issued three convertible notes for an aggregate amount of $20,000. The debentures are collateralized by substantially all of the company's assets. The debentures accrue interest at the rate of 10% per annum.

The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be an amount equal to 50% of the mean average price of the common stock for the ten trading days prior to notice of conversion.

We recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 4,992 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

During September 2001, the Company issued two convertible debentures for an aggregate amount of $400,000. The debentures are collateralized by substantially all of the company's assets. These debentures are in default as they were due on September 30, 2002. The debentures accrue interest at the rate of 12% per annum. A late fee equal to 15% of the accrued and unpaid interest is also assessed during the default period. Interest on the debentures was not paid quarterly and accordingly accrued interest and late fees payable related to the notes totaling $187,600 is included in the accompanying condensed consolidated financial statements.

The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock at anytime after issuance. The conversion price in effect on any Conversion Date shall be the lesser of $.08 per share or 50% of the average of the lowest three inter-day sales prices during the ten trading days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 800,000 shares of common stock of the Company at an exercise price per share equal to the lesser of $.36 or the average of the lowest three closing sales prices for the common stock during the twenty Trading Days immediately prior to exercise. The estimated fair value of the warrants of $48,000 was allocated to paid-in capital. This resulting debt discount plus $90,000 of financing charges were amortized on a straight-line basis over the term of the debentures, and were fully amortized at December 31, 2002.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 59,407 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

During 2004, $10,500 of the debenture was converted into 35,000,000 shares of common stock and during 2003; $3,164 of the debenture was converted into 15,818,010 shares of common stock.

In December, 2001 the Company issued three convertible debentures for an aggregate amount of $500,000. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due December 31, 2002. Interest accrues at the rate of 12% per annum through maturity, and increased to 15% per annum during the default period. Quarterly interest payments were not made, and accordingly accrued interest payable related to the notes totaling $210,000 is included in the accompanying condensed consolidated financial statements.

The holders have the right to convert the principal amount plus accrued interest into shares of the Company's common stock at any time. The conversion price in effect on any Conversion Date shall be the lesser of $.043 per share or 50% of the average of the lowest three inter-day sales prices during the twenty Trading Days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 1,500,000 shares of common stock of the Company at an exercise price per share equal to the lesser of $.02 or the average of the lowest three inter-day sales prices during the twenty Trading Days immediately prior to exercise. The estimated fair value of the warrants of $90,000 was allocated to paid-in capital. This resulting debt discount plus $77,500 of financing charges were amortized on a straight-line basis over the term of the debentures, and were fully amortized at December 31, 2002.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 388,800 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In June 2002, a 12% convertible promissory note for $75,000 was issued to two investors. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due in August 2003. The debentures accrue interest at the rate of 12% per annum. A late fee equal to 15% of the accrued and unpaid interest is also assessed during the default period. Quarterly interest on the debentures was not paid and accordingly accrued interest and late fees payable related to the notes totaling $29,071 is included in the accompanying condensed consolidated financial statements.

The holders have the right to convert the principal amount plus unpaid accrued interest into shares of the Company's common stock at any time through repayment. The conversion price is equal to fifty percent of the average of the lowest three (i) inter-day trading prices, or (ii) if the common stock is traded on the OTC Bulletin Board or Pink Sheets, the prices asked by any person or entity acting as a market maker in the common stock during the twenty trading days immediately preceding the relevant date upon which a conversion is effected.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 59,430 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In September 2002, the Company issued secured convertible debentures in the aggregate principal amount of $100,000. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due on September 30, 2003. The debentures accrue interest at the rate of 12% per annum. A late fee equal to 15% of the accrued and unpaid interest is also assessed during the default period. Quarterly interest on the debentures was not paid, and accordingly accrued interest and late fees payable related to the notes totaling $30,000 are included in the accompanying condensed consolidated financial statements.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable conversion date.

