UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.

                  For the fiscal year ended DECEMBER 31, 2005,

                                       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 0-24431

                            INKSURE TECHNOLOGIES INC.
                 (Name of Small Business Issuer in its Charter)

              DELAWARE                                    84-1417774
   (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                     Identification No.)


   1770 N.W. 64TH STREET, FORT LAUDERDALE, FL                33309
   (Address of principal executive offices)                (Zip Code)

                                 (954) 772-8507
                (Issuer's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

                                                    NAME OF EACH EXCHANGE
    TITLE OF EACH CLASS                             ON WHICH REGISTERED


           Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                                (Title of Class)

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [_]

Check whether the issuer : (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

                                 Yes [X] No [_]

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                 Yes [_] No [X]

Issuer's revenues for its most recent fiscal year.  $1,626,000

<PAGE>


The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of March 30,
2006, was $58,045,000.

As of March 30, 2006, 15,234,854 shares of the issuer's common stock, par value
$0.01 per share, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-KSB: certain information required in Part
III of this Annual Report on Form 10-KSB is incorporated from the issuer's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 7, 2006.

Transitional Small Business Disclosure Format (check one):

                                 Yes [_] No [X]

                                       ii

<PAGE>

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
PART I

ITEM 1.   DESCRIPTION OF BUSINESS                                           1
ITEM 2.   DESCRIPTION OF PROPERTY                                          10
ITEM 3.   LEGAL PROCEEDINGS                                                10
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              10

PART II

ITEM 5    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
          SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES             10
ITEM 6    MANAGEMENT'S DISCUSSION AND ANALYSIS                             13
ITEM 7    FINANCIAL STATEMENTS                                             27
ITEM 8    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE                                         27
ITEM 8A   CONTROLS AND PROCEDURES                                          27
ITEM 8B   OTHER INFORMATION                                                27

PART III

ITEM 9    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT                28
ITEM 10   EXECUTIVE COMPENSATION                                           28
ITEM 11   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AN
          MANAGEMENT AND RELATED STOCKHOLDER MATTERS                       28
ITEM 12   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                   28
ITEM 13   EXHIBITS                                                         28
ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES                           29

SIGNATURE PAGE                                                             30


                                       i
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     THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN
THIS FORM 10-KSB AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF INKSURE TECHNOLOGIES INC. (TOGETHER WITH OUR SUBSIDIARIES,
REFERRED TO IN THIS REPORT AS "WE," "US" AND "OUR") WITH RESPECT TO (I) OUR
FINANCING PLANS, (II) TRENDS AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF
OPERATIONS, (III) THE IMPACT OF COMPETITION, AND (IV) THE EXPANSION OF CERTAIN
OPERATIONS. INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT THE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE INFORMATION CONTAINED IN THIS
FORM 10-KSB, INCLUDING, WITHOUT LIMITATION, THE INFORMATION UNDER "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" AND
"DESCRIPTION OF BUSINESS," IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES. SEE "DESCRIPTION OF BUSINESS-RISK FACTORS-ALL
FORWARD LOOKING STATEMENTS SHOULD BE READ WITH CAUTION."

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

     We develop, market and sell customized authentication systems designed to
enhance the security of documents and branded products and to meet the growing
demand for protection from counterfeiting and diversion. In this context,
"counterfeit items" are imitation items that are offered as genuine with the
intent to deceive or defraud. "Diversion" (also termed "parallel trading" or
"gray market commerce") is the selling of goods (often genuine goods) in a
geographic market where both wholesale and retail prices are high while falsely
purchasing them for another market where wholesale prices are lower, thus taking
advantage of the price difference between the two markets. We operate within the
"authentication industry," an industry that includes a variety of firms
providing technologies and services designed to prevent the counterfeiting and
diversion of valuable documents and products. The World Customs Organization
estimates that the trade in fakes is currently worth about $512 billion, or 7
percent of the world's trade. In the United States, the Bureau of Customs and
Border Protection estimates that counterfeiting costs the United States $200
billion annually.

     Our products are based on two principal technologies - customizable
security inks that are suitable for almost every type of digital and impact
printing on a wide variety of surfaces or substrates (e.g., paper documents,
plastic identification cards, packaging materials and labels), and a
sophisticated "full-spectrum" reader that uses proprietary software to quickly
analyze marks printed with our specialty inks. Our security solutions are
considered to be covert because our specialty inks are indistinguishable from
standard non-security inks and are easily incorporated into variable and fully
personalized data on documents, products, product labels, packaging, and
designs.

     Our ink-based products provide a customized solution by creating a unique
chemical code for each product line or document batch that can only be
authenticated by our reader. We have applied for three patents covering various
methods of marking documents for the purpose of authentication and three patents
related to the radio frequency ("RFID") technology being developed by us. We are
also seeking protection under the Patent Cooperation Treaty. See "Description of
Business -- Emerging Technology" and" Description of Business -- Patents and
Proprietary Technology."

     We are currently working on the development of next-generation RFID
technology that is being designed to enable low-cost tagging of items. This RFID
technology is being designed to permit "no line of sight" identification and
will be suitable for a variety of applications, including authentication, supply
chain management , proof of ownership, and life cycle information. If
successfully developed, we believe that such technology could eventually replace
the familiar barcode technology and other electronic article surveillance
solutions currently available. See "Description of Business -- Research and
Development" and "Description of Business -- Emerging Technology."

     CORPORATE HISTORY

     We were incorporated under the laws of the state of Nevada on April 22,
1997 under the name "Lil Marc, Inc." We were incorporated as a development stage
enterprise in the baby products industry to develop, manufacture and market the
"Lil Marc", a plastic toilet training device for young boys. Pursuant to an
Agreement and Plan of merger, dated as of July 5, 2002, a wholly owned
subsidiary of Lil Marc, Inc., LILM Acquisition Corp., a Delaware corporation,
merged with and into InkSure Technologies Inc., a Delaware corporation, or
InkSure Delaware. InkSure Delaware was the surviving corporation in the merger
and became a wholly owned subsidiary of Lil Marc, Inc.


<PAGE>


     Pursuant to the merger agreement, each share of InkSure Delaware common
stock outstanding immediately prior to the effective time of the merger was
converted into the right to receive one share of our common stock. The total
number of issued and outstanding shares of our common stock was 11,982,166
immediately after giving effect to the merger and a reverse stock split that was
consummated on October 23, 2002.

     As a result of the merger, the former stockholders of InkSure Delaware
held, immediately after the merger, approximately 88.0% of the issued and
outstanding shares of our common stock; the remaining 12.0% of the issued and
outstanding shares of our common stock were held by the stockholders who held
our common stock immediately before the merger became effective. On a fully
diluted basis, the former holders of securities of InkSure Delaware held,
immediately after the merger, approximately 90.5% of the shares of Lil Marc,
Inc. common stock.

     Pursuant to the merger agreement, all outstanding options and warrants to
purchase shares of InkSure Delaware common stock were exchanged or converted
into options and warrants to purchase shares of our common stock on the same
terms and conditions as were in effect prior to the effective time of the
merger. The options and warrants issued with respect to such exchanged options
and warrants are exercisable for such number of shares of our common stock equal
to the number of whole shares of InkSure Delaware common stock subject to each
such exchanged option or warrant immediately prior to the effective time of the
Merger. The per share exercise price of options and warrants issued by us with
respect to the exchanged options and warrants remained unchanged from the per
share exercise price of the exchanged options and warrants. Upon consummation of
the merger, our board of directors and management resigned and were replaced by
InkSure Delaware's board of directors and management, and we began to carry on
InkSure Delaware's business activities.

     On October 28, 2002, we also filed an amendment of its Articles of
Incorporation to, among other things, change our name from "Lil Marc, Inc." to
"InkSure Technologies Inc." Effective on October 30, 2002, the OTC Bulletin
Board stock symbol for our common stock was changed from "LILM" to "INKS." We
conduct our operations with and through our direct and indirect subsidiaries,
InkSure Inc., a Delaware corporation formed in March 2000, IST Operating Inc., a
Delaware corporation formed in May 2000 (formerly known as InkSure Technologies
Inc. and referred to throughout this prospectus as InkSure Delaware), and
InkSure Ltd., which was formed in December 1995 under the laws of Israel. We
also have a subsidiary, InkSure RF Inc., a Delaware corporation formed in March
2000, which does not currently conduct any operations.

     On July 8, 2003, we reincorporated as a Delaware corporation by merging
with and into a newly formed, wholly owned subsidiary.

     MARKET OPPORTUNITY

     In general, brand owners that are victims of counterfeiting do not
publicize their losses, nor do they publish their expenditures related to
controlling the problem. In a survey conducted by the International Anti
Counterfeiting Coalition in the year 2000, Fortune 500 companies reported that
they spend an average of between $2 - $4 million per year to combat
counterfeiting and some reported spending up to $10 million.

     There are a growing number of companies, banks, organizations and other
entities that recognize, acknowledge and are able to quantify or estimate the
scope of their counterfeiting problem, and are willing to invest in security
solutions to combat them, and are potential customers for our products and
services. We believe that the number of entities willing to invest in security
solutions will grow as the magnitude of the problem continues to grow. In
addition, there has been an increase in regulatory and legislative efforts to
countermand counterfeiting, such as U.S. legislation and Federal Drug
Administration guidelines concerning the incorporation of counterfeit-resistant
tools into the packaging of U.S. prescription drugs.

     Once the end user has decided to implement a security plan and introduce
new security features or technology, there are various criteria by which the
selected technology will be measured. We believe that our products provide a
high level of security and flexibility, while remaining cost-effective. See
"Business -- Competition."


                                       2
<PAGE>


TRADITIONAL AUTHENTICATION TECHNOLOGIES

     Technologies used to authenticate and protect products and documents can be
divided into two general categories: overt and covert. Overt technologies are
visible to the naked eye and are typically used by the consumer to identify the
product or document as genuine. Holograms, intricate graphic design and color
changing inks are among the most common overt security features used in both
products and documents.

     Covert technologies are invisible and, historically, designed to be used by
investigators, customs officials and other law enforcement agents to verify
authenticity. There are numerous covert technologies currently in use in the
market, including specialty substrates (e.g., papers with security fibers or
magnetic threads) and in-product marking (e.g., tracers placed in fuels).
However, one of the most frequently used features for product and document
security is specialty ink for the obvious reason that ink is the main consumable
for printing on documents, packaging and labels.

     The rapid rise in counterfeiting and diversion, however, has led to the
need for increasingly sophisticated security techniques for companies and
organizations to mark and protect high-value products and documents.
Accordingly, the market for countermeasures to counterfeiting and diversion is
characterized by a constant inflow and introduction of new authentication
techniques as a result of rapid technological progress. Complex new technologies
that are difficult for counterfeiters to circumvent are in demand.

     Typically, currency and high value documents incorporate more than one
security feature (high denominations of United States currency have up to 20
security features). Brand owners are increasingly adopting this same strategy
and are using several security features simultaneously to make reproducing the
document or packaging increasingly difficult and costly for the counterfeiter.
In addition, layered security features provide continued protection for products
in the market even if one of the features is compromised.

INKSURE SOLUTIONS

     We believe that our authentication technology can be distinguished from
other authentication solutions, such as visible and invisible ultra-violet
marks, fluorescent inks, watermarks and fibers, optically variable inks, and
holograms, currently offered by our competitors because our solutions offer a
high level of security and flexibility while remaining cost-effective. Due to
the nature of our technology, which is based upon multi-disciplinary
technologies, including chemistry, printing, electro-optics and software, the
solution is customized for each customer.

          HIGH LEVEL OF SECURITY. Each security ink manufactured by us has a
     unique "signature" that is comprised of a variety of factors, including the
     amounts and the unique properties of the chemicals included in the ink, the
     type of ink, the ink color, the printing method and the substrate. Since
     the reader utilized by our solution reads a "full-spectrum" rather than
     sampling a specific point or points in a signature, a counterfeit item
     would have to replicate an entire unique signature - i.e., every variable
     upon which the signature depends - rather than merely replicating certain
     portions of the signature. In addition, because a coded ink's unique
     signature is comprised of various factors, with numerous possible
     permutations thereof, our inks are extremely difficult to reverse engineer.
     We believe that holograms, color changing inks and other more common overt
     security features are more easily replicated than our products. In
     addition, to thwart any counterfeiting attempts that successfully
     replicated a unique signature, we could alter any of the variables upon
     which a signature is comprised of and create an entirely new unique
     signature without significant expense.

          FLEXIBILITY. Our solution is highly flexible, applicable to almost
     every standard ink or toner used by standard printing devices. In addition,
     we believe that our specialty inks are suitable for printing on any type of
     surface or substrate for which digital and impact printing is suitable. Our
     readers are available either as hand-held devices designed for quick and
     accurate field inspection, or as a technology that can be integrated in
     existing terminals and readers (e.g., ATMs, MICR readers and access control
     systems) to allow automated identification and verification in mass
     quantities. According to the client's security needs, several different
     coded inks can be incorporated in a single product or document and the
     corresponding reader can be programmed to authenticate and verify each of
     the different codes - and indicate which code was verified.

          COST EFFECTIVE. Our technology provides a cost-effective solution to
     prevent counterfeiting and diversion because of our positive
     cost-performance ratio. In addition, because our readers are designed to
     detect even trace amounts of the specific chemical markers, our solutions
     provide a relatively high level of security, including through the use of
     chemicals, such as tagging agents, at reasonable incremental costs to our
     customers.


                                       3
<PAGE>


MARKETING AND BUSINESS STRATEGY

     Our business strategy utilizes a "razor / razor blade" approach with
respect to the sale of our readers and inks. We regard the selling of our
proprietary readers as infrastructure similar to a hand held razor, while our
specialty inks may be considered analogous to the blades of a razor that
represent continuing sales. The potential anti-counterfeit market segments for
our products can generally be divided into two major groups: documents (e.g.,
bank notes, checks, transportation and event tickets, pre-paid telephone cards,
identification cards, and passports) and brand products (e.g., pharmaceuticals,
software, automotive, multi-media, and apparel). We have entered into strategic
relationships with Sun Chemicals Group B.V., Merck KgaA, and H.W. Sands Corp. to
leverage the development, distribution and co-marketing of their security
products.

     We believe that the most receptive market segment for our authentication
applications - the middle and high-end of the security market - includes
customers who have experienced significant problems with counterfeiting and have
been unable to reduce or eliminate the effects of counterfeiting through the
authentication solutions that are more easily circumvented than our solutions.
In addition, we have targeted customers that need a covert security feature that
is extremely difficult to reverse engineer.

     More specifically, we have identified and targeted the following market
segments:

     o    PACKAGING. We believe our product may facilitate brand protection
          through use in 1st level (on the product), 2nd level (on the
          packaging) and 3rd level packaging (through the use of labels,
          stickers, etc.). We believe our products are suitable for a number of
          industries, including consumer goods (e.g., apparel, cosmetics,
          fragrances, software, tobacco and multi-media, including CDs and
          DVDs), pharmaceuticals, and industries that rely upon component parts
          (e.g., automotive, computer hardware).

     o    GAMES AND ENTERTAINMENT. Tickets and wrist bands for major sporting
          events and entertainment venues can be printed using our coded inks
          and authenticated at the entrance using either hand-held or stationary
          readers. Similarly, lottery tickets and gaming chips are subject to
          counterfeiting. Lottery tickets and gaming chips may be authenticated
          at the time of submission for payment.

     o    TRANSPORTATION. Both national and local transportation authorities
          issue travel passes, season tickets and single-use tickets, all of
          which are subject to counterfeiting.

     o    FINANCIAL DOCUMENTS. Historically checks and other financial documents
          have incorporated security features in the substrate or the
          pre-printed form, all in an effort to protect the fixed and variable
          data imprinted on the document. With our technology, both fixed and
          variable data can now be protected directly.

     o    GOVERNMENT IDENTITY DOCUMENTS. We believe that our ability to mark
          inkjet ink and thermal transfer ribbons and therefore provide
          authentication capabilities to the variable data on government
          identity documents such as passports, visas, drivers licenses, ID
          cards, birth certificates, and motor vehicle registrations is unique.
          We view these market segments as requiring a long-term marketing and
          selling process given the typical government bid process and cycles
          for initiating new features, as well as government cost constraints.

     o    RETAIL VOUCHERS AND GIFT CERTIFICATES. Retail establishments currently
          use printed vouchers, gift cards and gift certificates for increased
          sales. Certificates of Authenticity, which are printed documents that
          accompany a wide variety of retail goods ranging from software
          products to luxury goods are also an area of opportunity.

     o    TAX STAMPS. Government issued tax stamps for a variety of taxed items
          such as tobacco, wine, alcohol and export tax stamps offer
          opportunities for our authentication technology.


                                       4
<PAGE>


     We have focused the bulk of our initial efforts on market segments where we
have already achieved market penetration in actual sales and where we believe
sales potential is highest - packaging, financial documents, entertainment
(i.e., ticketing) and transportation. As a result of this focused strategy, we
have increased awareness of our products in these segments, established a
presence in targeted markets throughout the world, and formed strategic
alliances with companies that provide access to specific markets. See "Business
-- Sales and Marketing."

SALES AND MARKETING

     Initially, we relied solely on intermediaries to market and distribute our
products and services. However, we currently sell our products and services
through a combination of our own sales personnel, strategic alliances and
licenses with intermediaries. To date, we have established key strategic
alliances or valuable relationships with end-users.

     In March 2004 and August 2004 we entered into two sales agreements to
supply our authentication solutions to two separate customers in North America
for brand protection projects. Each project involves the protection of millions
of items using our coding solutions and handheld authentication readers, as well
as our quality assurance tools, which are used to ensure that our inks are
applied according to specifications. Revenues from these two agreements were
$616,000 and $1,187,000 for the fiscal years ended December 31, 2004 and 2005,
respectively, representing approximately 65% and 73% of our revenues for the
fiscal years ended December 31, 2004 and 2005, respectively.

     On June 9, 2003 we entered into a strategic marketing alliance with Sun
Chemical Group B.V., the world's largest manufacturer of printing inks. Under
such alliance, Sun Chemical worked with us to offer machine-readable ink-based
brand and document authentication solutions under the SunSure(TM) brand name.
This agreement is terminable by either party on 180 days' notice.

     On February 2, 2006, we announced that we are exploring the possibility of
entering into a new strategic alliance with H.W. Sands Corp., a leader in
bringing in new products and technologies to the identification, security and
financial transactions card markets. Under such an alliance, H.W. Sands Corp.
would work with us to offer CMRT (covert machine readable technology)
authentication solutions that will be marketed under the Sands-Secure(R) line of
security solutions. The details of this possible strategic alliance are subject
to further discussions between the parties.

     Although we intend to continue marketing our products and services through
licensees and strategic alliances, we believe that expanding our customer base
through our direct sales personnel and maintaining a direct relationship with
the end user are necessary elements to achieving deep market penetration.

CURRENT PRODUCTS

     We have created "Solution Packages" designed to meet various market needs.
These packages rely primarily on our core technology, best described as "line of
sight authentication" (i.e., electro-optical detection and analysis of organic
and inorganic materials). The micro-processing unit within the readers uses a
proprietary algorithm to authenticate genuine codes, as well as differentiate
between various codes.

     We have designed several generic readers that provide different levels of
security for the various target applications. For specific projects, due to the
flexibility upon which the technology is built, we customize the generic readers
to fit customer needs according to size and speed. Our current line of products,
which support our customizable solutions, include the following:

o    SIGNASURE(TM) -- ADVANCED AUTHENTICATION READERS FOR SMART PROTECTION

     We believe that our new SignaSure(TM) series features advanced readers for
fast, on-the-spot authentication of sensitive documents and branded products.
The SignaSure(TM) readers are equipped with technology to provide users with
maximum value by combining high security, exceptional functionality and cost
effective solutions. The readers utilize proprietary algorithms and unique
electro-optical techniques to authenticate covert SmartInk(TM) codes, which are
created by mixing special chemical markers (taggants) into commercial inks,
coatings and other media, and applying them, using standard printing processes,
onto documents, tickets, product packaging and labels.


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o    SORTSURE(TM) -- IN-LINE VERIFICATION FOR HIGH-SPEED PROCESSING, QUALITY
     CONTROL AND AUDIT FUNCTION

     Our SortSure(TM) readers provide high-speed authentication and/or quality
control in mass quantities. The embedded OEM kits enable seamless integration
within existing equipment, whether backroom processing units, printing presses
or inspection systems in distribution/return centers. One model incorporates a
mechanized traversing arm for real-time quality control readings over web-based
printing presses. All models utilize proprietary technology and unique
electro-optical techniques to measure and/or authenticate covert SmartInk(TM)
codes.

o    SMARTINK(TM) -- MACHINE READABLE AUTHENTICATION CODES FOR ADVANCED SECURITY

     Our SmartInk(TM) codes are secure encoded inks and coatings that provide
authentication solutions ranging from a definitive "yes/no" verification to
multi functional systems that allow for item identification, track & trace
functionality, real-time encoding and debiting applications. SmartInk(TM)codes
are created by mixing special chemical markers (taggants) into commercial inks,
coatings and other media, and applying them, using any standard printing
process, onto documents, tickets, product packaging and labels. All SmartInk(TM)
marker/carrier mixtures are allocated with covert signatures, that, while being
completely invisible and protected from reverse-engineering attempts, are easily
detected by our line of readers, including the handheld field verification
SignaSure(TM) readers and the high speed SortSure(TM) validator.

o    HOLOSURE(TM) -- COMBINING COVERT & OVERT SECURITY: A MULTI-TIER PROTECTION

     The HoloSure(TM), Machine-Readable Hologram System consists of: a
Holographic image and a machine readable, coding. The HoloSure(TM)system
combines the benefits of both systems into one feature that contains multiple
levels of security.

     The machine-readable element is a unique fingerprint signature of a highly
secure code, incorporated in the hologram during standard production. The
combination of this with an advanced decoding system, and processing multiple
and changeable parameters provides a high level of protection.

o    TRANSURE(TM) -- AUTOMATIC ANTI-COUNTERFEITING PUBLIC & MASS TRANSIT TICKETS

     We believe that our high-speed and automated TranSure(TM) Security Tickets
system improves travelers' satisfaction, enhances security, curbs revenue loss
and provides new earning streams. This tickets system has numerous applications
such as Mass Transit (bus, rail and tram) System Entry, Travel and Flight
Tickets, Automatic Fare Collection (AFC) Systems and Access Control Gate (ACG)
Systems.

     We have developed an advanced automatic secure admission tickets and passes
system for public transportation and mass-transit systems to prevent the loss of
income caused by counterfeit tickets. This system contains features such as
invisible coded ink. Our electro-optic detector can only decode these invisible
features. Our unique security tickets system is highly flexible and customizable
and therefore, can protect all types of tickets: paper cards, PVC, PET, Teslin,
magnetic cards, smart cards, contactless smart cards, etc. Our machine-readable
encoded tickets ensure maximum security and are processed in fractions of a
second, which allows mass-quantity processing and on spot processing (such as at
the point-of-entrance to a terminal).

EMERGING TECHNOLOGY

     We also plan to develop products that permit high volume tagging and
authentication without requiring a line of sight. We are currently working on
the development of next-generation chipless label technology for low cost RFID
applications. This RFID technology is being designed to permit "no line of
sight" identification and will be suitable for a variety of applications,
including authentication, supply chain management, proof of ownership, and life
cycle information.

     The underlying concept of our new technology is to utilize the rules of
diffraction phenomena and image/pattern recognition tools as the basis for
ultra-low-cost passive chipless RFID tags. The existence of diffraction has
limited the extent to which symbols or images (such as barcodes) can be
compressed. When one symbol is placed too near another, its waves interfere with
those of its neighbor ("diffraction") and vice versa, making it impossible to
accurately read either bar. This limitation has restricted the density with
which symbol-based code can be printed and, therefore, the minimum size required
for machine-readable codes. By extension, this has also limited the number of
digits which can be used in barcodes, for example.


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<PAGE>


     Current technologies do not take into account that it is possible to place
two-dimensional objects within extremely high density, yet still use deductive
methods to identify them. Our approach devises a code of simple objects,
together with algorithms for interpreting the phenomena produced when they are
printed close to each other. Although the labels produced using this method are
two-dimensional, the phenomena itself produces a three-dimensional effect. In
that way, it is possible to derive the exact position of the origin layout, even
if behind an obstacle. This capability minimizes the challenge of correctly
identifying objects that are located directly behind other objects
("collision").

     Our RFID technology is in the initial development phase, and our goal is to
complete development with a view to launching our chipless label system by 2007.
We aim to include, without limitation, the following RFID deliverables:

     o    Fixed and hand-held readers;

     o    Specialized conductive inks;

     o    Unique symbology; and

     o    Printer quality control systems.

     If successfully developed, we believe that such technology could eventually
replace the familiar barcode technology and other electronic article
surveillance solutions that are currently available.

COMPETITION

     We are aware of other technologies, both covert and overt surface marking
techniques, requiring decoding implements or analytical methods to reveal
relevant information. These technologies are offered by other companies for the
same anti-counterfeiting and anti-diversion purposes that we market our
products. Our competitors, many of whom have greater financial resources than
us, include:

     o    Technology providers that typically offer a specific range of security
          solutions.

     o    Security printers, which are generally well established companies
          whose core business is printing. Security printing tends to be
          segregated from the bulk of the printing industry, implementing
          fundamentally the same technologies as those generally used by the
          printing industry but with specific 'twists' that are more complex,
          difficult to access or expensive to use.

     o    Systems Integrators, which have often evolved from other sectors in
          the printing industry, mainly security print manufacturers, technology
          providers or packaging and label manufacturers. These companies offer
          a wide range of security solutions, enabling them to offer a complete
          suite tailored to the customer's specific needs.

     o    Security consultancy groups, which offer a range of technologies from
          several technology providers and tailor a specific solution to
          end-customers, based on a preliminary process involving risk analysis
          and characterization of a comprehensive organizational security
          program.

     Competition in our markets is based upon price, service, quality,
reliability and the ability to offer secure transaction products and services
with the flexibility to meet a customer's particular needs. We believe our
technology provides a unique and cost-effective solution that has certain common
competitive advantages over other technologies. However, even technologies that
are not as secure or reliable as our products may be competitive if they are
marketed effectively and may also compete on the basis of other criteria, such
as price. We believe that prospective customers typically consider the following
criteria when choosing a security technology:

     o    Level of security (e.g., multi-layer or single layer solution, covert,
          overt);

     o    Ability to support or be integrated with existing production,
          logistical processes and equipment;


                                       7
<PAGE>


     o    Ease of utilization/verification;

     o    Ability to extend the use for various organizational uses (e.g.,
          alteration, simulation, counterfeiting, diversion, supply chain
          management);

     o    Safety and durability (i.e., ability to withstand environmental
          factors such as temperature, humidity, sunlight);

     o    Consistency and integrity of solution;

     o    Need for protection of variable vs. fixed data;

     o    Flexibility of code location (e.g., location on package, on product,
          on different substrates);

     o    In the case of overt features, attractiveness to consumer (i.e., added
          marketing value); and

     o    Conclusiveness (i.e., Can the technology provide conclusive evidence
          of counterfeiting).

     Strong competitive pricing pressures exist, particularly with respect to
products whose customers seek to obtain volume discounts and economies of scale.
In addition, alternative goods or services, such as those involving electronic
commerce, could replace printed documents and thereby also adversely affect
demand for our products.

RESEARCH AND DEVELOPMENT

     The technology and know-how upon which our products are based are subject
to continued development of materials and processes to meet the demands of new
applications and increased competition. We conduct most of our research and
development activities at our facility in Rehovot, Israel. We believe our future
success depends upon our ability to identify the requirements for future
products and product enhancements, and to define, implement and successfully
develop the technologies, including, without limitation, our next generation
RFID technology, needed to deploy those products and product enhancements.

     We pursue a process-oriented strategy which includes efforts aimed at
developing new or enhanced classes of products and services. As part of this
strategy, we work closely with current and potential customers, distributors and
other members of the industry to identify market needs and define appropriate
product specifications. Our research and development expenditures totaled
approximately $775,000 and $875,000 for fiscal years 2004 and 2005,
respectively.

MANUFACTURING AND PRODUCTION

     The principal raw materials used by us for the manufacturing of our
specialty inks include trace amounts of various chemicals and inks suitable for
various printing methods. We believe that there are many sources for both these
chemicals and the printing inks, which we currently purchase from major
suppliers in Europe. Some of these chemicals, however, are considered rare, with
prices in excess of $20,000 per pound for certain chemicals. We do not believe
that we will have difficulty in continuing to procure these chemicals and
printing inks given the number of suppliers, including, without limitation,
suppliers located in the United States, Europe and Japan, from whom they can be
procured. We currently subcontract the manufacturing of our specialty inks to
various ink suppliers, who incorporate chemicals provided by us into the inks.
To maintain the integrity and security of our specialty inks, we do not disclose
the precise chemical ingredients to these ink suppliers.

     The principal raw materials used by us for the manufacturing of our readers
include electronic components, optic components, plastics and other raw
materials. We believe that these materials are in good supply and are available
from multiple sources. We currently utilize subcontractors for the manufacturing
of our readers.

PATENTS AND PROPRIETARY TECHNOLOGY

     Although our policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of our
business, and although we will continue to seek the supplemental protection
afforded by patents, we generally consider protection of our products, processes
and materials to be more dependent upon proprietary knowledge, know-how and
rapid assimilation of innovations than patent protection.


                                       8
<PAGE>


     We currently hold one pending patent in the United States and we have been
issued two patents in Israel relating to our technology of marking documents for
the purpose of authentication.

     With respect to the RFID technology being developed by us, we have applied
for four patents: we have been issued patents for our first application in each
of the United States, France, Germany, Switzerland and the United Kingdom; we
have been issued a patent in the United States for our second application and
hold one pending patent before the European Patent Office; we have been issued a
patent in the United States for our third application and we hold one pending
patent before the European Patent Office; and we have only recently made an
application before the United States Patent and Trademark Office with respect to
our fourth patent application.

     We require our employees, consultants and advisors to execute
confidentiality agreements upon the commencement of any employment or consulting
relationship with us. Each agreement provides that all confidential information
developed or made known to the individual during the course of the relationship
will be kept confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions conceived by an individual will be the exclusive property of us,
other than inventions unrelated to our business and developed entirely on the
employee's own time. There can be no assurance, however, that these agreements
will provide adequate protection or remedies for misappropriation of our trade
secrets in the event of unauthorized use or disclosure of such information or
that an independent third party will not develop functionally equivalent
technology.

     Our patent position is uncertain and may involve complex legal and factual
issues. Consequently, we do not know whether our patent applications will result
in the issuance of any patents, or whether patents, if issued, will provide
significant proprietary protection or will not be circumvented or invalidated.
Since patent applications are maintained in secrecy until patents issue, and
since publications of discoveries in scientific or patent literature tend to lag
behind actual discoveries by several months, we cannot be certain that it was
the first creator of inventions covered by pending patent applications or that
it was the first to file patent applications for such inventions. Moreover, we
may have to participate in interference proceedings declared by the United
States Patent and Trademark Office or other patent offices to determine the
priority of inventions, which could result in substantial cost to us.

GOVERNMENT REGULATION

     Our scanning device and the next-generation radio frequency technology
scanning equipment must comply with the regulations of the United States Federal
Communications Commission (the "FCC"), which may require certification,
verification or registration of the equipment with the FCC. Certification and
verification of new equipment requires testing to ensure the equipment's
compliance with the FCC's rules. In addition, the equipment must be labeled
according to the FCC's rules to show compliance with these rules. Electronic
equipment permitted or authorized to be used by the FCC through our
certification or verification procedures must not cause harmful interference to
licensed FCC users, and it is subject to radio frequency interference from
licensed FCC users.

EMPLOYEES

     As of March 30, 2006, we had 12 employees located in Israel, including
eight engineers, three management and administrative personnel, and one
operations personnel. In addition, as of March 30, 2006, we had eight employees
located in the United States, one of whom is a member of our management, one of
whom manages our operations in the United States, with the remaining three being
sales, marketing and customer support personnel. We consider our relations with
our employees to be satisfactory. We believe our future will depend in large
part on our ability to attract and retain highly skilled employees.

     The employees of InkSure Ltd. are entitled to "Dmey Havra'a" as provided in
a Collective Bargaining Agreement to which the General Labor Union of the
Workers in Israel is a party. Dmey Havra'a is an employee benefit program
whereby employees receive payments from their employer for vacation. In
addition, InkSure Ltd. pays a monthly amount equal to 14.53% of the salary of
each employee to an insurance policy, pension fund or combination of both,
according to the request of such employee. Each employee pays a monthly amount
to such insurance policy equal to 5% of such employee's salary. InkSure Ltd.
pays a monthly amount up to 7.5% of each employee's salary to an educational
fund in the name of such employee. Each employee pays a monthly amount to such
fund equal to 2.5% of such employee's salary. Our wholly owned subsidiary,
InkSure Ltd. makes cars available to some employees for their exclusive use.
InkSure Ltd. pays all costs associated with these cars, whether fixed or
variable, including without limitation, fuel, repairs and insurance.


                                       9
<PAGE>


ITEM 2. DESCRIPTION OF PROPERTY.

     We maintain our executive offices in approximately 2,000 square feet of
space that is located in Fort Lauderdale, FL pursuant to a lease which expires
in February 2007. Our monthly lease payments are approximately $2,800 per month.
We maintain our research and development facilities in Rehovot, Israel. The
facilities we lease in Israel are approximately 1,300 square feet pursuant to a
lease expiring in September 2006. Monthly lease payments for such facility are
approximately $3,500 per month.

ITEM 3. LEGAL PROCEEDINGS.

     On December 12, 1999, Secu-Systems filed a lawsuit with the District Court
in Tel Aviv-Jaffa against Supercom Ltd. (InkSure Delaware's former parent
company) and InkSure Ltd. seeking a permanent injunction and damages. The
plaintiff asserted in its suit that the printing method applied to certain
products that have been developed by InkSure Ltd. constitutes, INTER ALIA: (a)
breach of a confidentiality agreement between the plaintiff and Supercom; (b)
unjust enrichment of Supercom and InkSure Ltd.; (c) a breach of fiduciary duties
owed to the plaintiff by Supercom and InkSure Ltd.; and (d) a tort of
misappropriation of trade secret and damage to plaintiff's property. As part of
its complaint, Secu-Systems sought, among other things, an injunction and a 50%
share of profits from the printing method at issue.