The Company also issued common stock purchase warrants for the right to purchase 300,000 shares of common stock of the Company at an exercise price per share equal to $.01. The estimated fair value of the warrants was zero. Debt issuance costs of $27,500 were also amortized on a straight-line basis over the term of the debentures and were fully amortized at December 31, 2003.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 79,190 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In January, 2003 the Company issued three convertible debentures for an aggregate amount of $250,000, with simple interest accruing at the annual rate of 10%. The debentures are collateralized by substantially all of the company's assets. These debentures are in default as they were due January 10, 2004. Quarterly interest was not paid and accordingly, accrued interest of $61,415 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 750,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Financing costs incurred of $56,750 were fully amortized at December 31, 2003.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 92,225 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In February, 2003, the Company issued three convertible debentures for an aggregate amount of $125,000, with simple interest accruing at the annual rate of 10%. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due February 27, 2004. Quarterly interest due was not paid and accordingly accrued interest of $28,125 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 375,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Debt issuance costs of $10,843 were also amortized on a straight-line basis over the term of the debentures. Amortization expense during 2004 was $24,307 and the costs were fully amortized as of December 31, 2004.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 47,850 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In April, 2003, The Company issued three convertible debentures for an aggregate amount of $125,000, with simple interest accruing at the annual rate of 10%. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due March 31, 2004. Quarterly interest was not paid and accordingly accrued interest of $15,834 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 375,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Debt issuance costs of $20,844 were also amortized on a straight-line basis over the term of the debentures. Amortization expense during 2004 was $38,591 and the costs were fully amortized as of December 31, 2004.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 68,250 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In October, 2003, the Company issued two convertible debentures for an aggregate amount of $165,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. The debentures are in default as they were due October 1, 2004. Quarterly interest was not paid and accordingly accrued interest of $25,988 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable Conversion Date.

The debenture holders also received warrants to purchase 1,505,000 shares at an exercise price of $0.01 per share. The estimated fair value of the warrants was zero. Amortization expense during 2004 was $147,469 and the costs were fully amortized as of December31, 2004.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 326,733 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

In November, 2003, the Company issued two convertible debentures for an aggregate amount of $45,000, with simple interest accruing at the annual rate of 10%. The debentures are in default as they were due November 27, 2004. Quarterly interest was not paid and accordingly accrued interest of $9,453 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 315,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Amortization expense during 2004 was $47,469 and the costs were fully amortized as of December 31, 2004.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 72,572 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In December, 2003, the Company issued three convertible debentures for an aggregate amount of $45,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are in default as they were due by December 3, 2004. Quarterly interest was not paid and accordingly accrued interest of $5,694 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any Conversion Date shall be the lesser of (1) $.005 or (2) 40% of the average of the lowest three inter-day sales prices of the common stock during the twenty Trading Days immediately preceding the applicable Conversion Date.

The Company also issued common stock purchase warrants for the right to purchase 750,000 shares of common stock of the Company at an exercise price per share equal to $0.01. The estimated fair value of the warrants was zero. Amortization expense during 2004 was $42,349 and the costs were fully amortized as of December 31, 2004.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 72,527 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In February, 2004, the Company issued two convertible debentures for an aggregate amount of $45,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are due in February, 2005. Quarterly interest was not paid and accordingly accrued interest of $4,906 is included in the condensed consolidated financial statements.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any conversion date shall be the lesser of (1) $.005 or (2) 67% of the average of the lowest three inter-day sales prices of the common stock during the twenty trading days immediately preceding the applicable conversion date. In addition the debenture holders also received warrants to purchase 315,000 shares at an exercise price of $0.005 per share anytime before February 28, 2009. The estimated fair value of the warrants was $504, which was also recorded as a debt discount. The total debt discount is being amortized on a straight line basis which approximates the effective interest method, over the life of the note. $20,317 of this amount was charged to interest expense during 2004. Additional costs of $12,819 incurred with the issuance of the convertible debentures were recorded as deferred financing cost and are being amortized on a straight-line basis, which approximates the effective interest method, over the term of the debentures. Unamortized costs as of December 31, 2004 amounted to $1,068.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $172,265 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In May, 2004, the Company issued four convertible debentures for an aggregate amount of $250,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are due in May 2005. Quarterly interest was not paid and accordingly accrued interest of $19,555 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any conversion date shall be the lesser of (1) $.005 or (2) 67% of the average of the lowest three inter-day sales prices of the common stock during the twenty trading days immediately preceding the applicable conversion date. In addition the debenture holders also received warrants to purchase 750,000 shares at an exercise price of $0.005 per share anytime before May 31, 2009. The estimated fair value of the warrants was $5,175, which was also recorded as a debt discount. The total debt discount is being amortized on a straight line basis which approximates the effective interest method, over the life of the note. $35,911 of this amount was charged to interest expense during 2004.