     On March 15, 2006, the court rendered a decision (i) denying the claim for
breach of contract; (ii) finding that there was a misappropriation of a trade
secret, but not assessing any damages with respect thereto; (iii) requiring the
defendants to cease all activity involving the use of any confidential
information; and (iv) awarding the plaintiff reimbursement of the costs of the
litigation in the amount of NIS 130,000 (approximately $28,000), plus interest
and VAT, which the defendants intend to split equally.

     We do not use any of the information that was alleged to be confidential in
our current products. Accordingly, we do not believe that the court decision
will have any significant impact on our business going forward.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended December 31, 2005.

                                    PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ISSUER PURCHASES OF EQUITY SECURITIES.

PRICE RANGE OF COMMON STOCK

     The following table sets forth, for the fiscal periods indicated, the high
and low bid prices of a share of common stock as reported by the Over The
Counter Bulletin Board under the symbol "INKS.OB" for the periods indicated.
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.

                                                 HIGH            LOW
                                                 ----            ---
FISCAL YEAR 2004
      1st Quarter                               $1.20           $0.51
      2nd Quarter                               $1.30           $0.77
      3rd Quarter                               $1.80           $0.98
      4th Quarter                               $1.80           $1.20

FISCAL YEAR 2005
      1st Quarter                               $1.77           $1.25
      2nd Quarter                               $2.21           $1.20
      3rd Quarter                               $4.17           $2.20
      4th Quarter                               $4.03           $2.55

FISCAL YEAR 2006
      1st Quarter (through March 30, 2006)      $3.90           $1.95

                                       10
<PAGE>

     As of March 30, 2006, the high and low bid prices per share of common stock
as reported by the Over the Counter Bulletin Board under the symbol "INKS.OB"
were $3.870 and $3.750, respectively, and there were approximately 63 holders
of record of the common stock.

     We have not paid dividends on the common stock since inception and do not
intend to pay any dividends to our stockholders in the foreseeable future. We
currently intend to retain earnings, if any, for the development of our
business. The declaration of dividends in the future will be at the election of
our board of directors and will depend upon our earnings, capital requirements,
financial position, general economic conditions, and other factors the board of
directors deem relevant.

EQUITY COMPENSATION PLAN INFORMATION

     The following table provides information about shares of our common stock
that may be issued upon the exercise of options and warrants under all of our
existing compensation plans as of December 31, 2005. Our stockholder approved
equity compensation plans consist of the 2002 Stock Option Plan. We have a
number of options and warrants which were granted pursuant to equity
compensation plans not approved by security holders and such securities are
aggregated in the table below.


<TABLE>
<CAPTION>
                                                                                        NUMBER OF SECURITIES
                                                                                      REMAINING AVAILABLE FOR
                       NUMBER OF SECURITIES TO BE                                   FUTURE ISSUANCE UNDER EQUITY
                        ISSUED UPON EXERCISE OF        WEIGHTED-AVERAGE EXERCISE   COMPENSATION PLANS (EXCLUDING
                     OUTSTANDING OPTIONS, WARRANTS       PRICE OF OUTSTANDING         SECURITIES REFLECTED IN
PLAN CATEGORY                 AND RIGHTS            OPTIONS, WARRANTS AND RIGHTS           COLUMN (A))
-------------                 ----------            ----------------------------           -----------
                                  (A)                              (B)                          (C)
<S>                            <C>                                <C>                        <C>
Equity
compensation plans
approved by
security holders               1,973,025                          $0.985                     1,526,975
Equity
compensation plans
not approved by
security holders                 806,241                          $1.215                             0
                               ---------                                                     ---------
       TOTAL                   2,779,266                                                     1,526,975
</TABLE>

     We have authorized the issuance of equity securities under the compensation
plans described below without the approval of stockholders. No additional
options, warrants or rights are available for issuance under any of these plans,
except for additional shares which may become purchasable under warrants with
anti-dilution protection as noted below. We have either already registered or
agreed to register for resale the common stock underlying all of these plans
(except for the last bullet point listed below).

     o    Commonwealth Associates, L.P. warrants, dated July 5, 2002, July 31,
          2002 and September 6, 2002: We issued warrants to purchase shares of
          InkSure Delaware common stock in connection with Commonwealth's role
          as placement agent in a private placement of InkSure Delaware's
          securities. The warrants were to purchase an aggregate of 550,933
          shares of InkSure Delaware common stock at an exercise price of $1.61
          per share. In connection with the merger of InkSure Delaware with our
          wholly owned subsidiary, these warrants to purchase shares of InkSure
          Delaware common stock were converted into warrants to purchase shares
          of our common stock. As of 12/31/2005, warrant holders had exercised
          273,161 warrants.


                                       11
<PAGE>


     o    Elie Housman option, dated February 6, 2002: We issued an option to
          purchase up to 478,469 shares of InkSure Delaware common stock at an
          exercise price of $0.966 per share, with an expiration date of
          February 6, 2009. In connection with the merger of InkSure Delaware
          with our wholly owned subsidiary, these options to purchase shares of
          InkSure Delaware common stock were converted into options to purchase
          shares of our common stock.

     o    March 15, 2005 warrant issued to Mr. Jerry Falkner: We issued a
          warrant to Mr. Falkner to purchase up to 50,000 shares of our common
          stock in connection with services he rendered to us. The warrant will
          expire in 10 years and has an exercise price of $1.40 per share.

     o    The Company finalized the validity of the issuance of an option to
          purchase 300,480 shares of InkSure Delaware common stock that was
          issued prior to the reverse acquisition merger at an exercise price of
          $ 0.50 per share. This option will be converted into an option to
          purchase shares of our common stock.

RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES.

     We consummated the following equity transactions, each exempt from the
registration requirements under Section 4(2) and Regulation D of the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder:

SEPTEMBER 2002 PRIVATE PLACEMENT OF UNITS

     In the third quarter of the fiscal year ended December 31, 2002, InkSure
Delaware received gross proceeds of $6,700,000 in three tranches, with the third
tranch closing on September 6, 2002, from the private sale to investors of 67
units, with each unit consisting of 62,112 shares of InkSure Delaware common
stock and a five-year warrant to purchase 21,739 shares of InkSure Delaware
common stock at a price of $2.17 per share. In the aggregate this represented a
sale to the investors of 4,161,505 shares of common stock and warrants to
purchase 1,456,526 shares of common stock, which at the time represented
approximately 43% of InkSure Delaware's outstanding common stock on a fully
diluted basis. In connection with the merger of InkSure Delaware with our wholly
owned subsidiary, all of the shares of InkSure Delaware common stock issued in
the private placement were exchanged for shares of our common stock and all
warrants to purchase shares of InkSure Delaware common stock were converted into
warrants to purchase shares of our common stock. Commonwealth Associates, L.P.
acted as the placement agent in such private placement.

     In connection with the September 2002 private placement, InkSure Delaware
paid Commonwealth Associates, L.P., a registered broker-dealer, a $569,500 cash
fee and issued three five-year warrants to purchase an aggregate of 550,933
shares of InkSure Delaware common stock at a price of $1.61 per share. In
connection with the merger of InkSure Delaware with our wholly owned subsidiary
these warrants to purchase shares of InkSure Delaware common stock were
converted into warrants to purchase shares of our common stock. In December
2002, Commonwealth distributed these warrants to certain of its employees and
affiliates.

APRIL 2004 PRIVATE PLACEMENT OF UNITS

     On April 8, 2004, we closed the sale of $1,295,000 of units in a private
placement to accredited investors, at a price per unit equal to $0.68, which was
85% of the average of the last reported bid and ask prices for the 30 business
days prior to the date of the closing of such private placement. Each unit sold
consisted of: (i) one share of our common stock, and (ii) a five-year warrant to
purchase one share of our common stock at an exercise price of $1.00 per share.

JULY 2004 PRIVATE PLACEMENT

     On July 19, 2004 we closed a private placement of $1,125,000 of shares of
our common stock to accredited investors at the price of $1.00 per share.

MARCH 2005 WARRANT ISSUANCE

     On March 15, 2005, in connection with services rendered to us by Mr.
Jerry Falkner, we issued a warrant to Mr. Falkner to purchase up to 50,000
shares of our common stock. The warrant will expire in 10 years and has an
exercise price of $1.40 per share.


                                       12
<PAGE>


SEPTEMBER 2005 PRIVATE PLACEMENT OF CONVERTIBLE NOTES

     On September 30, 2005, we completed a private placement of convertible
notes in the aggregate principal amount of $6,000,000, pursuant to the terms of
a Securities Purchase Agreement as of such date between us and certain investors
listed on the schedule of buyers attached thereto. All of such investors were
"accredited" as such term is defined under Rule 506 under the Securities Act of
1933. The Irrevocable Trust of James E. Lineberger u/a 12/17/98, affiliated with
James E. Lineberger, who is also a member of our Board of Directors, purchased
$300,000 of the convertible notes. The private placement resulted in gross
proceeds of $6,000,000 before placement agent fees and expenses associated with
the transaction.

     The convertible notes issued by us in the private placement are unsecured
and will become due on September 30, 2010, and may be extended at the option of
the investors in certain circumstances. Prior to maturity, the convertible notes
will be interest-only, with interest payments due quarterly at the rate of 4%
per year.

     The convertible notes are convertible initially into 2,000,000 shares of
our common stock at an initial conversion price per share of $3.00, subject to
full ratchet anti-dilution protection with respect to any future stock issuances
below such conversion price. For the first 18 months following the effectiveness
of the registration statement covering the shares of common stock underlying the
convertible notes (which was declared effective by the Securities and Exchange
Commission on January 24, 2006), the investors will have the right to
participate up to one-third with any subsequent equity or equity-linked capital
raising by us.

     We have the right, in our sole discretion, to require that all of the
outstanding convertible notes be redeemed at a price equal to 125% of the sum of
(i) the remaining principal, (ii) accrued and unpaid interest with respect to
such principal, and (iii) accrued and unpaid late charges with respect to such
principal and interest, if a merger or acquisition, pursuant to which holders of
common stock are to receive consideration consisting solely of cash, is
consummated at any time while the convertible notes remain outstanding and
certain other conditions are met. Furthermore, the anti-dilution protection and
participation right outlined in the preceding paragraph will terminate if we are
acquired by a publicly traded corporation having an equity market capitalization
exceeding $150,000,000 and certain other conditions are met.

     We may require the investors to convert all or any portion of the
convertible notes into shares of common stock if the volume weighted average
price of the common stock exceeds (i) $6.50 for any 20 trading days in any 30
consecutive trading day period after September 30, 2006 or (ii) $5.50 for any 20
trading days in any 30 consecutive trading day period after September 30, 2007,
and certain other conditions are met.

     No indebtedness, except Senior Permitted Indebtedness (as defined in the
Securities Purchase Agreement), will be senior to any indebtedness under the
convertible notes. The agreements also include certain covenants, including
covenants prohibiting us, subject to certain exceptions, from incurring debt,
unless such debt does not, as of the date on which it is incurred, exceed three
times LTM EBITDA. The convertible notes also include covenants against paying
dividends, making redemptions, and incurring liens, subject to certain
exceptions.

     The investors were granted the option to invest an additional $1,250,000
through the purchase of additional convertible notes at a conversion price of
$3.60 per share.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.

     In this section, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," references to "we," "us," "our," and
"ours" refer to InkSure Technologies, Inc. and its consolidated subsidiaries.

     The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
included in this report. This discussion contains certain forward-looking
statements that involve substantial risks and uncertainties. When used in this
report the words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to our management or us are intended to identify such
forward-looking statements. Our actual results, performance or achievements
could differ materially from those expressed in, or implied by, these
forward-looking statements. Historical operating results are not necessarily
indicative of the trends in operating results for any future period.


                                       13
<PAGE>


OVERVIEW

     We specialize in comprehensive security solutions, designed to protect
branded products and documents of value from counterfeiting, fraud, and
diversion. By creating "Smart Protection" systems from proprietary
machine-readable authentication technologies, we help companies and
organizations worldwide regain control over their most valuable assets, their
products, their reputation and their revenues. We employ a team of experts in
the fields of material science, electro-optics and software. We utilize
cross-disciplinary technological innovations to implement customized and cost
efficient security systems for data and asset integrity within the customer's
existing infrastructure and environment.

     Our SmartInkTM solutions enable authentication and tracking of documents
and products by adding special chemical markers to standard inks and coatings.
The combination of markers, inks and materials produce electro-optic
"signatures", unique codes that are seamlessly incorporated into the printed
media used by the customer. Proprietary computerized readers, available in
hand-held, stationary and modular kit configurations, quickly verify these codes
by manual or automatic operation. By focusing on customer driven solutions, we
are able to offer added value through enhanced reader functionality, including
high-speed automatic sorting, one-to-many code matching, first and second level
track and trace, code activation at the point of distribution and detrimental
authentication for debit applications. The inherent flexibility of our
technology also enables overlaying the machine-readable codes onto holograms and
other overt features, resulting in multi-layered security that is both effective
and economical.

     FACTORS AFFECTING FUTURE RESULTS

     INDUSTRY AND ECONOMIC FACTORS: Our operations and earnings are affected by
local, regional and global events or conditions that affect supply and demand
for products and services. These events or conditions are generally not
predictable and include, among other things, general economic growth rates and
the occurrence of economic recessions; the development of new supply sources;
supply disruptions; technological advances, including advances in security
technology and advances in technology relating to security usage; changes in
demographics, including population growth rates and consumer preferences; and
the competitiveness of alternative security sources or product substitutes.
Currently, the economy in general is suffering. As a result, raising capital has
become extremely difficult, and there is pressure on the pricing of our products
and services.

     COMPETITIVE FACTORS: The brand and document protection industry is
competitive. There is competition with the traditional document protection
suppliers (mainly protection for bank notes) and also with other emergent "next
generation" technology providers. We compete with other firms in the sale and
purchase of various products and services in many national and international
markets and employ all methods of competition, which are lawful and appropriate
for such purposes. We believe that a key component of our competitive position
is our technology.

     POLITICAL FACTORS: Our operations and earnings have been, and may in the
future be, affected from time to time in varying degree by political instability
and by other political developments and laws and regulations, such as forced
divestiture of assets; restrictions on production; imports and exports; war or
other international conflicts; civil unrest and local security concerns that
threaten the safe operation of our facilities, particularly those that are
located in Israel; price controls; expropriation of property; and the
cancellation of contract rights. Both the likelihood of such occurrences and
their overall effect upon us vary greatly from country to country and are not
predictable.

     PROJECT FACTORS: In addition to the factors cited above, the advancement,
cost and results of particular projects depend on the outcome of negotiations
with potential partners, governments, suppliers, customers or other third
parties; changes in operating conditions or costs; and the occurrence of
unforeseen technical difficulties.

     RISK FACTORS: See "Risk Factors" for discussion of the impact of market
risks, financial risks and other uncertainties.

     REVENUES

     We are currently concentrating on entering and implementing large-scale
projects. These potential contracts are subject to a long sales cycle and the
timetable is lengthy for entering and implementing such projects. These projects
involve high volume sales through multiple-year sales contracts. In the 2005
fiscal year, we have completed several successful field trials related to new
projects. In the 2005 fiscal year, approximately 75% of our revenues were earned
from customers located in the United States.


                                       14
<PAGE>


     COSTS AND OPERATING EXPENSES

     Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expenses.

     Our cost of revenues consists primarily of materials including taggants and
electronic and optical parts, sub-contractors and compensation costs for our
operations staff.

     Our research and development expenses consist primarily of costs associated
with development of new generic products. These expenses may fluctuate as a
percentage of revenue depending on the projects undertaken during the reporting
period. Since our inception, we have expensed all research and development costs
in each of the periods in which they were incurred.

     Our selling and marketing expenses consist primarily of costs associated
with our direct sales force that have been incurred to attract potential
business customers, professional advisors and commissions. We anticipate that as
we add new customers we will be able to spread these costs over a larger revenue
base and accordingly improve our operating margins.

     Our general and administrative expenses consist primarily of costs related
to compensation and employees benefits of our management (including the costs of
directors' and officers' insurance), legal and accounting fees, as well as the
expenses associated with being a publicly traded company.

     We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to December 31, 2005. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.

CRITICAL ACCOUNTING POLICIES

     Our financial statements are prepared in accordance with US GAAP. The
significant accounting policies followed in the preparation of the financial
statements, applied on a consistent basis and which have been prepared in
accordance with the historical cost convention, are set forth in Note 2 to the
Consolidated Financial Statements.

     Of these significant accounting policies, certain policies may be
considered critical because they are most important to the portrayal of our
financial condition and results, and they require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

     REVENUE RECOGNITION. Revenues from product sales are recognized in
accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements", or SAB No. 104, when delivery has occurred, persuasive
evidence of an agreement exists, the vendor's fee is fixed or determinable, no
further obligation exists and collectability is probable. Delivery is considered
to have occurred upon shipment of products. When a right of return exists, we
defer revenues until the right of return expires. We do not grant a right of
return to our customers.

     Revenues from certain arrangements may include multiple elements within a
single contract. The Company's accounting policy complies with the provisions of
Emerging Issues Task Force Issue 00-21, "Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"), relating to the separation of multiple
deliverables into individual accounting units with determinable fair value.

     In cases where the Company has partial delivery at the cut off dates and no
fair value exist for the undelivered elements revenues are being deferred and
recognized only at the point where the entire arrangement has been delivered.

     INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined on a "first in, first out" basis. We regularly review inventory
values and quantities on hand and write down our inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. In making the determination, we consider future
sales of related products and the quantity of inventory at the balance sheet
date, assessed against each inventory item's past usage rates and future
expected usage rates. Changes in factors such as technology, customer demand,
competing products and other matters could affect the level of our obsolete and
excess inventory in the future.


                                       15
<PAGE>


     OTHER ACCRUED EXPENSES. We also maintain other accrued expenses. These
accruals are based on a variety of factors including past experience and various
actuarial assumptions and, in many cases, require estimates of events not yet
reported to us. If future experience differs from these estimates, operating
results in future periods would be impacted.

     DEFERRED INCOME TAXES. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets and any
valuation allowance recorded against net deferred tax assets. Due to the fact
that the Company has history of losses it is likely that the deferred tax will
not be realized, therefore a valuation allowance of approximately $3,771,000 has
been recorded as of December 31, 2005.

A.   RESULT OF OPERATIONS

     The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes. The financial statements have been prepared in
accordance with US Generally Accepted Accounting Principles, or GAAP.

     This discussion contains forward-looking statements that involve risks and
uncertainties.

     Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors.

     The following table sets forth, for the periods indicated, certain
financial data expressed as a percentage of total revenue:

                            YEAR ENDED DECEMBER 31,

                               2005       2004
                               ----       ----
Revenues                        100%       100%
Cost of Revenues                 48         43
                               ----       ----
Gross profit                     52         57

Operating expenses:
Research and development         54         81
Selling and marketing            95        130
General and administrative       36         62
Amortization expenses             3
                               ----       ----
Total operating expenses        188        273

Operating loss                 (136)      (216)
Financial income, net             0          0
                               ----       ----
Net loss                       (136)      (216)
                               ====       ====

                                       16
<PAGE>


YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

     REVENUES. Revenues consist of gross sales of products. We are currently
concentrating on entering and implementing large-scale projects. These potential
contracts are subject to a long sales cycle and the timetable for entering and
implementing such projects fluctuates. This affected our results in 2005. Our
revenues increased by $671,000, or 70%, to $1,626,000 in 2005 from $955,000 in
2004, primarily due to our new customers located in the United States.

     COST OF REVENUES. Cost of revenues consist of materials, sub-contractors
and compensation costs. Cost of revenues increased by $371,000, or 90%, to
$784,000 in 2005 from $413,000 in 2004. The increase in cost of revenues is
mainly due to the increase of sales and the increase of cost as a percentage of
revenues. Cost of revenues as a percentage of sales was 48 % in 2005, compared
with 43% in 2004. The increase in cost of revenues is the result of our
strategic decision to reduce the price paid by one of our customers in
connection with one of our new major contracts.

     RESEARCH AND DEVELOPMENT EXPENSES, NET. Research and development expenses,
net consist primarily of compensation costs attributable to employees engaged in
ongoing research and development activities, development-related raw materials
and sub-contractors, and other related costs. Research and development expenses
increased by $100,000, or 13%, to $875,000 in 2005 from $775,000 in 2004. This
increase in research and development expenses is primarily related to the
development and implementation of our RFID technology.

     SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of costs relating to compensation attributable to employees engaged in
sales and marketing activities, promotion, advertising, trade shows and
exhibitions, sales support, travel, commissions and related expenses. Selling
and marketing expenses increased by $310,000, or 25%, to $1,549,000 in 2005 from
$1,239,000 in 2004. This increase in selling and marketing expenses was
primarily due to higher marketing expenses related to the new sales agreements
we have entered into. We believe that our significant investment in sales and
marketing activities over time will contribute to our short-term and long-term
sales levels.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of compensation costs for administration, finance and general
management personnel, office maintenance, insurance, legal, accounting and
administrative costs. General and administrative expenses decreased by $11,000,
or 2%, to $579,000 in 2005 from $590,000 in 2004. This decrease was primarily a
result of lower D&O insurance expenses.

     FINANCIAL INCOME, NET. Financial income, net decreased by $7,000, or 700%,
to expense of $6,000 in 2005 from income of $1,000 in 2004 due to non cash
financial expenses relating to the convertible note.

     NET LOSS. We had a net loss of $2,213,0000 in 2005, compared with a net
loss of $2,061,000 in 2004, which is an increase of $152,000, or 7%. The
increase in net loss in 2005 in comparison with 2004 is primarily due to our
increase in operating expenses.

B.   LIQUIDITY AND CAPITAL RESOURCES

     We have incurred substantial losses since our inception in May 2000. We had
an accumulated deficit of approximately $11, 987,000 at December 31, 2005, and
had a working capital (current assets less current liabilities) of approximately
$5,156,000 at December 31, 2005.

     Capital expenditures were approximately $188,000 in 2005 and $72,000 in
2004. These expenditures were principally for computers and research and
development equipment purchases. We do not have any material commitments for
capital expenditures for the year ending December 31, 2005.

     As of December 31, 2005, we had cash, cash equivalents and short-term
deposits of approximately $5,089,000, compared to $1,648,000 in 2004. This
increase is the result of the issuance of convertible note with net proceeds of
$5,304,000 as such amount is offset by our continuing investments in research
and development and selling and marketing expenses. We had $0 short-term bank
credit in each of 2005 and 2004.


                                       17
<PAGE>


     We generated negative cash flow from operating activities of approximately
$1,748,000 in 2005 compared to $2,112,000 in 2004.

     Our investing activities used cash of $4,545,000 in 2005 and $51,000 in
2004. Our policy is to invest our funds in short-term deposits.

     We believe that cash generated from operations and cash from the 2005
private placement will provide sufficient cash resources to finance our
operations and the projected expansion of our marketing and research and
development activities for the next twenty-four months. However, if our
operations do not generate cash to the extent currently anticipated, or we grow
more rapidly than currently anticipated, it is possible that we would require
more funds than presently anticipated.

     We have determined that the Convertible notes contained embedded
derivatives. Derivatives instruments are contractual commitments or payment
exchange agreements between counterparties that derive their value from an
underlying asset, liability or equity, depending on their characteristics. We
have determined each derivative component should be recorded as a liability. We
valued the derivative components using Black Scholes model. The value of the
derivatives as of December 31, 2005 is $966. The derivatives will be revalued at
each reporting period.

C.   RESEARCH AND DEVELOPMENT; PATENTS AND LICENSES

     We believe that our future success will depend upon our ability to enhance
our existing products and systems and introduce new commercially viable products
and systems addressing the demands of the evolving markets for brand and
document protection. As part of the product development process, we work closely
with current and potential customers, distribution channels and leaders in
certain industry segments to identify market needs and define appropriate
product specifications. Our employees also participate in industry forums in
order to stay informed about the latest industry developments.

     Our research and development expenses were approximately $1,184,000 in
2003, $775,000 in 2004 and $875,000 in 2005. To date, all research and
development expenses have been charged to operating expense as incurred.

     We currently hold one pending patent in the United States and we have been
issued two patents in Israel relating to our technology of marking documents for
the purpose of authentication.

     With respect to the RFID technology being developed by us, we have applied
for four patents: we have been issued patents for our first application in each
of the United States, France, Germany, Switzerland and the United Kingdom; we
have been issued a patent in the United States for our second application and
hold one pending patent before the European Patent Office; we have been issued a
patent in the United States for our third application and we hold one pending
patent before the European Patent Office; and we have only recently made an
application before the United States Patent and Trademark Office with respect to
our fourth patent application.

D.   CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     Our contractual obligations and commitments at December 31, 2005
principally include obligations associated with our future-operating lease
obligations and the lease of several automobiles. Our total future obligation is
$160,000 until 2007. See Note 8 to the Consolidated Financial Statements. We
expect to finance these contractual commitments from cash on hand and cash
generated from operations.

                                       18
<PAGE>

                                  RISK FACTORS

     ALL FORWARD-LOOKING STATEMENTS SHOULD BE READ WITH CAUTION. STATEMENTS IN
THIS ANNUAL REPORT ON FORM 10-KSB UNDER THE CAPTIONS "DESCRIPTION OF BUSINESS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS," AND ELSEWHERE IN
THIS FORM 10-KSB, AS WELL AS STATEMENTS MADE IN PRESS RELEASES AND ORAL
STATEMENTS THAT MAY BE MADE BY US OR BY OFFICERS, DIRECTORS OR EMPLOYEES ACTING
ON OUR BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING THOSE DESCRIBED IN
THIS FORM 10-KSB UNDER THE CAPTION "RISK FACTORS," THAT COULD CAUSE OUR ACTUAL
RESULTS TO BE MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OR FROM ANY
FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN
ADDITION TO STATEMENTS WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," OR "INTENDS," TO BE UNCERTAIN AND
FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE IN THIS FORM 10-KSB SHOULD BE
READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR. INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS AS WELL AS THE
RISKS DESCRIBED ELSEWHERE IN THIS FORM 10-KSB.

WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOWS AND THUS MAY NOT
BE PROFITABLE IN THE FUTURE.

     We have incurred substantial losses and negative cash flows since our
inception. We had an accumulated deficit of approximately $11, 987,000 at
December 31, 2005 and had a working capital (current assets less current
liabilities) of approximately $5,156,000 at December 31, 2005. We incurred
losses of approximately $2, 213,000 for the year ended December 31, 2005. We
expect to spend significant amounts to enhance our products and services,
develop further sales and operations, and fund expansion. As a result, we will
need to generate significant revenue to break even or achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

     Our operating expense levels are based on internal forecasts for future
demand and not on firm customer orders for products or services. Our results may
be affected by fluctuating demand for our products and services from one quarter
to the next and by increases in the costs of components acquired from suppliers.

WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.

     InkSure Delaware was formed in May 2000. We have a limited operating
history on which to base an evaluation of our business and prospects. Our
revenue and income potential are unproven. An investor must consider the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages, particularly companies with limited capital in new and
rapidly evolving markets. These risks and difficulties include our ability to
develop our infrastructure; attract and maintain a base of end users; develop
and introduce desirable products and services; provide customer support,
personnel, and facilities to support our business; establish and maintain
strategic relationships; and respond effectively to competitive and
technological developments. Our business strategy may not be successful or may
not successfully address any of these risks or difficulties.

IF WE CONTINUE TO RELY ON TWO MAJOR CUSTOMERS FOR MOST OF OUR REVENUES, THE LOSS
OF SUCH CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS.

     For the fiscal year ended December 31, 2005, sales to two of our new
customers in the United States accounted for approximately 62% of our revenues.
The loss of this customers, or any other customer that accounts for a
significant portion of our revenues from time to time, could adversely affect
our business, operating results and financial condition due to the substantial
decrease in revenue such loss would represent.


                                       19
<PAGE>


IF OUR PRODUCT OFFERINGS ARE NOT ACCEPTED BY THE MARKET, OUR BUSINESS MAY BE
ADVERSELY AFFECTED.

     We generate all of our revenue from sales of products relating to the
"authentication industry." The market for providing these products and services
is highly competitive and is affected by the introduction of new products and
services that compete with the products and services offered by us. Demand for
these products and services could be affected by numerous factors outside our
control, including, among others, market acceptance by prospective customers,
the introduction of new or superior competing technologies or products and
services that are available on more favorable pricing terms than those being
offered by us, and the general condition of the economy. Any market acceptance
for our products and services may not develop in a timely manner or may not be
sustainable. New or increased competition may result in market saturation, more
competitive pricing, and lower margins. Our business, operating results and
financial condition would be materially and adversely affected if the market for
our products and services fails to grow, grows more slowly than anticipated, or
becomes more competitive or if targeted customers do not accept our products and
services and we experience a corresponding reduction in revenues, a higher loss
and a failure to generate substantial revenues in the future.

WE HAVE A LONG AND VARIABLE SALES CYCLE WHICH CAN RESULT IN SIGNIFICANT
FLUCTUATIONS IN OUR REVENUE FROM QUARTER TO QUARTER.

     The sales cycle of our products, which is the period of time between the
identification of a potential customer and completion of the sale, is typically
long and subject to a number of significant risks over which we have little
control. As our operating expenses are based on anticipated revenue levels, a
small fluctuation in the timing of sales can cause our quarterly operating
results to vary significantly from period to period. If revenue falls
significantly below anticipated levels, our business would be seriously harmed.
Investors can also anticipate uneven revenue results, which may be reflected in
a volatile market price for our stock.

WE FACE POTENTIAL LIABILITY DUE TO PRODUCT DEFECTS AND MAY INCUR SIGNIFICANT
LIABILITIES IN DEFENDING LAWSUITS OVER ANY SUCH DEFECTS.

     Authentication products as complex as those offered by us may contain
undetected errors or defects when first introduced or as new versions are
released. Despite testing by us and by current and potential customers, errors
may be found in new authentication products after commencement of commercial
shipments resulting in product recalls and market rejection of our
authentication products and resulting in damage to our reputation, as well as
lost revenue, diverted development resources and increased support costs. In
addition, our product liability insurance, if any, may be insufficient to cover
claims related errors or defects in our authentication products.

WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ADVERSELY
AFFECT OUR ABILITY TO COMPETE IN THE AUTHENTICATION MARKET.

     Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We regard protection of our proprietary
rights as critical to our success, and rely on patent, trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
our employees, customers, partners and others to protect our proprietary rights.
We currently hold one pending patent in the United States and we have been
issued two patents in Israel relating to our technology of marking documents for
the purpose of authentication.

     With respect to the RFID technology being developed by us, we have applied
for four patents: we have been issued patents for our first application in each
of the United States, France, Germany, Switzerland and the United Kingdom; we
have been issued a patent in the United States for our second application and
hold one pending patent before the European Patent Office; we have been issued a
patent in the United States for our third application and we hold one pending
patent before the European Patent Office; and we have only recently made an
application before the United States Patent and Trademark Office with respect to
our fourth patent application.

     We are also seeking protection under the Patent Cooperation Treaty. We may
file for additional patents as we determine appropriate. A patent may not be
issued with respect to any patent application filed by us or the scope of any
claims granted in any patent may not provide meaningful proprietary protection
or a competitive advantage to us. The validity or enforceability of patents
which may be issued or licensed to may be challenged by others and, if
challenged, may not be upheld by a court. In addition, competitors may be able
to circumvent any patents that may be issued or licensed to us. Due to our
reliance on our proprietary technology, our inability to protect our proprietary
rights adequately would have a material adverse effect on us.

     We generally have entered into agreements containing confidentiality and
nondisclosure provisions with our employees and consultants and limits access to
and distribution of our documentation and other proprietary information.
However, the steps taken by us may not prevent misappropriation of our
technology and agreements entered into for that purpose may not be enforceable.


                                       20
<PAGE>


     Notwithstanding the precautions taken by us, a third party may be able to
copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. Policing
unauthorized use of our technology is difficult. The laws of other countries may
afford us little or no effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available. In the future, we may also need to file lawsuits to enforce our
intellectual property rights, protect our trade secrets, and determine the
validity and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could have a material adverse effect on our
business, operating results, and financial condition due to the substantial
costs and diversion of resources. See "Business, Risk Factors -- We are a
co-defendant in a litigation, and we could incur significant liabilities in
defense of this lawsuit or in damages if our defense is unsuccessful."

     In addition, we have entered into several agreements pursuant to which we
have granted third parties broad, exclusive rights to distribute and sell
certain of our technology, subject to customary provisions governing
confidentiality and nondisclosure. Failure of these third parties to effectively
market products and services based upon our technology could have a material
adverse effect on our business, operating results, and financial condition due
to the lack of revenues expected to be generated from such agreements.

WE WILL HAVE TO KEEP PACE WITH NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE IN
ORDER TO REMAIN COMPETITIVE IN THE MARKETPLACE.

     If we are able to sufficiently penetrate the market with our products and
services, our future success will depend upon our ability to keep pace with
technological developments and respond to evolving customer demands. Failure to
anticipate or respond adequately to technological developments or significant
delays in product development could damage our potential position in the
marketplace and could have a material adverse effect on our business, operating
results, and financial condition. With our current limited financial and
technical resources, we may not be able to develop or market new products,
services or enhancements to our existing product and service offerings. It is
possible that we could experience significant delays in these endeavors. Any
failure to successfully develop and market products and services and product and
service enhancements could have a material adverse effect on our business,
operating results and financial condition. See "Business Risk Factors-- If our
product offerings are not accepted by the market, our business may be adversely
affected."

WE FACE COMPETITION AND PRICING PRESSURES FROM LARGER, WELL FINANCED AND MORE
RECOGNIZED COMPANIES AND WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE WITH SUCH
COMPANIES.

     The market for our products and services is highly competitive. Many of our
competitors have far greater financial, human, and other resources. Barriers to
entry in our business are relatively insubstantial and companies with
substantially greater financial, technical, marketing, manufacturing and human
resources, as well as those with far greater name recognition than us, may also
attempt to enter the market. We believe that our ability to compete depends on
our technology and price, as well as on our distribution channels and the
quality of products and services. If we do not successfully compete, we will not
generate significant revenues or profits.

WE DEPEND ON THIRD PARTIES FOR INFRASTRUCTURE AND SUPPLIES, THE LOSS OF WHICH
COULD ADVERSELY AFFECT OUR OPERATIONS.