Additional costs of $55,244 incurred with the issuance of the convertible debentures were recorded as deferred financing cost and are being amortized on a straight-line basis, which approximates the effective interest method, over the term of the debentures. Unamortized costs as of December 31, 2004 amounted to $36,829.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $327,750 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In November, 2004, the Company issued four convertible debentures for an aggregate amount of $3,500,000, with simple interest accruing at the annual rate of 12%. The debentures are collateralized by substantially all of the company's assets. These debentures are due in November, 2005. Quarterly interest was not paid and accordingly accrued interest of $36,151 is included in the condensed consolidated financial statements.

The holders have the right to convert the principal amount and interest due under the debentures into shares of the Company's common stock. The conversion price in effect on any conversion date shall be the lesser of (1) $.0005 or (2) 67% of the average of the lowest three inter-day sales prices of the common stock during the twenty trading days immediately preceding the applicable conversion date. In addition the debenture holders also received warrants to purchase 10,500,000 shares at an exercise price of $0.005 per share anytime before November 30, 2009. The estimated fair value of the warrants was $5,250, which was also recorded as a debt discount. The total debt discount is being amortized on a straight line basis which approximates the effective interest method; over the life of the note $71,828 of this amount was charged to interest expense during 2004.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

Additional costs of $391,569 with the issuance of the convertible debentures were recorded as deferred financing cost and are being amortized on a straight-line basis which approximates the effective interest method, over the term of the debentures. Unamortized costs as of December 31, 2004 amounted to $376,509.

In addition, we recorded a derivative liability related to this convertible debenture. The initial fair market value of the conversion option in the amount of $ 2,519,300 was recorded as a debt discount and is being amortized over the stated maturities of the notes using the effective interest method. The fair market value of the conversion feature is also shown as a derivative liability on the company’s balance sheet and is being adjusted to fair market value each reporting period with the change being reported as “other income and expenses” in the statement of operations.

In 2005 the Company converted $643,340 of accrued interest into convertible debentures; $97,402 was recorded as debt discount. In March 2005, $513,431 was repaid on convertible debentures.

Note 6 - Deferred Financing Costs

Deferred financing costs represent cost incurred in connection with the issuance of the convertible debentures. Deferred financing costs are being amortized over the life of the convertible debentures on the straight-line basis, which approximates the effective interest method. The net financing costs were $164,272 and $301,663 for the Nine Months ended September 30, 2006 and 2005, respectively.

Note 7 - Commitments and Contingencies

Operating Lease

The Company rents office facilities under a rental agreement that is automatically renewable every four months. The most recent renewal period will expire on December 31, 2006.

CGM leases two facilities, one in Somerset NJ and the other in Staten Island New York under non-cancelable lease agreements that end in December 2007 and December 2008, respectively.

Employment Agreements

Anthony R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was re-appointed as Chairman, President and Chief Executive Officer effective February, 2005. On February 25, 2005, DDSI entered into a five-year employment agreement with Mr. Shupin, which entitled him to a base salary of $215,000 per year, which may at the Board of Directors discretion adjust his base salary (but not below $215,000 per year). Mr. Shupin is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Shupin will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Plan, Mr. Shupin will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of DDSI. The Company may grant Mr. Shupin, following the first anniversary of the date hereof and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Shupin will be entitled to 25 vacations days per year at such times as may be mutually agreed with the Board of Directors. DDSI will provide Mr. Shupin a monthly car allowance of Six Hundred Dollars ($600.00) along with related car expenses.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

Michael J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino was appointed as Senior Vice President and Chief Financial Officer effective February 25, 2005. On February 25, 2005, DDSI entered into a five-year employment agreement with Mr. Pellegrino, which entitled him to a base salary of $175,000 per year which may at the Board of Directors discretion adjust his base salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to participate in the Annual Management Bonus Plan. As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses, based on performance, in any amount from 10% to 200% of the Base Salary. In addition, Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As a participant in the Management Equity Incentive Plan, Mr. Pellegrino will be eligible to receive options, which vest over a period of time from the date of the option's issue, to purchase common shares of DDSI. DDSI may also grant to the Employee, following the first anniversary of the date of the Agreement and at the sole discretion of the Board of Directors, options to purchase common shares of the Company (subject to the vesting and the satisfaction of the other terms and conditions of such options). Mr. Pellegrino will be entitled to 25 vacation days per year at such times as may be mutually agreed with the Board of Directors. DDSI shall also furnish Mr. Pellegrino with monthly car allowance of Six Hundred Dollars ($600.00) and related car expenses.