     With regard to our products, we are dependent in part on the availability
of equipment, supplies and services provided by independent third parties.
Currently we use a limited number of suppliers in order to take advantage of
volume discounts. If one of our suppliers were unable to meet our supply demands
and we could not quickly replace the source of supply, it could have a material
adverse effect on our business, operating results and financial condition, for
reasons including a delay of receipt of revenues and damage to our business
reputation.

THE SUCCESS OF OUR JOINT VENTURES IS DEPENDENT ON THE PERFORMANCE OF OUR JOINT
VENTURE PARTNERS OF THEIR CONTRACTUAL OBLIGATIONS.

     We enter into various joint ventures as part of our marketing and sales
efforts. Success of these joint ventures depends largely on the satisfactory
performance by our partners of their contractual obligations. If our joint
venture partners fail to perform their contractual obligations as a result of
financial or other difficulties, our revenues will decline as a result of
reduced revenues and we may be required to make additional investments towards
our sales and marketing efforts. These lost revenues and additional investment
obligations could result in reduced profits or in losses for us.


                                       21
<PAGE>


WE DEPEND ON OUR SENIOR MANAGEMENT AND KEY EMPLOYEES, THE LOSS OF WHICH COULD
ADVERSELY AFFECT OUR OPERATIONS.

     Our success depends to a large degree upon the skills of our senior
management team and current key employees and upon our ability to identify,
hire, and retain additional sales, marketing, technical and financial personnel.
We may be unable to retain our existing key personnel or attract and retain
additional key personnel. We do not maintain key person life insurance for any
of our officers or key employees. We require our executives and key employees to
enter non-competition agreements with us. Due to our reliance on our senior
management and key employees, the loss of any of our key executives, the use of
proprietary or trade secret data by former employees who compete with us, or the
failure to attract, integrate, motivate, and retain additional key employees
could have a material adverse effect on our business, operating results and
financial condition.

WE MAY NOT BE ABLE TO MANAGE OUR GROWTH TO SUCCESSFULLY IMPLEMENT OUR BUSINESS
PLAN AND SUCH MISMANAGEMENT COULD ADVERSELY AFFECT OUR BUSINESS AND OUR ABILITY
TO GROW.

     We anticipate a period of significant growth in connection with expansion
of our marketing efforts and business. The resulting strain on our managerial,
operational, financial, and other resources could be significant and could
render our increased marketing efforts useless. Our ability to manage our growth
effectively will require us to continue to improve our operations, financial and
managerial controls, reporting systems and procedures. If we are successful in
achieving our growth plans, such growth is likely to result in increased
responsibility for our management; and our management may not be able to
successfully manage such growth due to their lack of experience in managing
companies of our size.

OUR RESEARCH AND DEVELOPMENT EFFORTS FOR NEW PRODUCTS MAY BE UNSUCCESSFUL.

     We incur significant research and development expenses to develop new
products and technologies in an effort to maintain our competitive position in a
market characterized by rapid rates of technological advancement. There can be
no assurance that any of these products or technologies will be successfully
developed or that, if developed, will be commercially successful. In the event
that we are unable to develop commercialized products from our research and
development efforts or we are unable or unwilling to allocate amounts beyond our
currently anticipated research and development investment, we could lose our
entire investment in these new products and technologies. Any failure to
translate research and development expenditures into successful new product
introductions could have an adverse effect on our business.

WE ARE FOCUSING ON NEW RFID TECHNOLOGY PRODUCT DEVELOPMENT. IF WE ARE UNABLE TO
COMMERCIALIZE THIS PRODUCT OR ANY OTHER PRODUCT THAT WE MAY PURSUE IN THE
FUTURE, OR EXPERIENCE SIGNIFICANT DELAYS OR UNANTICIPATED COSTS IN DOING SO, OUR
BUSINESS WILL BE MATERIALLY HARMED.

     We are focusing on development of a new RFID product utilizing unproven
technology. We may spend significant amounts on attempting to develop the
product and there is no assurance that such product will be successfully
developed or, if developed, that we will be able to commercialize this product.
As with any effort at new product development, we may experience significant
delays. Accordingly, we may spend significant time, management resources and
money on the RFID product with nothing to show for it.

     WE ARE CURRENTLY IN A GROWTH STAGE AND MAY NOT BE ABLE TO FULFILL LARGE
ORDERS.

     We have no history of fulfilling large orders. As we begin to receive
significant orders for our products, we will be required to fulfill such orders
and implement substantial projects. We have little experience doing so and doing
so will strain our resources and require us to develop new capabilities and
expand existing ones. These include managerial and administrative structure,
sales and marketing activities, financial systems and personnel recruitment.

As a result, there can be no assurance that we will be able to timely fulfill
large orders. Failure to do so could materially and adversely affect our
business reputation, impede future sales and place a significant strain on
senior management.


                                       22
<PAGE>


OUR SPECIALTY INKS INCLUDE VARIOUS CHEMICALS AND ARE SUBJECT TO CERTAIN
ENVIRONMENTAL REGULATIONS, FOR WHICH WE COULD INCUR SIGNIFICANT LIABILITIES FOR
PROBLEMS RELATING TO THEIR SHIPPING AND STORAGE.

     Our operations are subject to federal, state, local, and foreign
environmental laws and regulations. Our specialty inks include various
chemicals, some of which may be hazardous substances and subject to various
government regulations relating to our transfer, handling, packaging, use, and
disposal. We may store these chemicals or inks at our facilities in the United
States and Israel, and a shipping company ships them at our direction. We could
face potential liability for problems that may arise when we store or ship these
inks or chemical components. To the extent future laws and regulations are
adopted or interpretations of existing laws and regulations change, new
requirements may be imposed on our future activities or may create liability
retroactively. Failure to comply with applicable rules and regulations could
subject us to monetary damages and injunctive action, which could have a
material adverse effect on our business, financial condition or results of
operations.

SOME OF OUR PRODUCTS IN DEVELOPMENT WILL BE SUBJECT TO GOVERNMENT REGULATION OF
RADIO FREQUENCY TECHNOLOGY WHICH COULD CAUSE A DELAY OR INABILITY TO INTRODUCE
SUCH PRODUCTS IN THE UNITED STATES AND OTHER MARKETS.

     The rules and regulations of the United States Federal Communications
Commission, or the FCC, limit the radio frequency used by and level of power
emitting from electronic equipment. Our scanning device and the next-generation
radio frequency technology scanning equipment will be required to comply with
these FCC rules which may require certification, verification or registration of
the equipment with the FCC. Currently we do not have FCC approval for our
equipment. Certification and verification of new equipment requires testing to
ensure the equipment's compliance with the FCC's rules. The equipment must be
labeled according to the FCC's rules to show compliance with these rules.
Testing, processing of the FCC's equipment certificate or FCC registration, and
labeling may increase development and production costs and could delay
introduction of our verification scanning device and next-generation radio
frequency technology scanning equipment into the United States' market.
Electronic equipment permitted or authorized to be used by the FCC through our
certification or verification procedures must not cause harmful interference to
licensed FCC users, and it is subject to radio frequency interference from
licensed FCC users. Selling, leasing or importing non-compliant equipment is
considered a violation of FCC rules and federal law and violators may be subject
to an enforcement action by the FCC. Any failure to comply with the applicable
rules and regulations of the FCC could subject us to monetary action or an
injunction and could have a material adverse effect on our business, operating
results and financial condition. In addition, certain other countries may impose
similar or more burdensome regulations.

CONDITIONS IN ISRAEL AFFECT THE OPERATIONS OF OUR SUBSIDIARY IN ISRAEL AND MAY
LIMIT OUR ABILITY TO SELL OUR PRODUCTS AND SERVICES.

     InkSure Ltd., our principal operating subsidiary, is incorporated under
Israeli law and its principal office, manufacturing facility and research and
development facility are located in Israel. Political, economic and military
conditions in Israel directly affect InkSure Ltd.'s operations. Since the
establishment of the state of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Despite negotiations to effect peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Since October 2000,
there has been a significant increase in violence primarily in the West Bank and
Gaza Strip, negotiations between Israel and the Palestinian Authority have
ceased and there has been increased military activity characterized by some as
war. Violence has spread to Jerusalem and areas near Tel Aviv. Furthermore,
several countries still restrict trade with Israeli companies, which may limit
our ability to make sales, or purchase components from, in those countries. Any
future armed conflict, political instability, continued violence in the region
or restrictions could limit our ability to operate our business and could have a
material adverse effect on our business, operating results and financial
condition.


                                       23
<PAGE>


OUR OPERATIONS COULD BE DISRUPTED AS A RESULT OF THE OBLIGATION OF MANAGEMENT OR
KEY PERSONNEL OF INKSURE LTD. TO PERFORM MILITARY SERVICE.

     Generally, all male adult citizens and permanent residents of Israel under
the age of 45 are, unless exempt, obligated to perform up to 36 days of military
reserve duty annually. Additionally, all Israeli residents of this age are
subject to being called to active duty at any time under emergency
circumstances. Some of the officers and employees of InkSure Ltd. are currently
obligated to perform annual reserve duty. Our operations could be disrupted by
the absence for a significant period of one or more of InkSure Ltd.'s officers
or key employees due to military service. Any such disruption could limit our
ability to operate our business and could affect our business, results and
financial condition.

UNDER CURRENT ISRAELI LAW, INKSURE LTD. MAY NOT BE ABLE TO ENFORCE COVENANTS NOT
TO COMPETE WHICH COULD HAVE A NEGATIVE EFFECT ON OUR OPERATIONS IN ISRAEL.

     InkSure Ltd. has non-competition agreements with all of its employees.
These agreements prohibit its employees, if they cease working for InkSure Ltd.,
from directly competing with it or working for its competitors, generally, for
up to twelve months. However, we have been advised by our Israeli counsel, Yossi
Avraham & Co., that Israeli courts are reluctant to enforce non-compete
undertakings of former employees.

FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE UNITED STATES DOLLAR AND FOREIGN
CURRENCIES MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

     We incur expenses for our operations in Israel in new Israeli shekels (NIS)
and translate these amounts into United States dollars for purposes of reporting
consolidated results. As a result, fluctuations in foreign currency exchange
rates may adversely affect our expenses and results of operations as well as the
value of our assets and liabilities. Fluctuations may adversely affect the
comparability of period-to-period results. In addition, we hold foreign currency
balances, primarily Israeli shekels, that will create foreign exchange gains or
losses, depending upon the relative values of the foreign currency at the
beginning and end of the reporting period, affecting our net income and earnings
per share. Although we may use hedging techniques in the future (which we
currently do not use), we may not be able to eliminate the effects of currency
fluctuations. Thus, exchange rate fluctuations could have a material adverse
impact on our operating results and stock price. In addition, future currency
exchange losses may increase if we become subject to exchange control
regulations restricting our ability to convert local currencies into United
States dollars or other currencies.

WE ARE EXPOSED TO SPECIAL RISKS IN FOREIGN MARKETS WHICH MAY RESTRICT OUR
ABILITY TO CONVERT LOCAL CURRENCY INTO UNITED STATES DOLLARS OR ISRAELI SHEKELS
AND THEREBY FORCE US TO CURTAIL OUR BUSINESS OPERATIONS.

     In conducting our business in foreign countries, we are subject to
political, economic, legal, operational and other risks that are inherent in
operating in other countries. These risks range from difficulties in settling
transactions in emerging markets to possible nationalization, expropriation,
price controls and other restrictive governmental actions. We also face the risk
that exchange controls or similar restrictions imposed by foreign governmental
authorities may restrict our ability to convert local currency received or held
by it in their countries into United States dollars or other currencies, or to
take those dollars or other currencies out of those countries.

UNDER ISRAELI LAW, OUR STOCKHOLDERS MAY FACE DIFFICULTIES IN THE ENFORCEMENT OF
CIVIL LIABILITIES AGAINST OUR SUBSIDIARY INKSURE LTD., ITS OFFICERS, DIRECTORS
OR PROFESSIONAL ADVISORS.

     InkSure Ltd. is incorporated under Israeli law and its principal office,
manufacturing facility and research and development facility are located in
Israel. Certain of the directors and InkSure Ltd.'s professional advisors are
residents of Israel or otherwise reside outside of the United States. All or a
substantial portion of the assets of such persons are or may be located outside
of the United States. It may be difficult to effect service of process within
the United States upon InkSure Ltd. or upon any such directors or professional
advisors or to realize in the United States upon judgments of United States'
courts predicated upon civil liability of InkSure Ltd. or such persons under
United States federal securities laws. InkSure Ltd. has been advised by our
Israeli counsel, Yossi Avraham & Co., that Israeli courts may not (i) enforce
judgments of United States' courts obtained against InkSure Ltd. or such
directors or professional advisors predicated solely upon the civil liabilities
provisions of United States' federal securities laws, or (ii) impose liabilities
in original actions against InkSure Ltd. or such directors and professional
advisors predicated solely upon such United States' laws. However, subject to
certain time limitations, Israeli courts will enforce foreign (including United
States) final executory judgments for liquidated amounts in civil matters,
obtained after due trial before a court of competent jurisdiction which
recognizes similar Israeli judgments, provided that (1) due process has been
observed, (2) such judgments or the execution thereof are not contrary to
Israeli law, public policy, security or sovereignty, (3) such judgments were not
obtained by fraud and do not conflict with any other valid judgment in the same
matter between the same parties and (4) an action between the same parties in
the same matter is not pending in any Israeli court at the time the law suit is
instituted in the foreign court.


                                       24
<PAGE>


WE HAVE A STOCKHOLDER THAT IS ABLE TO EXERCISE SUBSTANTIAL INFLUENCE OVER US AND
ALL MATTERS SUBMITTED TO OUR STOCKHOLDERS WHICH MAY MAKE US DIFFICULT TO BE
ACQUIRED AND LESS ATTRACTIVE TO NEW INVESTORS.

     ICTS International, N.V. and its affiliates beneficially own, as of March
30, 2006, 4,825,555 shares of our common stock, representing approximately 31.7%
of our outstanding common stock. Such ownership interest gives ICTS and its
affiliates substantial influence over the outcome of all matters submitted to
our stockholders, including the election of directors and the adoption of a
merger agreement, and such influence could make us a less attractive acquisition
or investment target.

OUR CERTIFICATE OF INCORPORATION CONTAINS ANTI-TAKEOVER PROVISIONS WHICH COULD
ADVERSELY AFFECT THE VOTING POWER OR OTHER RIGHTS OF THE HOLDERS OF OUR COMMON
STOCK.

     Our certificate of incorporation authorizes the issuance of up to
10,000,000 shares of preferred stock and our board of directors is empowered,
without stockholder approval, to issue a new series of preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of common stock. Such
authority, together with certain provisions of Delaware law and of our
certificate of incorporation and bylaws, may have the effect of delaying,
deterring or preventing a change in control of us, may discourage bids for the
common stock at a premium over the market price and may adversely affect the
market price, and the voting and other rights of the holders of the common
stock. Although we have no present intention to issue any additional shares of
our preferred stock, we may do so in the future. The board of directors of a
Delaware corporation may issue rights, options, warrants or other convertible
securities, (hereinafter the "rights"), entitling the holders of the rights to
purchase, receive or acquire shares or fractions of shares of the corporation or
assets or debts or other obligations of the corporation, upon such terms as are
determined by the board of directors. Our board of directors is free, subject to
their fiduciary duties to stockholders, to structure the issuance or exercise of
the rights in a manner which may exclude "significant stockholders," as defined,
from being entitled to receive such rights or to exercise such rights or in a
way which may effectively prevent a takeover of the corporation by persons
deemed hostile to management. Nothing contained in our certificate of
incorporation will prohibit our board of directors from using these types of
rights in this manner.

WE HAVE NEVER PAID COMMON STOCK DIVIDENDS AND ARE UNLIKELY TO DO SO FOR THE
FORESEEABLE FUTURE.

     We have never paid cash or other dividends on our common stock. It is our
intention to retain any earnings to finance the operation and expansion of our
business, and therefore, we do not expect to pay any cash dividends on our
common stock in the foreseeable future.

THE TRADING OF OUR COMMON STOCK IS VOLATILE WHICH MAY PREVENT A STOCKHOLDER FROM
SELLING ITS STOCK AT THE TIME OR PRICE THEY DESIRE.

     Our common stock is traded on the over-the-counter market with quotations
published on the NASD OTC Bulletin Board under the symbol "INKS". The trading
volume of our common stock historically has been limited and sporadic, and the
stock prices have been volatile. For example, during the twelve months prior to
March 30, 2006, our common stock traded at prices ranging from $[4.12] to
$[1.20]. As a result of the limited and sporadic trading activity, the quoted
price for our common stock on the over-the-counter market is not necessarily a
reliable indicator of its fair market value. The price at which our common stock
will trade in the future may be highly volatile and may fluctuate as a result of
a number of factors, including, without limitation, quarterly variations in our
operating results (which have historically been, and we expect to continue to
be, substantial) and actual or anticipated announcements of new products or
services by us, other business partners, or competitors as well as the number of
shares available for sale in the market.


                                       25
<PAGE>


"PENNY STOCK" RULES MAY RESTRICT THE MARKET FOR OUR COMMON STOCK AND MAY AFFECT
OUR STOCKHOLDERS' ABILITY TO SELL THEIR SHARES IN THE SECONDARY MARKET.

     Our common stock is subject to rules promulgated by the Securities and
Exchange Commission, or the Commission, relating to "penny stocks," which apply
to companies whose shares are not traded on a national stock exchange or on the
Nasdaq small-cap or national market systems, trade at less than $5.00 per share,
or who do not meet certain other financial requirements specified by the
Commission. These rules require brokers who sell "penny stocks" to persons other
than established customers and "accredited investors" to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in such penny stocks.
These rules may discourage or restrict the ability of brokers to sell our common
stock and may affect the secondary market for our common stock. These rules
could also hamper our ability to raise funds in the primary market for our
common stock and may affect our stockholders' ability to sell their shares in
the secondary market.

THE NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE REPRESENTS NEARLY ALL OF OUR
OUTSTANDING COMMON STOCK AND THUS MAY ADVERSELY AFFECT THE MARKET FOR OUR COMMON
STOCK.

     Of the 15,234,854 shares of common stock held by our present stockholders
as of December 31, 2005, 6,067,698 shares may be available for public sale by
means of ordinary brokerage transactions in the open market pursuant to Rule
144, promulgated under the Act, subject to certain limitations. In general,
under Rule 144, a person (or persons whose shares are aggregated) who has
satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitation, by a person who is not our affiliate and who
has satisfied a two-year holding period. In addition, 3,500,000 shares of common
stock underlying both current options to purchase our common stock and future
issuances of options to purchase our common stock are being registered for
resale. The substantial number of shares eligible for sale could cause our
common stock price to be less than it would be in the absence of such an
offering, whether or not such shares are actually sold, and sales of a
significant number of such shares at any one time could further decrease our
stock price.

WE WILL FACE A NEED FOR ADDITIONAL CAPITAL AND MAY NEED TO CURTAIL OUR
OPERATIONS IF IT IS NOT AVAILABLE.

     We believe that our current cash and cash equivalents will satisfy our
operating capital needs for at least twenty-four months based upon our currently
anticipated business activities. On September 30, 2005, we completed a private
placement of convertible notes in the aggregate principal amount of $6,000,000.
However, we will need additional capital, even within twenty-four months, if we
undertake large projects. Our need for additional capital to finance our
operations and growth will be greater should, among other things, our revenue or
expense estimates prove to be incorrect. We may not be able to obtain additional
financing in sufficient amounts or on acceptable terms when needed, which would
adversely affect our prospects, business, operating results and financial
condition by forcing us to curtail our operations or not pursue opportunities
which present themselves.

OUR CONVERTIBLE DEBT HAS A FULL RATCHET ANTI-DILUTION PROVISION, WHICH, IF
TRIGGERED, COULD SIGNIFICANTLY DILUTE OUR STOCKHOLDERS.

     On September 30, 2005, we completed a private placement of convertible
notes in the aggregate principal amount of $6,000,000 (see "Recent Sales of
Unregistered Securities; Use of Proceeds from Registered Securities" above). The
convertible notes are convertible into shares of our common stock at an initial
conversion price of $3.00 per share. Based on this initial conversion price we
would issue approximately 2,000,000 shares of common stock upon conversion in
full of the $6,000,000 of convertible notes. The convertible notes contain a
full ratchet anti-dilution provision, which provides, unlike a more traditional
weighted average anti-dilution provision, that if we issue convertible or equity
securities in the future (subject to certain exceptions) at a price per share
less than the conversion price, the conversion price of the convertible notes
will be automatically adjusted down to that lesser price. In such case, the
number of shares into which the convertible note is convertible would increase
correspondingly. By way of example only, if the price per share of common stock
were to fall to $2.30, and the Company were to issue securities at such reduced
price, the conversion price of the convertible notes would be automatically
adjusted down to $2.30 per share, and the number of shares into which the
convertible notes would be convertible would increase from 2,000,000 shares to
2,608,695. Accordingly, if we trigger the full ratchet anti-dilution provision,
our stockholders could suffer substantial dilution.


                                       26
<PAGE>


THE NUMBER OF SHARES OF COMMON STOCK WHICH ARE AVAILABLE FOR SALE UPON EXERCISE
OF OUR OUTSTANDING WARRANTS OR CONVERSION OF OUR OUTSTANDING CONVERTIBLE NOTES
IS SIGNIFICANT IN RELATION TO OUR CURRENTLY OUTSTANDING COMMON STOCK AND COULD
CAUSE DOWNWARD PRESSURE ON THE MARKET PRICE FOR OUR COMMON STOCK.

     The number of shares of common stock registered for resale upon exercise of
our outstanding warrants or conversion of our outstanding convertible notes is
significant in relation to the number of shares of common stock currently
outstanding. If those securityholders determine to sell a substantial number of
shares into the market at any given time, there may not be sufficient demand in
the market to purchase the shares without a decline in the market price for our
common stock. Moreover, continuous sales into the market of a number of shares
in excess of the typical trading volume for our common stock, or even the
availability of such a large number of shares, could depress the trading market
for our common stock over an extended period of time.

IF PERSONS ENGAGE IN SHORT SALES OF OUR COMMON STOCK, INCLUDING SALES OF SHARES
TO BE ISSUED UPON EXERCISE OF OUR OUTSTANDING WARRANTS OR CONVERSION OF OUR
OUTSTANDING CONVERTIBLE NOTES, THE PRICE OF OUR COMMON STOCK MAY DECLINE.

     Selling short is a technique used by a stockholder to take advantage of an
anticipated decline in the price of a security. In addition, holders of options
and warrants will sometimes sell short knowing they can, in effect, cover
through the exercise of an option or warrant, thus locking in a profit. A
significant number of short sales or a large volume of other sales within a
relatively short period of time can create downward pressure on the market price
of a security. Further sales of common stock issued upon exercise of our
outstanding warrants or conversion of our outstanding convertible notes could
cause even greater declines in the price of our common stock due to the number
of additional shares available in the market upon such exercise or conversion,
which could encourage short sales that could further undermine the value of our
common stock. You could, therefore, experience a decline in the value of your
investment as a result of short sales of our common stock.

ITEM 7. FINANCIAL STATEMENTS.

     The Financial Statements and Notes thereto can be found beginning on page
F-1, "Index to Consolidated Financial Statements," following Part III of this
Annual Report on Form 10-KSB.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

     None.

ITEM 8A. CONTROLS AND PROCEDURES.

     (a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Annual Report on Form 10-KSB, have concluded that, based on such evaluation, our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to us, including our consolidated subsidiaries,
was made known to them by others within those entities, particularly during the
period in which this Annual Report on Form 10-KSB was being prepared.

     (b) Changes in Internal Controls. We have evaluated our internal control
over financial reporting as of the end of our fourth fiscal quarter. There were
no changes in our internal control over financial reporting, identified in
connection with the evaluation of such internal control, that occurred during
the fourth quarter of our last fiscal year that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 8B. OTHER INFORMATION.

     None.


                                       27
<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.

     The information set forth under the caption "Directors, Executive Officers,
Promoters and Control Persons," "Compliance with Section 16(a) of the Exchange
Act" and "Code of Ethics" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held on or about July 7, 2006 is
hereby incorporated by reference.

ITEM 10. EXECUTIVE COMPENSATION.

     The information set forth under the caption "Executive Compensation" in our
Proxy Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held on or about July 7, 2006 is hereby incorporated by
reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

     The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held on or about July
7, 2006 is hereby incorporated by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information set forth under the captions "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in connection with
our Annual Meeting of Stockholders to be held on or about July 7, 2006 is hereby
incorporated by reference.

ITEM 13. EXHIBITS.

EXHIBIT NO.    DESCRIPTION

2.1  Agreement and Plan of Merger, dated July 5, 2002, by and among the Company,
     LILM Acquisition and InkSure Delaware (previously filed as an exhibit to
     the Company's Information Statement on Schedule 14C filed with the
     Commission on October 8, 2002).

3.1  Certificate of Change in Number of Authorized Shares of Class and Series of
     the Company (previously filed as an exhibit to the Company's Current Report
     filed on Form 8-K with the Commission on November 8, 2002).

3.2  Certificate of Amendment of Articles of Incorporation of the Company
     (previously filed as an exhibit to the Company's Current Report filed on
     Form 8-K with the Commission on November 8, 2002).

3.3  Articles of Incorporation of the Company (previously filed as an exhibit to
     the Company's Current Report filed on Form 8-K with the Commission on
     November 8, 2002).

3.4  Amendment to By-Laws of the Company (previously filed as an exhibit to the
     Company's Quarterly Report on Form 10-QSB filed with the Commission on
     November 14, 2002).

3.5  By-Laws of the Company (previously filed as an exhibit to the Company's
     Current Report filed on Form 8-K with the Commission on November 8, 2002).

10.1 2002 Employee, Director and Consultant Stock Option Plan (previously filed
     as an exhibit to the Company's Quarterly Report on Form 10-QSB filed with
     the Commission on November 14, 2002).

10.2 Securities Purchase Agreement, dated as of September 30, 2005, by and among
     the Company and the buyers listed therein (previously filed as an exhibit
     to the Company's Current Report filed on Form 8-K with the Commission on
     October 30, 2005).

10.3 Registration Rights Agreement, dated as of September 30, 2005, by and among
     the Company and the investors listed therein (previously filed as an
     exhibit to the Company's Current Report filed on Form 8-K with the
     Commission on October 30, 2005).


                                       28
<PAGE>


10.4 Irrevocable Transfer Agent Instruction Letter dated September 30, 2005 from
     the Company to Pacific Stock Transfer Company (previously filed as an
     exhibit to the Company's Current Report filed on Form 8-K with the
     Commission on October 30, 2005).

21.1 Subsidiaries of the Registrant (previously filed as an exhibit to the
     Company's Annual Report on Form 10-KSB filed with the Commission on March
     31, 2003).

23.1 Consent of Brightman Almagor & Co., Certified Public Accountants, a member
     firm of Deloitte Touche Tohmatsu.*

23.2 Consent of Yossi Avraham, Arad & Co.*

31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.*

31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.*

32.1 Certifications of Chief Executive and Financial Officers Pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002.*

*    Filed herewith.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

     The information set forth under the caption "Independent Public
Accountants" in our Proxy Statement to be furnished in connection with our
Annual Meeting of Stockholders to be held on or about July 7, 2006 is hereby
incorporated by reference.


                                       29
<PAGE>


                                 SIGNATURE PAGE

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on our behalf by the undersigned, thereunto duly
authorized.

INKSURE TECHNOLOGIES INC.

    SIGNATURE                       TITLE                               DATE
    ---------                       -----                               ----

/s/ Elie Housman      Chairman, Director and Chief Executive   March 30, 2006
----------------      Officer (Principal Executive Officer)
Elie Housman

     In accordance with the Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.

    SIGNATURE                       TITLE                               DATE
    ---------                       -----                               ----


/s/ Yaron Meerfeld    Chief Operations Officer and Director    March 30, 2006
------------------
Yaron Meerfeld


/s/ Elie Housman      Chairman, Director and Chief Executive   March 30, 2006
------------------    Officer(Principal Executive Officer)
Elie Housman


/s/ Eyal Bigon        Chief Financial Officer (Principal       March 30, 2006
------------------    Financial and Accounting Officer)
Eyal Bigon

/s/ James Lineberger  Director                                 March 30, 2006
------------------
James Lineberger

/s/ Philip Getter     Director                                 March 30, 2006
------------------
Philip Getter

/s/ Michael Acks      Director                                 March 30, 2006
------------------
Michael Acks

/s/ Albert Attias     Director                                 March 30, 2006
------------------
Albert Attias

/s/ David Sass        Director                                 March 30, 2006
------------------
David Sass

<PAGE>


                 INKSURE TECHNOLOGIES INC. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2005

                            U.S. DOLLARS IN THOUSANDS


                                      INDEX


                                                                  PAGE
                                                              -------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           F - 2

CONSOLIDATED BALANCE SHEET                                    F - 3 - F - 4

CONSOLIDATED STATEMENTS OF OPERATIONS                             F - 5

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                     F - 6

CONSOLIDATED STATEMENTS OF CASH FLOWS                             F - 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                    F - 8 - F - 21


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


                             TO THE STOCKHOLDERS OF

                            INKSURE TECHNOLOGIES INC.

     We have audited the accompanying consolidated balance sheet of InkSure
Technologies Inc. ("the Company") and its subsidiaries as of December 31, 2005,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

     We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2005, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.

Tel-Aviv, Israel
March 16, 2006


                                     F - 2
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                              DECEMBER 31,
                                                                 2005
                                                                ------
    ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                     $  732
  Short-term deposit                                             4,357
  Trade receivables                                                359
  Other accounts receivable and prepaid expenses (Note 3)          131
  Inventories (Note 4)                                             595
                                                                ------

TOTAL current assets                                             6,174
                                                                ------


PROPERTY AND EQUIPMENT, NET (Note 5)                               337
                                                                ------

DEFERRED CHARGES                                                   661
                                                                ------

GOODWILL                                                           271
                                                                ------

TOTAL assets                                                    $7,443
                                                                ======


The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 3
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                              2005
                                                                            --------
<S>                                                                         <C>
    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Trade payables                                                            $    494
  Employees and payroll accruals                                                 105
  Deferred income                                                                206
   Accrued expenses and other payables                                           213
                                                                            --------

TOTAL current liabilities                                                      1,018
                                                                            --------

ACCRUED SEVERANCE PAY (Note 6)                                                    17
                                                                            --------

Convertible notes, net                                                         5,681
Warrants to purchase Convertible notes                                           296
                                                                            --------

Total amount related to Convertible notes (Note 7)                             5,977
                                                                            --------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 8)

STOCKHOLDERS' EQUITY:
  Stock capital (Note 9):
    Preferred stock of $ 0.01 par value -
      Authorized: 10,000,000 shares; Issued and outstanding: 0 shares
    Common stock of $ 0.01 par value -
      Authorized: 35,000,000; Issued and outstanding: 15,234,854                 152
  Additional paid-in capital                                                  12,148
  Accumulated other comprehensive income                                         118
  Accumulated deficit                                                        (11,987)
                                                                            --------

TOTAL stockholders' equity                                                       431
                                                                            --------

TOTAL liabilities and stockholders' equity                                  $  7,443
                                                                            ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                     F - 4
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    --------------------------------
                                                                                       2005                 2004
                                                                                    ------------        ------------
<S>                                                                                 <C>                 <C>
Revenues (Note 12)                                                                  $      1,626        $        955

Cost of revenues                                                                             784                 413
                                                                                    ------------        ------------

Gross profit                                                                                 842                 542
                                                                                    ------------        ------------

Operating expenses:

  Research and development, net                                                              875                 775
  Selling and marketing                                                                    1,549               1,239
  General and administrative                                                                 579                 590
   Amortization of deferred stock-based compensation (relating to General and
     Administrative expenses)                                                                 46                   -
                                                                                    ------------        ------------

TOTAL operating expenses                                                                   3,049               2,604
                                                                                    ------------        ------------

Operating loss                                                                            (2,207)             (2,062)

Financial income                                                                               5                   1
Non cash financial expenses related to convertible notes, net                                (11)                  -
                                                                                    ------------        ------------
Financial income (expenses), net (Note 11)                                                    (6)                  1

Net loss                                                                            $     (2,213)       $     (2,061)
                                                                                    ============        ============

Basic and diluted net loss per share                                                $      (0.15)       $      (0.15)
                                                                                    ============        ============

Weighted average number of shares of Common stock used in computing basic and
  diluted net loss per share                                                          15,071,152          13,956,864
                                                                                    ============        ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 5
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                            ACCUMULATED
                                                                  ADDITIONAL    DEFERRED       OTHER                      TOTAL
                                                       SHARE       PAID-IN    STOCK-BASED  COMPREHENSIVE  ACCUMULATED  STOCKHOLDERS'
                                                      CAPITAL      CAPITAL    COMPENSATION     INCOME       DEFICIT       EQUITY
                                                      --------     --------     --------      --------     --------      --------

<S>                                                   <C>          <C>               <C>      <C>          <C>           <C>
Balance as of January 1, 2004                         $    119     $  9,683            -      $    118     $ (7,713)     $  2,207

  Issuance of Common stock and warrants, net                31        2,348            -             -            -         2,379
  Net loss                                                   -            -            -             -       (2,061)       (2,061)
                                                      --------     --------     --------      --------     --------      --------

Balance as of December 31, 2004                            150       12,031            -           118       (9,774)        2,525

Grant of warrant                                                         58          (58)                                       -
Amortization of deferred stock-based compensation                                     46                                       46
Conversion of 368,429 warrants into
  223,278 ordinary shares                                    2           71                          -            -            73
  Net loss                                                   -            -                          -       (2,213)       (2,323)
                                                      --------     --------     --------      --------     --------      --------

Balance as of December 31, 2005                       $    152     $ 12,160          (12)     $    118     $(11,987)     $  2,061
                                                      ========     ========     ========      ========     ========      ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                     F - 6
<PAGE>


                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                                --------------------
                                                                                 2005         2004
                                                                                -------      -------
<S>                                                                             <C>          <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                     $(2,213)     $(2,061)
   Adjustments required to reconcile net loss to net cash used in operating
     activities:
     Depreciation and amortization                                                  264          186
     Accrued severance pay, net                                                       4            4
     Decrease (increase) in trade receivables                                       (42)         182
     Decrease (increase) in other accounts receivable and prepaid expenses          (20)          26
     Increase in inventories                                                        (65)        (425)
     Increase in trade payables                                                     113           19
     Decrease in employees and payroll accruals                                      (3)         (33)
     Increase (decrease) in accrued expenses                                        305          (10)
     Other                                                                          (91)           -
                                                                                -------      -------

 Net cash used in operating activities                                           (1,748)      (2,112)
                                                                                -------      -------

 CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment                                              (188)         (72)
   Investment in short-term bank deposits                                        (4,357)           -
   Proceeds from short-term bank deposits                                             -           21
                                                                                -------      -------

 Net cash used in investing activities                                           (4,545)         (51)
                                                                                -------      -------

 CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of Common stock and warrants, net                                         -        2,379
   Conversion of warrants to Common Stock                                            73            -
   Issuance of convertible notes, net of deferred charges                         4,741            -
   Issuance of warrants to purchase convertible notes                               563            -
                                                                                -------      -------

 Net cash provided by financing activities                                        5,377        2,379
                                                                                -------      -------

 Increase (decrease) in cash and cash equivalents                                  (916)         216
 Cash and cash equivalents at the beginning of the year                           1,648        1,432
                                                                                -------      -------

 Cash and cash equivalents at the end of the year                               $   732      $ 1,648
                                                                                =======      =======

Supplemental cash flow information:

Cash paid for interest                                                          $    60      $     -
                                                                                -------      -------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                     F - 7
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL

     InkSure Technologies Inc. and its subsidiaries (together, "the Company")
     was incorporated under the laws of the State of Nevada, U.S., on April 22,
     1997. On July 8, 2003, InkSure Technologies Inc. effected a reincorporation
     from Nevada to Delaware, through a merger with and into its wholly-owned
     subsidiary, InkSure Technologies (Delaware) Inc., which was incorporated as
     of June 30, 2003. The surviving corporation in the merger was InkSure
     Technologies (Delaware) Inc., which thereafter renamed itself InkSure
     Technologies Inc.