DDSI has an employment agreement with Erik Hoffer, pursuant to which Mr. Hoffer will be employed as Executive Vice President of the Company for an initial term of three years, which may be extended, and President of CGM Sub for an initial term of one year, which may be renewed for successive one-year terms. Pursuant to the Employment Agreement, Mr. Hoffer will receive a base salary of $200,000, a bonus of 5% of the gross margin sales increase over the prior year's gross margin sales of CGM products and customary benefits and reimbursements.

Note 8 - Stock Option and Other Plans

The Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant to which the Company reserved 5,000,000 shares of common stock. The options granted have a term of ten years and are issued at or above the fair market value of the underlying shares on the grant date. The Company also maintains the 1996 Director Option Plan (the Director Plan) pursuant to which the Company reserved 200,000 shares of common stock. Options granted under the Director Plan are issued at or above the fair market value of the underlying shares on the grant date. A portion of the first option vests at the six-month anniversary of the date of the grant and continues over a four-year period. Subsequent options vest on the first anniversary of the grant date. The options expire ten years from the date of the grant or 90 days after termination of employment, whichever comes first.

The following is a summary of option activity under all plans:

	1994 Plan		1996 Director Plan		Nonqualified		Total Number of Options		Weighted Average Exercise Price
Outstanding at September 30, 2005		33,000		--		--		33,000	$	.10 - $.365
Outstanding at September 30, 2006		33,000						33,000	$	.10-.365

Net loss and net loss per common share determined as if the Company accounted for stock options granted under the fair value method of SFAS 123 would result in the same amounts reported.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

Note 9 - Contingency

There were two holders of convertible notes dated December 31, 2001 who could potentially seek similar damages from the Company. Should they seek these damages, the Company could incur additional expense of $71,668. Management feels however, that the likelihood that the other holders will seek the damages is remote, and therefore, no provision for this expense has been made in the accompanying condensed consolidated financial statements.

On October 16, 2003, a judgment was entered against the Company by its landlord, BT Lincoln L.P. for breach of lease in the amount of $184,706.76. The Company intends to negotiate a settlement.

Note 10 - Related Parties

A Director of the Company provided consulting services during 2006 and 2005 that amounted to $0 and $4,000 respectively. As of September 30, 2006, the Company owes this Director $0.

Note 11 - Purchase of CGM Applied Security Technology, Inc.

On March 1, 2005, the Company acquired substantially all of the assets of CGM Security Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000, subject to adjustment (the "Acquisition"). The assets of CGM were acquired pursuant to an Asset Purchase Agreement among the Company and CGM dated as of February 25, 2005. In connection with the acquisition, the Company and CGM each entered into an employment agreement with Erik Hoffer (the "Employment Agreement"). CGM is a manufacturer and distributor of barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers.

The principal amount of the Note is subject to adjustment based upon the average of (i) the gross revenues of CGM for the fiscal year ending December 31, 2007 and (ii) an independent valuation of CGM Sub based upon the consolidated audited consolidated financial statements of the Company and CGM Sub for the fiscal years ending December 31, 2006 and 2007. In addition, the Company has granted CGM a secondary security interest in substantially all of its assets and intellectual property.

In connection with the Acquisition, the Company entered into a letter agreement with certain of its investors (the "Investors") which extended the maturity date of debt instruments issued on November 30, 2004 until March 1, 2008, and amended the conversion price of the debt that is held by the Investors to the lower of (i) $0.0005 or (ii) 40% of the average of the three lowest intraday trading prices for the Company's common stock during the 20 trading days before, but not including, the conversion date. In addition, the exercise price of the warrants held by the Investors was amended to $.001 per share.