     The Company specializes in comprehensive security solutions, designed to
     protect branded products and documents of value from counterfeiting, fraud
     and diversion. During 2005, the Company generated most of its revenues from
     major customers (see also Note 11).

     The Company conducts its operations and business with and through its
     direct and indirect subsidiaries: InkSure Inc., a Delaware corporation
     incorporated in March 2000; IST Operating Inc., a Delaware corporation,
     incorporated in May 2000 (formerly: InkSure Technologies Inc.) (as of
     December 31, 2005, IST Operating Inc. is inactive); InkSure Ltd., which was
     incorporated in December 1995 under the laws of Israel; and InkSure RF
     Inc., a Delaware corporation incorporated in March 2000 (as of December 31,
     2005, InkSure RF Inc. is inactive).

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

     The consolidated financial statements are prepared in accordance with
     United States generally accepted accounting principles ("U.S. GAAP").

     a.   Use of estimates:

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the amounts reported in the financial
          statements and accompanying notes. Actual results could differ from
          those estimates.

     b.   Financial statements in U.S. dollars:

          A majority of the U.S. subsidiary's sales is made in U.S. dollars
          ("the dollar"). In addition, a substantial portion of the U.S.
          subsidiary costs is incurred in dollars and the majority of the
          expenses of the Israeli subsidiary is paid in new Israeli shekels
          ("NIS"); however, most of the expenses are dominated and determined in
          U.S. dollars. The Company's management believes that the dollar is the
          currency of the primary economic environment in which the Company and
          its subsidiaries operate. Thus, the functional and reporting currency
          of the Company and its subsidiaries is the dollar.

          Accordingly, monetary accounts maintained in currencies other than the
          dollar are remeasured into U.S. dollars in accordance with Statement
          of the Financial Accounting Standards No. 52, "Foreign Currency
          Translation" ("SFAS No. 52"). All transaction gains and losses of the
          remeasurement of monetary balance sheet items are reflected in the
          statements of operations as financial income or expenses, as
          appropriate.

                                     F - 8
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     c.   Principles of consolidation:

          The consolidated financial statements include the accounts of the
          Company and its subsidiaries. Intercompany transactions and balances
          have been eliminated upon consolidation.

     d.   Cash equivalents:

          Cash equivalents are short-term highly liquid investments purchased
          with maturities of three months or less as of the date acquired.

     e.   Inventories:

          Inventories are stated at the lower of cost or market value. Cost is
          determined as follows:

          Raw materials, parts and supplies - using the "first-in, first-out"
          method. Work in progress and finished products - on the basis of
          direct manufacturing costs with the addition of allocable indirect
          manufacturing costs.

     f.   Property and equipment, net:

          Property and equipment are stated at cost, net of accumulated
          depreciation. Depreciation is computed using the straight-line method,
          over the estimated useful lives of the assets as follows:

                                                            YEARS
                                              ----------------------------------

          Computers and peripheral equipment                3-5
          Office furniture and equipment                    5-17
                                                Over the shorter of the term of
          Leasehold improvements             the lease Or the life of the asset

     g.   Goodwill:

          Goodwill represents excess of the costs over the fair value of net
          assets of businesses acquired. Under Statement of Financial Accounting
          Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
          142") goodwill acquired in a business combination on or after July 1,
          2001, is not amortized.

          SFAS No.142 requires goodwill to be tested for impairment at least
          annually or between annual tests in certain circumstances, and written
          down when impaired, rather than being amortized as previous accounting
          standards required. Goodwill attributable to the reporting unit is
          tested for impairment by comparing the fair value of the reporting
          unit with its carrying value. Fair value is determined according to a
          financing round between unrelated parties.

          As of December 31, 2005, no impairment losses have been identified.


                                     F - 9
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     i.   Impairment of long-lived assets

          The Company's long-lived assets and certain identified intangibles are
          reviewed for impairment in accordance with Statement of Financial
          Accounting Standard No. 144, "Accounting for the Impairment or
          Disposal of Long-Lived Assets" ("SFAS No. 144") whenever events or
          changes in circumstances indicate that the carrying amount of an asset
          may not be recoverable. Recoverability of assets to be held and used
          is measured by a comparison of the carrying amount of an asset to the
          future undiscounted cash flows expected to be generated by the assets.
          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 assets exceeds the fair value of the assets. As of December 31,
          2005, no impairment losses have been identified.

     j.   Revenue recognition:

          The Company generates revenues mainly from sales of security inks and
          readers through a combination of its own sales personnel, strategic
          alliances and licenses with intermediaries.

          Revenues from product sales are recognized in accordance with "Revenue
          Recognition in Financial Statements" ("SAB No. 104"), when delivery
          has occurred, persuasive evidence of an agreement exists, the vendor's
          fee is fixed or determinable, no further obligation exists and
          collectability is probable. Delivery is considered to have occurred
          upon shipment of products. The Company does not grant a right of
          return to its customers.

          Revenues from certain arrangements may include multiple elements
          within a single contract. The Company's accounting policy complies
          with the provisions of Emerging Issues Task Force Issue 00-21,
          "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"),
          relating to the separation of multiple deliverables into individual
          accounting units with determinable fair value.

          In cases where the Company has partial delivery at the cut off dates
          and no fair value exist for the undelivered elements revenues are
          being deferred and recognized only at the point where the entire
          arrangement has been delivered.

     k.   Warranty:

          The Company provides a warranty for its products. The term of the
          warranty is three months for hardware products and up to 18 months for
          Smartink products.

          As of the balance sheet date, the Company did not receive any warranty
          claims and does not expect to receive any material warranty claims in
          the future. Therefore, the Company did not record a liability in
          respect of the warranty.

     l.   Research and development costs:

          Research and development costs are charged to the statement of
          operations, as incurred.

                                     F - 10
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

     m.   Basic and diluted net loss per share:

          Basic and diluted net loss per share is presented in accordance with
          Statement of Accounting Financial Standards No. 128, "Earnings Per
          Share" ("SFAS No. 128") for all periods presented. Basic and diluted
          net loss per share of Common stock was determined by dividing net loss
          attributable to Common stock holders by weighted average number of
          shares of Common stock outstanding during the period. Diluted net loss
          per share of Common stock is the same as basic net loss per share of
          Common stock for all periods presented as the effect of the Company's
          potential additional shares of Common stock were antidilutive.

          All outstanding stock options and warrants have been excluded from the
          calculation of the diluted net loss per share of Common stock because
          all such securities are anti-dilutive for the periods presented. The
          total number of shares related to the outstanding options and warrants
          excluded from the calculations of diluted net loss per share, was
          3,017,003 and 4,581,313 for the years ended December 31, 2005 and
          2004, respectively.

     n.   Income taxes:

          The Company accounts for income taxes in accordance with Statement of
          Financial Accounting Standards No. 109, "Accounting for Income Taxes"
          ("SFAS No. 109"). This statement prescribes the use of the liability
          method whereby deferred tax assets and liability account balances are
          determined based on differences between financial reporting and tax
          bases of assets and liabilities and are measured using the enacted tax
          rates and laws that will be in effect when the differences are
          expected to reverse. The Company provides a valuation allowance, if
          necessary, to reduce deferred tax assets to their estimated realizable
          value.

     o.   Concentrations of credit risk:

          Financial instruments that potentially subject the Company to
          concentrations of credit risk consist principally of cash and cash
          equivalents and trade receivables.

          Cash and cash equivalents are invested in major banks in Israel and
          the United States. Such deposits in the United States may be in excess
          of insured limits and are not insured in other jurisdictions.
          Management believes that the financial institutions that hold the
          Company's investments are financially sound, and, accordingly, minimal
          credit risk exists with respect to these investments.

          The trade receivables of the Company are mainly derived from sales to
          customers located in the United States. The Company performs ongoing
          credit evaluations of its customers and to date has not experienced
          any material losses. An allowance for doubtful accounts is determined
          with respect to those amounts that the Company has determined to be
          doubtful of collection. As of December 31, 2005 the Company did not
          provide an allowance for doubtful accounts. In certain circumstances,
          the Company may require letters of credit, other collateral or
          additional guarantees.

          The Company has no off-balance-sheet concentration of credit risk such
          as foreign exchange contracts, option contracts or other foreign
          hedging arrangements.

     p.   Fair value of financial instruments:

          The following methods and assumptions were used by the Company in
          estimating fair value and disclosures for financial instruments:

          The carrying amounts reported in the balance sheet for cash and cash
          equivalents, trade receivables, and trade payables approximate their
          fair value due to the short-term maturities of such instruments.


                                     F - 11
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

     q.   Accounting for stock-based compensation:

          The Company has elected to follow Accounting Principles Board
          Statement No. 25, "Accounting for Stock Options Issued to Employees"
          ("APB No. 25") and FASB Interpretation No. 44, "Accounting for Certain
          Transactions Involving Stock Compensation" ("FIN No. 44") in
          accounting for its employee stock option plans. Under APB No. 25, when
          the exercise price of an employee stock option is equivalent to or
          above the market price of the underlying stock on the date of grant,
          no compensation expense is recognized.

          The Company adopted the disclosure provisions of Statement of
          Financial Accounting Standards No. 148, "Accounting for Stock-Based
          Compensation - Transition and Disclosure" ("SFAS No. 148"), which
          amended certain provisions of Statement of Financial Accounting
          Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
          No. 123") to provide alternative methods of transition for an entity
          that voluntarily changes to the fair value based method of accounting
          for stock-based employee compensation, effective as of the beginning
          of the fiscal year. The Company continues to apply the provisions of
          APB No. 25, in accounting for stock-based compensation.

          Pro forma information regarding the Company's net loss and net loss
          per share is required by SFAS No. 123 and has been determined as if
          the Company had accounted for its employee stock options under the
          fair value method prescribed by SFAS No. 123.

          The fair value for options granted in 2005 and 2004 is amortized over
          their vesting period and estimated at the date of grant using a
          Black-Scholes options pricing model with the following weighted
          average assumptions:

                                                   YEAR ENDED
                                                   DECEMBER 31
                                       -------------------------------------
                                             2005                 2004
                                       -----------------    ----------------

          Dividend yield                      0%                   0%
          Expected volatility                1.16                 1.04
          Risk-free interest                 4.01%                3.7%
          Expected life of up to            5 years             5 years

          Pro forma information under SFAS No. 123 is as follows:


                                                      YEAR ENDED DECEMBER 31,
                                                       --------------------
                                                         2005        2004
                                                       -------      -------

Net loss as reported                                   $(2,213)     $(2,061)
Total stock-based employee compensation determined
   under fair value based method for all awards           (302)        (229)
                                                       -------      -------

Pro forma net loss                                     $(2,515)     $(2,290)
                                                       =======      =======

Net loss per share:
   Basic and diluted as reported                       $ (0.15)     $ (0.15)
                                                       =======      =======

   Basic and diluted pro-forma                         $ (0.17)     $ (0.16)
                                                       =======      =======


                                     F - 12
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

     r.   Advertising expenses:

          Advertising expenses are charged to the statements of operations as
          incurred. Immaterial advertising expenses were incurred in 2005 and
          2004.

     S.   Recent accounting pronouncements:

          In December 2004, the Financial Accounting Standards Board (FASB)
          issued SFAS No. 123(R). SFAS No. 123(R) requires employee share-based
          equity awards to be accounted for under the fair value method, and
          eliminates the ability to account for these instruments under the
          intrinsic value method prescribed by APB Opinion No. 25 and allowed
          under the original provisions of SFAS No. 123. SFAS No. 123(R)
          requires the use of an option pricing model for estimating fair value,
          which is then amortized to expense over the service periods. Had the
          Company adopted SFAS 123(R) in prior periods, the impact of that
          standard would have approximated the impact of SFAS 123 as described
          in the disclosure of pro forma net income and income per share above.
          SFAS No. 123(R) allows for either prospective recognition of
          compensation expense or retrospective recognition. In the first
          quarter of 2006, the company began to apply the prospective
          recognition method and implemented the provisions of SFAS No. 123(R).
          In January 2005, the SEC issued SAB No. 107, which provides
          supplemental implementation guidance for SFAS No. 123(R). SFAS No.
          123(R) will be effective for the Company beginning in the first
          quarter of fiscal 2006.

          In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
          Error Corrections." SFAS No. 154 replaces APB Opinion No. 20.
          "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
          Interim Financial Statements." SFAS No. 154 requires retrospective
          application to prior periods' financial statements of changes in
          accounting principle, unless it is impracticable to determine either
          the period-specific effects or the cumulative effect of the change.
          The Company does not expect the adoption of SFAS No. 154 will have any
          material impact on its consolidated financial statements.

          In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The
          Meaning of Other-Than-Temporary Impairment and Its Application to
          Certain Investments" ("FSP 115-1 and 124-1"), which clarifies when an
          investment is considered impaired, whether the impairment is other
          than temporary, and the measurement of an impairment loss. It also
          includes accounting considerations subsequent to the recognition of an
          other-than-temporary impairment and requires certain disclosures about
          unrealized losses that have not been recognized as
          other-than-temporary impairments. FSP 115-1 and 124-1 are effective
          for all reporting periods beginning after December 15, 2005. At
          December 31, 2005, the Company had no unrealized investment losses
          that had not been recognized as other-than-temporary impairments in
          its available-for-sale securities. The Company does not anticipate
          that the implementation of these statements will have a significant
          impact on its financial position or results of operations.

     T.   Reclassification

          Certain figures from prior years have been reclassified in order to
          conform to the 2005 presentation.


                                     F - 13
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


                                      DECEMBER 31,
                                          2005
                                      ------------

Government authorities                    $ 93
Prepaid expenses                            21
Other                                       17
                                          ----

                                          $131
                                          ====

NOTE 4:- INVENTORIES

                                       DECEMBER 31,
                                          2005
                                      ------------

Raw materials, parts and supplies         $202
Work in progress                            88
Finished products                          304
                                          ----

                                          $594
                                          ====


NOTE 5:- PROPERTY AND EQUIPMENT, NET

                                       DECEMBER 31,
                                          2005
                                      ------------
Cost:
   Computers and peripheral equipment     $559
   Office furniture and equipment          116
   Leasehold improvements                  118
                                          ----

                                           793
                                          ----
Accumulated depreciation:
   Computers and peripheral equipment      310
   Office furniture and equipment           30
   Leasehold improvements                  116
                                          ----

                                           456
                                          ----

Depreciated cost                          $337
                                          ====

          Depreciation expenses for the years ended December 31, 2005 and 2004,
          amounted to $ 115 and $ 111, respectively.

NOTE 6:- ACCRUED SEVERANCE PAY

          Under Israeli law and labor agreements, the Company is required to
          make severance payments to its dismissed employees and employees
          leaving its employment in certain other circumstances. The Company's
          severance pay obligation to its employees, which is calculated on the
          basis of the salary of the employee for the last month of the reported
          period multiplied by the years of such employee's employment, is
          reflected by the accrual presented in the balance sheet.

          Severance pay expenses amounted to $4 and $4 for the years ended
          December 31, 2005 and 2004, respectively.


                                     F - 14
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 7:- CONVERTIBLE NOTE

     ISSUANCE OF CONVERTIBLE NOTES

     On September 30, 2005, the Company completed a private placement of
     convertible notes ("Convertible notes"), in the aggregate principal amount
     of $6,000 pursuant to the Securities Purchase Agreement as of such date
     between the Company and certain investors ("the Investors").

     The Convertible notes are unsecured and will become due on September 30,
     2010, as may be extended at the option of the Investors in certain
     circumstances. Prior to maturity, the Convertible notes will be
     interest-only, with interest payments due quarterly at the rate of 4% per
     year.