Note 12 - Restatement

We have restated the condensed consolidated financial statements for the Nine Months ended September 30, 2005. Based upon the guidance in SFAS133 and EITF00-19, the Company concluded that the conversion features of it convertible debentures were required to be accounted for as derivatives. The imbedded derivative feature was bi-furcated and the fair market value was determined using a convertible bond valuation model. The derivative instruments are recorded at fair market value with changes in value recognized during the period of change.

The impact on the condensed consolidated financial statements is summarized below.

Digital Descriptor Systems, Inc. and Subsidiary

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the Nine Months Ended September 30, 2006 and 2005 (Restated)

	September 30, 2005
	As Reported			As Restated
Debt discount and deferred financing costs, net	$	729,522			301,663
Total Assets		6,764,112			6,336,253
Accumulated deficit		(23,060,364	)		( 26,111,344	)
Total Liabilities and Shareholders Deficit		6,764,112			6,336,253
Interest and amortization of deferred debt costs		539,566			362,935
Change in Fair Market Value of Derivative Liability		--			(1,311,762	)
Total Other (Income) Expenses		1,242,794			(685,470	)
Net Income (Loss)		(444,509	)		644,262
Net loss per share		(.00	)		(.01	)

Note 13 - Going Concern

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has sustained operating losses and has accumulated large deficits for the Nine Months ended September 30, 2006 and 2005. These factors raise substantial doubt about its ability to continue as a going concern.

Management has formulated and is in the process of implementing its business plan intended to develop steady revenues and income, as well as reducing expenses in the areas of operations. This plan includes the following management objectives:

·   Soliciting new customers in the U.S.

·   Expanding sales in the international market

·   Expanding sales through E-commerce

·   Adding new distributor both in the U.S and internationally

·   The introduction of new products into the market

· Seeking out possible merger candidates

Presently, the Company cannot ascertain the eventual success of management’s plan with any degree of certainty. The accompanying consolidated financial statements do not include any adjustments that might result from the eventual outcome of the risks and uncertainties described above.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of certain significant factors that will have affected our financial condition and results of operations. Certain statements under this section may constitute "forward-looking statements". The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in this report.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005

Revenues for the three months ended September 30, 2006 were $1,300,203 compared to $1,118,922 for the three months ended September 30, 2005 (restated), an increase of $181,281 or 16%. DDSI generates its revenues through software licenses, hardware, post customer support arrangements and other services. CGM generates its revenue through the manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products. The increase in DDSI's revenue is attributed to the purchase of CGM Applied Security Technology, Inc in March, 2005 and an increase in its revenue for the comparable three month period.

Cost of revenue for the three months ended September 30, 2006 was $291,038 compared to $296,024 for the three months ended September 30, 2005 (restated), a (decrease) of ($4,986) or (2%). The decrease was attributable more efficient purchasing procedures of raw material and more efficient production procedures put into place. Cost of revenue sold as a percentage of revenue for the three months ended September 30, 2006 was 22% of total revenues.

Operating expenses for the three months ended September 30, 2006 were $710,326 compared to $684,539 for the three months ended September 30, 2005 (restated), an increase of $25,787 or 4%. This increase was mainly attributable to management’s controls over spending.

General and Administrative expenses for the three months ended September 30, 2006 were $591,711 compared $635,911 for the three months ended September 30, 2005 (restated) for an (decrease) of ($44,200) or (7%). This decrease was mainly attributable management’s controls over spending and new accounting policies to reclass some expenses into sales and marketing.

Sales and Marketing expenses for the three months ended September 30, 2006 were $89,472 compared $22,903 for the three months ended September 30, 2005 (restated) for an increase of $66,569 or 291%. This increase was mainly attributable to the company increasing its advertising budget due to the purchase of CGM Applied Security Technologies, Inc, increase in presence at trade events which in turn increased travel expenses, and instituting a commission program for sales personal and the reclassification of some expense from general and administrative.

Research and development expenses for the three months ended September 30, 2006 were $29,143 compared to $25,725 for the three months ended September 30, 2005 (restated) for an increase of $3,418 or 13%. This increase was due in part to upgrades necessary to keep current.

DDSI had a net (loss) for the three months ended September 30, 2006 of $(291,791) and a net income for the three months ended September 30, 2005 (restated) of $644,282. This is an increase in net (loss) of $ ($936,073) or (145%). This was primarily due to the change in accounting procedures in which convertible debentures are treated as derivative according to the guidance of SFAS133 and EITF00-19.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005

Revenues for the Nine Months ended September 30, 2006 of $3,404,896 compared to $2,143,310 for the Nine Months ended September 30, 2005 (restated), an increase of $1,261,586 or 59%. DDSI generates its revenues through software licenses, hardware, post customer support arrangements and other services. . CGM generates its revenue through the manufacturer and distributor of indicative and barrier security seals, security tapes and related packaging security systems, protective security products for palletized cargo, physical security systems for tractors, trailers and containers as well as a number of highly specialized authentication products. The increase in DDSI's revenue is attributed to the purchase of CGM Applied Security Technology, Inc in March, 2005.

Cost of revenue for the Nine Months ended September 30, 2006 was $918,918 compared to $788,185 for the Nine Months ended September 30, 2005 (restated), an increase of ($130,733) or 17%. The increase was attributable to increased sales and an increase in the cost of raw materials. Cost of revenue sold as a percentage of revenue for the Nine Months ended September 30, 2006 was 27% of total revenues.

Operating expenses for the Nine Months ended September 30, 2006 was $2,077,955 compared to $1,590,668 for the Nine Months ended September 30, 2005 (restated), an increase of $487,287 or 30%. This increase was mainly attributable to the purchase of CGM Applied Security Technology, Inc in March 2005.

General and Administrative expenses for the Nine Months ended September 30, 2006 were $1,687,637 compared $1,411,364 for the Nine Months ended September 30, 2005 (restated) for an increase of $276,273 or 20%. This increase was mainly attributable to the purchase of CGM Applied Security Technology, Inc in March 2005.

Sales and Marketing expenses for the Nine Months ended September 30, 2006 were $307,521 compared $101,973 for the Nine Months ended September 30, 2005 (restated) for an increase of $205,548 or 201%. This increase was mainly attributable to the company increasing its advertising budget due to the purchase of CGM Applied Security Technologies, Inc.

Research and development expenses for the Nine Months ended September 30, 2006 were $82,797 compared to $77,331 for the Nine Months ended September 30, 2005 (restated) for an increase of $5,466 or 7%. This increase was due in part to upgrades necessary to keep current.

The net (loss) for DDSI increased (1,298,166) or 45% for the Nine Months ended September 30, 2006 to $(4,213,725) from $(2,915,559) for the Nine Months ended September 30, 2005 (restated). This was primarily due to the change in accounting procedures in which convertible debentures are treated as derivatives according to the guidance of SFAS133 and EITF00-..

Net cash (used in) operating activities for the Nine Months ended September 30, 2006 and the Nine Months ended September 30, 2005 (restated) was $(113,804) and ($629,519), respectively. The decrease in cash (used in) operating activities for the Nine Months ended September 30, 2006 was $515,715. This decrease was due in part to less expenditures for infrastructure necessary after the purchase of CGM Applied Security Technology, Inc. in March 2005.

Net cash (used in) investing activities was ($-0-) and ($1,604,512) for the Nine Months ended September 30, 2006 and September 30, 2005 (restated), respectively. This increase was due in part to the end of expenditures for infrastructure necessary after the purchase of CGM Applied Security Technology, Inc. in March 2005.

Net cash provided by (used in) financing activities was $(0) and $($515,871) for the Nine Months ended September 30, 2006 and the Nine Months ended September 30, 2005, respectively. This increase was due to repayment of officers for monies owed.

LIQUIDITY AND CAPITAL RESOURCES

DDSI's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, DDSI has been dependent on private placements of its common stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private or other capital will continue to be available, or that revenues will increase to meet DDSI's cash needs, or that a sufficient amount of DDSI's common stock or other securities can or will be sold or that any common stock purchase options/warrants will be exercised to fund the operating needs of DDSI.