     The Convertible notes are convertible initially into 2,000,000 shares of
     the Company's common stock at an initial conversion price per share of
     $3.00, subject to full ratchet anti-dilution protection with respect to any
     future stock issuances below such conversion price. Through July 24, 2007,
     the Investors will have the right to participate up to one-third with any
     subsequent equity or equity-linked capital raising by the Company.

     In accordance with the issuing of the notes, the Company accrued issuance
     charges in the amount of $696, which is amortized over a five year period.

     The Company shall have the right to require that all of the outstanding
     Convertible notes be redeemed at a price equal to 125% of the sum of (i)
     the remaining principal, (ii) accrued and unpaid interest with respect to
     such principal and (iii) accrued and unpaid late charges with respect to
     such principal and interest, if a merger or acquisition, pursuant to which
     holders of common stock are to receive consideration consisting solely of
     cash, is consummated at any time while the Convertible notes remain
     outstanding and certain other conditions are met. Furthermore,
     anti-dilution protection and participation right will terminate if the
     Company is acquired by a publicly traded corporation having an equity
     market capitalization exceeding $150,000 and certain other conditions are
     met.

     The Company may require the Investors to convert all or any portion of the
     convertible notes into shares of common stock if the volume weighted
     average price of the common stock exceeds (i) $6.50 for any 20 trading days
     in any 30 consecutive trading day period after September 30, 2006 or (ii)
     $5.50 for any 20 trading days in any 30 consecutive trading day period
     after September 30, 2007 and certain other conditions are met.

     The agreements also include certain covenants, including covenants
     prohibiting the Company, subject to certain exceptions, from incurring
     debt, unless such debt does not, as of the date on which it is incurred,
     exceed three times LTM EBITDA. The convertible notes also include covenants
     against paying dividends, making redemptions and incurring liens, subject
     to certain exceptions.

     The Company determined that the Convertible notes contained embedded
     derivatives. Derivatives instruments are contractual commitments or payment
     exchange agreements between counterparties that derive their value from an
     underlying asset, liability or equity, depending on their characteristics.
     The Company determined each derivative component should be recorded as a
     liability. The Company valued the derivative components using Black Scholes
     model. The value of the derivatives as of December 31, 2005 is $966. The
     derivatives will be revalued at each reporting period.

     ISSUANCE OF WARRANTS TO PURCHASE CONVERTIBLE NOTES

     The Investors were granted the option to invest an additional $1,250
     through the purchase of additional convertible notes at a conversion price
     of $3.60 per share.

                                     F - 15
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 7:- CONVERTIBLE NOTE (CONT.)

     ISSUANCE OF WARRANTS TO PURCHASE CONVERTIBLE NOTES (CONT.)

     The Company assessed the characteristics of the warrants to purchase
     Convertible notes and determined that they should be recorded as a
     liability and valued by using Black Scholes model. The value of the
     warrants as of December 31, 2005 is $296. The warrants will be revalued at
     each reporting period.

     As a result of recording the warrants and the derivative instruments at
     fair value at the date of issuance, the Company recorded a discount in the
     amount of $1,352, which will be amortized over 5 years period.


NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES

     a.   Lease commitments:

          The Company leases its facilities and certain motor vehicles under
          various operating lease agreements, which expire on various dates, the
          latest of which is in 2007. The annual minimum future rental payments
          under non-cancelable operating leases as of December 31, 2005, are as
          follows:

          YEAR ENDED DECEMBER 31,
          -----------------------

          2006                      $  111
          2007                          49
                                    ------

                                    $  160
                                    ======


          Total rent expenses for the years ended December 31, 2005 and 2004,
          were approximately $ 74 and $ 126, respectively.

          Motor vehicle lease expenses for the years ended December 31, 2005 and
          2004 were approximately $ 47 and $ 71, respectively.

     b.   Charges and guarantees:

          The Company obtained bank guarantees in the amount of $ 9, to secure
          its lease commitments.


                                     F - 16
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

     c.   Other contingencies:

          On December 12, 1999, Secu-Systems filed a lawsuit with the District
          Court in Tel-Aviv-Jaffa against Supercom Ltd. (InkSure Delaware's,
          former parent company) and InkSure Ltd. seeking a permanent injunction
          and damages. The plaintiff asserted in its suit that the printing
          method applied to certain products that have been developed by InkSure
          Ltd. constitutes inter alia: (a) a breach of a confidentiality
          agreement between the plaintiff and Supercom; (b) unjust enrichment of
          Supercom and InkSure Ltd; (c) breach of fiduciary duties owed to the
          plaintiff by Supercom and InkSure Ltd.; and (d) a tort of
          misappropriation of trade secrets and damages to the plaintiff's
          property. Secu-Systems seeks, among other things, an injunction and a
          50% share of profits from the printing method at issue. On March 15,
          2006, the court rendered a decision (i) denying the claim for breach
          of contract; (ii) finding that there was a misappropriation of a trade
          secret, but not assessing any damages with respect thereto; (iii)
          requiring the defendants to cease all activity involving the use of
          any confidential information; and (iv) awarding the plaintiff
          reimbursement of the costs of the litigation in the amount of NIS
          130,000 (approximately $28,000) , plus interest and VAT, which the
          defendants intend to split equally.

          We do not use any of the information that was alleged to be
          confidential in our current products. Accordingly, we do not believe
          that the court decision will have any significant impact on our
          business going forward.

     d.   European commission grants:

          The Company has received non-royalty-bearing grants amounted to $96,
          during the year ended December 31, 2005, from the European commission.
          During 2005 the Company recognized income of $6. These grants are
          recognized at the time the Company is entitled to such grants on the
          basis of the costs incurred and included as a reduction in research
          and development expenses.

NOTE 9:- STOCK CAPITAL

     a.   Stockholders' rights:

          Shares of Common stock confer upon the holders right to receive notice
          to participate and vote in the general meetings of the Company, and
          the right to receive dividends, if and when declared.

     b.   Private placements:

          In March 2004, the Company entered into an investment agreement with
          certain investors. In April 2004, under the agreement, the Company
          issued in a private placement 1,904,412 units with each unit
          consisting of a share of Common stock and a five-year warrant to
          purchase a share of Common stock at an exercise price of $ 1 per
          share. The price per unit was $ 0.68 with net proceeds to the Company
          of $ 1,267 (net of issuance expenses).

          In July 2004, the Company entered into an additional investment
          agreement with certain investors. According to the agreement, the
          Company issued in a private placement an aggregate of 1,125,000 of
          shares of Common stock, at a price per share equal to $ 1 with gross
          proceeds to the Company of $ 1,112 (net of issuance expenses).


                                     F - 17
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 9:- STOCK CAPITAL (CONT.)

     c.   Stock options:

          On August 24, 2001, the board of directors of InkSure Delaware adopted
          the 2001 Employee Stock Option Plan ("the 2001 Plan"). Under the 2001
          Plan 600,000 shares have been reserved for issuance upon the exercise
          of options granted thereafter. The 2001 Plan will remain in effect
          until August 24, 2007.

          According to the merger agreement and according to the approval of the
          Board of Directors of InkSure Technologies Inc., all outstanding
          option agreements (as mentioned above) have been replaced with new
          options agreements in accordance with the Company's 2002 stock option
          plan ("the 2002 Plan").

          The terms and conditions of the 2002 Plan relating to vesting periods
          and exercise prices are the same as in the 2001 Plan.

          Under the 2002 Plan, up to 3,500,000 options may be granted to
          officers, directors, employees and consultants of the Company.

          The options vest ratably over a period of up to four years, commencing
          with the date of grant. The options generally expire no later than
          five years from the date of grant. Any options, which are forfeited or
          cancelled before expiration, become available for future grants.

          As of December 31, 2005, an aggregate of 1,048,506 options are still
          available for future grant under the Company's stock option plans.

          The following is a summary of the Company's stock options granted
          among the various plans:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                        -----------------------------------------------
                                                   2005                     2004
                                        ---------------------     ---------------------
                                                      WEIGHTED                   WEIGHTED
                                                       AVERAGE                   AVERAGE
                                          AMOUNT      EXERCISE      AMOUNT       EXERCISE
                                        OF OPTIONS      PRICE     OF OPTIONS      PRICE
                                        ----------      -----     ----------      -----
<S>                                      <C>            <C>        <C>            <C>
Outstanding at beginning of year *)      2,055,294      $1.00      1,326,994      $0.95

   Granted                                 400,000      $1.32        809,500      $1.10
   Forfeited                                (3,800)     $1.20        (81,200)     $1.13
                                        ----------                ----------


Outstanding at end of year               2,451,494      $0.98      2,055,294      $1.00
                                        ==========      =====     ==========      =====

Exercisable at end of year               1,706,962      $0.92        994,322      $0.90
                                        ==========      =====     ==========      =====
</TABLE>

          *)   Include 300,480 options, which the Company has finalized their
               validity, to purchase 300,480 shares of InkSure Delaware common
               stock. Those options were issued in 2001, at an exercise price of
               $0.50 per share and the Company has agreed to convert the options
               into options to purchase shares of the Company's common stock.

                                     F - 18
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 9:- STOCK CAPITAL (CONT.)

     c.   Stock options (Cont.):

          The options outstanding as of December 31, 2005, have been separated
          into ranges of exercise price as follows:

<TABLE>
<CAPTION>
                                                                                             WEIGHTED
                            OPTIONS          WEIGHTED                        OPTIONS         AVERAGE
                          OUTSTANDING        AVERAGE       WEIGHTED        EXERCISABLE       EXERCISE
    RANGE OF                 AS OF          REMAINING       AVERAGE           AS OF          PRICE OF
    EXERCISE              DECEMBER 31,      CONTRACTUAL    EXERCISE        DECEMBER 31,       OPTIONS
      PRICE                   2005          LIFE (YEARS)     PRICE            2005         EXERCISABLE
      -----                   ----          ------------     -----            ----         -----------
<S>                         <C>                <C>           <C>            <C>                <C>
$   0.8 - 1.2               1,668,494          3.36          $0.80          1,382,627          $0.80
$   1.25 - 1.61               783,000          3.19          $1.37            324,335          $1.44
                            ---------          ----          -----          ---------

                            2,451,494          3.30          $0.98          1,706,962          $0.92
                            =========          ====          =====          =========          =====
</TABLE>

          The company recognized compensation expenses of $46 and $0 for the
          year ended December 31, 2005 and 2004.

     d.   Stock warrants:

          The Company has issued warrants, as follows:

<TABLE>
<CAPTION>
                      OUTSTANDING                       EXERCISABLE
                         AS OF                             AS OF
                      DECEMBER 31,                      DECEMBER 31,
ISSUANCE DATE             2005        EXERCISE PRICE        2005          EXERCISABLE THROUGH
-------------        -------------    --------------    -------------      -------------------
<S>                      <C>             <C>                <C>             <C>
July 2002 (1)            1,326,092       $   2.17           1,326,092       July 2007
September 2002 (1)         108,695       $   2.17             108,695       September 2007
September 2002 (2)         277,772       $   1.61             277,772       September 2007
April 2004 (3)           1,830,883       $   1.00           1,830,883       April 2009
March 2005(4)               50,000       $   1.40              50,000       March 2010
                     -------------                      -------------

                         3,593,442                          3,593,442
                     =============                     ==============
</TABLE>

          (1)  Issued to investors in the 2002 private placement.

          (2)  Issued to underwriters of the 2002 private placement.

          (3)  Issued to investors in the 2004 private placement.

          (4)  Issued to a consultant of the company.

     e.   Dividends:

          In the event that dividends are declared in the future, such dividends
          will be paid in U.S. dollars.

          The Company does not intend to pay cash dividends in the foreseeable
          future.

                                     F - 19
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- TAXES ON INCOME

     a.   Measurement of taxable income under the Income Tax Law (Inflationary
          Adjustments), 1985:

          The results for tax purposes of the Israeli subsidiary are measured in
          terms of earnings in NIS, after certain adjustments for increases in
          the Israeli Consumer Price Index ("CPI"). As explained in Note 2b, the
          financial statements are measured in U.S. dollars. The difference
          between the annual change in the Israeli CPI and in the NIS/dollar
          exchange rate causes a further difference between taxable income and
          the income before taxes shown in the financial statements. In
          accordance with paragraph 9(f) of SFAS No. 109, the Company has not
          provided deferred income taxes on the difference between the
          functional currency and the tax bases of assets and liabilities at the
          Israeli subsidiary.

     b.   Deferred income taxes:

          Deferred income taxes reflect the net tax effects of temporary
          differences between the carrying amounts of assets and liabilities for
          financial reporting purposes and the amounts used for income tax
          purposes. Significant components of the Company's deferred tax assets
          are as follows:

                                                         YEAR ENDED DECEMBER 31,
                                                        -------        -------
                                                          2005           2004
                                                        -------        -------

Net operating loss carryforward                         $ 2,706        $ 1,994
Other deductions for tax purposes                           249          1,084
                                                        -------        -------

Net deferred tax asset before valuation allowance         2,955          3,078
Valuation allowance                                      (2,955)        (3,078)
                                                        -------        -------

Net deferred tax asset                                  $     -        $     -
                                                        =======        =======

          The Company has provided valuation allowances in respect of deferred
          tax assets resulting from tax loss carryforward and other temporary
          differences. Management currently believes that since the Company has
          a history of losses it is more likely than not that the deferred tax
          regarding the loss carryforward and other temporary differences will
          not be realized in the foreseeable future.

          Net loss consists of the following:


               YEAR ENDED DECEMBER 31,
               -------        -------
                2005            2004
               -------        -------

Domestic       $(1,005)       $(1,043)
Foreign         (1,208)        (1,018)
               -------        -------

               $(2,213)       $(2,061)
               =======        =======

     c.   On July 24, 2002, Amendment 132 to the Israeli Income Tax Ordinance
          ("the Amendment") was approved by the Israeli parliament and came into
          effect on January 1, 2003. The principal objectives of the Amendment
          were to broaden the categories of taxable income and to reduce the tax
          rates imposed on employees income.

          The material consequences of the Amendment applicable to the Israeli
          subsidiary include, among other things, imposing tax upon all income
          of Israel residents, individuals and corporations, regardless of the
          territorial source of income and certain modifications in the
          qualified taxation tracks of employee stock options.


                                     F - 20
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- TAXES ON INCOME (CONT.)

     d.   Tax loss carryforwards:

          Net operating loss carryforwards as of December 31, 2005 are as
          follows:

          Israel                    $3,710
          United States *)           5,018
                                    ------

                                    $8,728
                                    ======

          Net operating losses in Israel may be carried forward indefinitely.
          Net operating losses in the U.S. are available through 2024.

          *)   Utilization of U.S. net operating losses may be subject to
               substantial annual limitation due to the "change in ownership"
               provisions of the Internal Revenue Code of 1986 and similar state
               provisions. The annual limitation may result in the expiration of
               net operating losses before utilization.

     e.   The main reconciling items between the statutory rate of the Company
          and the effective tax rate are the non-recognition of tax benefits
          from the accumulated net operating losses carryforward among the two
          subsidiaries due to the uncertainty of the realization of such tax
          benefits.

     f.   Reduction in corporate tax rate:

          On July 25, 2005 an amendment to the Israeli tax law was approved by
          the Israeli parliament, which reduces the tax rates imposed on Israeli
          companies to 31% for 2006. This amendment states that the corporate
          tax rate will be further reduced in subsequent tax years as follows:
          in 2007 29%, in 2008 27%, in 2009 26% and thereafter 25%. This change
          does not have a material effect on the Company's financial statements.

NOTE 11:- FINANCIAL INCOME (EXPENSES), NET


                                                        YEAR ENDED DECEMBER 31,
                                                          ----------------
                                                          2005        2004
                                                          ----        ----

Interest, bank charges and fees, net                      $ (7)       $  5
Foreign currency translation differences                    12          (4)

Non cash expenses related to convertible notes, net        (11)          -
                                                          ----        ----

                                                          $ (6)       $  1
                                                          ====        ====


                                     F - 21
<PAGE>

                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

          The Company manages its business on a basis of one reported operating
          segment: Security Solutions (see Note 1 for a brief description of the
          Company's business). Total revenues are attributed to geographic areas
          based on the location of the end customers. This data is presented in
          accordance with Statement of Financial Accounting Standards No. 131,
          "Disclosure About Segments of an Enterprise and Related Information"
          ("SFAS No. 131").

          The following data presents total revenue for the years ended December
          31, 2005 and 2004, based on the customer's location and long-lived
          assets as of December 31, 2005 and 2004:

                           2005                      2004
                    -------------------       -------------------
                    TOTAL      LONG-LIVED     TOTAL      LONG-LIVED
                   REVENUES      ASSETS      REVENUES      ASSETS
                    ------       ------       ------       ------
United States       $1,215       $  301       $  619       $  312
Export:
   Israel                -          307            -          259
   Turkey              407            -          237            -
   Other                 4            -           99            -
                    ------       ------       ------       ------

                    $1,626       $  608       $  955       $  571
                    ======       ======       ======       ======

          Major customer data as a percentage of total revenues, is as follows:

                       YEAR ENDED DECEMBER 31,
                           --------------
                           2005      2004
                           ----      ----
          Customer A       31%       63%
          Customer B        *        25%
          Customer C       31%        *
          Customer D       17%        *

          *    Represent a percentage lower than 10%


                                     F - 22