Over the next twelve months, management is of the opinion that sufficient working capital will be obtained from operations and external financing to meet DDSI's liabilities and commitments as they become payable. DDSI has in the past relied on private placements of common stock securities, and loans from private investors to sustain operations. However, if DDSI is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations. At September 30, 2006, DDSI had assets of $6,405,187 compared to $6,336,253 on September 30, 2005 an increase of $68,934 and shareholder (deficit) of $(31,358,530) on September 30, 2006 compared to shareholder (deficit) of $(26,111,344) on September 30, 2005, an increase of ($5,247,186). This increase in shareholder (deficit) for the Nine Months ended September 30, 2006 resulted from the net loss for the Nine Months ended September 30, 2006.

Plan of Operations

Acquisition of CGM

On March 1, 2005, DDSI and CGM Sub acquired substantially all of the assets of CGM, for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the "Note") in the principal amount of $3,500,000, subject to adjustment (the "Acquisition"). The assets of CGM were acquired pursuant to an Asset Purchase Agreement among DDSI, CGM Sub and CGM dated as of February 25, 2005.

The principal amount of the Note is subject to adjustment based upon the average of (i) the gross revenues of CGM Sub for the fiscal year ending December 31, 2007 and (ii) an independent valuation of CGM Sub based upon the consolidated audited condensed consolidated financial statements of the Company and CGM Sub for the fiscal years ending December 31, 2006 and 2007. In addition, the Company has granted CGM a secondary security interest in substantially all of its assets and intellectual property.

In connection with the Acquisition, the Company entered into a letter agreement with certain of its investors (the "Investors") which extended the maturity date of debt instruments issued on November 30, 2004 until March 1, 2008, and amended the conversion price of the debt that is held by the Investors to the lower of

(i) $0.0005 or (ii) 60% of the average of the three lowest intraday trading prices for the Company's common stock during the 20 trading days before, but not including, the conversion date. In addition, the exercise price of the warrants held by the Investors was amended to $.001 per share.

The short-term objective of DDSI is the following:

The Company plans to spend the majority of it's time and efforts on increasing the revenue and marketplace of its wholly owned subsidiary, CGM Applied Security Technologies, as it feels that there is a much greater potential for growth of the product line of CGM. In order to accomplish this, the Company has hired additional sales people and is increasing its marketing budget in order to expand the awareness of CGM's product line. In addition, the Company has begun a complete revamping of the company's infrastructure in order to make it better able to respond to the need of its customers and to give management the reporting it needs on a timely basis.

Additionally, DDSI plans to execute an acquisition strategy based upon the availability of financing.

We also plan to add additional product lines as a Value Added Reseller. Technologies related to DDSI's core business can bring additional cash flow with relatively small internal development capital outlay.

DDSI's long-term objective is as follows:

To enhance its sales of the product line acquired with the acquisition of CGM both domestically and internationally, though the addition of sales representative and distributors

To seek additional products to sell into its basic business market - Criminal Justice - so that DDSI can generate sales adequate enough to allow for profits.

DDSI believes that it will not reach profitability in the foreseeable future due to its debt service. Over the next twelve months, management is of the opinion that sufficient working capital will be obtained from operations and external financing to meet DDSI's liabilities and commitments as they become payable. DDSI has in the past successfully relied on private placements of common stock securities, bank debt, loans from private investors and the exercise of common stock warrants in order to sustain operations. If DDSI is unable to obtain additional funding in the future, it may be forced to curtail or terminate operations.

DDSI is doing the following in its effort to reach profitability:

l	The Company is putting a great deal of effort to increase the sales of the CGM subsidiary. The Company believes at this time that the most significant growth in revenue will come from CGM and its product lines.
l	Cutting costs in areas that add the least value to DDSI.
l	Deriving funds through investigating business alliances with other companies who may wish to license the FMS SDK (software developer's kit).
l	Increasing revenues through the introduction of Compu-Capture(R), specifically towards kindergarten through twelfth grades, for the creation of ID cards.

l	Increasing revenues through the introduction of a scaled down version of our Compu-Capture(R) product.
l	Increasing revenues through the addition of innovative technologies as a Value Added Seller.
l	Acquiring and effectively adding management support to profitable companies complementary to its broadened target markets.

Liquidity and Capital Resources

We had net losses of ($4,213,725) and ($2,915,559) during the Nine Months ended September 30, 2006 and 2005, respectively. As of September 30, 2006, we had a cash balance in the amount of $182,007 and current liabilities of $13,895,187. The total amount of notes payable and debentures is $8,979,751. We may not have sufficient cash or other assets to meet our current liabilities. In order to meet these obligations, we may need to raise cash from the sale of securities or from borrowings.

The Company's revenues have been insufficient to cover the cost of revenues and operating expenses. Therefore, the Company has been dependent on private placements of its Common Stock and issuance of convertible notes in order to sustain operations. In addition, there can be no assurances that the proceeds from private placements or other capital will continue to be available, or that revenues will increase to meet the Company's cash needs, or that a sufficient amount of the Company's Common Stock or other securities can or will be sold or that any Common Stock purchase options/warrants will be exercised to fund the operating needs of the Company.

The Company has contractual obligations of $11,000,335 as of September 30, 2006. These contractual obligations, along with the dates on which such payments are due are described below:

Contractual Obligations	Total		One Year or Less		More Than One Year
Due to Related Parties	$	0	$	0	$	0
Accounts Payable and Accrued Expenses		690,136		690,136		0
Accrued interest on loans		1,330,448		1,330,448		0
Note payable		3,500,000		0		3,500,000
Convertible Debentures		5,479,751		3,826,624		1,653,127
Total Contractual Obligations	$	11,000,335	$	5,847,208	$	5,153,127

The Company is currently in default on several of the convertible debentures that are included in current liabilities. Below is a discussion of our sources and (uses) of funds For the Nine Months Ended September 30, 2006 and 2005 (Restated), respectively.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements as of September 30, 2006 or as of the date of this report.

Item 3. Control and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2006, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

( b) Changes in Internal Controls.

There was no change in our internal controls over financial reporting that has materially affected, or is reasonable likely to materially affect, our internal control  over financial reporting during the quarter covered by this Report.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities:

The Company is in default of $1,733,478 of outstanding debentures. Although the debenture holders have not pursued their rights under such debentures, there can be no assurances that such rights will not be exercised.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

31.1	Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Section 302
31.2	Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 302
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C., Section 1350
32.2	Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Section 1350

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIGITAL DESCRIPTOR SYSTEMS, INC.

(Registrant)

Date: November 14, 2006	By:	/s/ ANTHONY SHUPIN
		Anthony Shupin
		(President, Chief Executive Officer)
		(Chairman)

Date: November 14, 2006	By:	/s/ MICHAEL J. PELLEGRINO
		Michael J. Pellegrino
		Senior Vice President & CFO
		(Director)

EX-31.1

  
    
      Unassociated Document





  

EX-31.2

EXHIBIT 31.2

DIGITAL DESCRIPTOR SYSTEMS, INC.

OFFICER'S CERTIFICATE PURSUANT TO SECTION 302

I, Michael Pellegrino, the Chief Financial Officer, of Digital Descriptor Systems, Inc., certify that:

(1) I have reviewed this Form 10-QSB of Digital Descriptor Systems, Inc. for the Nine Months ended September 30, 2006;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the condensed consolidated 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 small business issuer as of, and for, the periods presented in this report;

(4) The small business issuer's other certifying officer(s) and 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 small business issuer and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer is made known to us by other within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

(5) The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design of operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: November 14, 2006

/s/ Michael Pellegrino

Michael Pellegrino

Chief Financial Officer

EX-32.1

EXHIBIT 32.1

DIGITAL DESCRIPTOR SYSTEMS, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Digital Descriptor Systems, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anthony Shupin, Chairman, President, and Chief Executive Officer, of the Company, certify, pursuant to 18 U.S.C.ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Quarterly Report on Form 10-QSB of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Digital Descriptor Systems, Inc. and will be retained by Digital Descriptor Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Date: November 14, 2006

/s/ Anthony Shupin

Anthony Shupin

President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

DIGITAL DESCRIPTOR SYSTEMS, INC.

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Digital Descriptor Systems, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Pellegrino, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C.ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Quarterly Report on Form 10-QSB of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Digital Descriptor Systems, Inc. and will be retained by Digital Descriptor Systems, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Date: November 14, 2006

/s/ Michael Pellegrino

Michael Pellegrino

Chief Financial Officer