U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB


(Mark one):

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
     1934.

     For the fiscal year ended December 31, 2003.

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
     OF 1934


                           COMMISSION FILE NO. 0-24431

                            INKSURE TECHNOLOGIES INC.
                 (Name of small business issuer in our charter)



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

        INKSURE TECHNOLOGIES INC.
               32 BROADWAY
               SUITE 1314                                 10004
              NEW YORK, NY                              (Zip Code)
 (Address of principal executive office)



                     Issuer's telephone number 212-269-0370

Securities registered under Section 12(b) of the Exchange Act:

         Title of each Class           Name of each exchange on which registered



Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                                (Title of Class)

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 disclosure of delinquent filers in response to Item 405 of the
Regulation S-B is not 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. [_]

     State issuer's revenues for its most recent fiscal year: $608,000.

     Aggregate market value of the voting and non-voting common equity stock
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
a specified date within the past 60 days: $10,544,000 as of March 25, 2004.

<PAGE>


Shares of Common Stock outstanding as of March 25, 2004: 11,982,166.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement relating to its Annual Meeting
of Stockholders to be held on July 7, 2004.


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                                TABLE OF CONTENTS


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PART I

ITEM 1.      DESCRIPTION OF BUSINESS                                             1
ITEM 2.      DESCRIPTION OF PROPERTY                                            16
ITEM 3.      LEGAL PROCEEDINGS                                                  16
ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                16

PART II

ITEM 5       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS           17
ITEM 6       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION          19
ITEM 7       FINANCIAL STATEMENTS                                               24
ITEM 8       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE                                           24
ITEM 8A      CONTROLS ANDPROCEDURES                                             25

PART III

ITEM 9       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                 25
ITEM 10      EXECUTIVE COMPENSATION                                             25
ITEM 11      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
             MANAGEMENT AND RELATED STOCKHOLDER MATTERS                         25
ITEM 12      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                     25
ITEM 13      EXHIBITS AND REPORTS ON FORM 8-K                                   26
ITEM 14      PRINCIPAL ACCOUNTANT FEES AND SERVICES                             26

SIGNATURE PAGE                                                                  27
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                                       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 United Kingdom's Counterfeit
Intelligence Bureau estimates that losses by companies and governments from
counterfeiting and diversion range from $300 billion to as high as $1 trillion
annually. Security Solution Consultancy reported that their research had
revealed a market of approximately $25 billion for document and product
protection - a mere 5% to 6% of the total estimated losses due to
counterfeiting.

     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 ("RF") technology being developed by us. We are
also seeking protection under the Patent Cooperation Treaty. See "Description of
Business -- Patents and Proprietary Technology."

     We are currently working on the development of next-generation RF
technology that is being designed to enable low-cost tagging of items. This RF
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 and traceability, proof of ownership, and data carrying
transactions. 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 -- Products."

     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.

     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
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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 without significant additional costs to
the customer or us.

          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. For example, our technology was sufficiently cost-effective to
     be chosen for deployment in the City of Istanbul's bus system, where the
     average ticket price is approximately $0.50. After deployment of our
     solutions through an initial investment of approximately $2,000,000, the
     Istanbul Electric, Tunnel and Tramway Enterprise Administration, which
     operates the City of Istanbul's bus system, has seen its monthly revenue
     from the sale of bus tickets increase by approximately $750,000 per month.
     We believe this increase is due largely to the ability of our technology to
     prevent counterfeiting of tickets for this bus system.


                                       3
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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, toys, and apparel). We have entered into strategic
relationships with Sun Chemicals Group B.V., an industry leader, 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), 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
          toners, 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 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
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     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, including the
alliance we formed in June of 2003 with Sun Chemical Group B.V., the world's
largest manufacturer of printing inks. 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.

     We have entered into an alliance with ISBAK A.S. (Istanbul Belediyeler
Bakim Ulasim San Ve Tic. A.S.), a corporation incorporated under the laws of
Turkey, and MTM Guvenlik ve Holografik Kart Sistemleri A.S., a corporation
incorporated under the laws of Turkey. Pursuant to this agreement dated July
2001, MTM Guvenlik and us will provide certain products and services to ISBAK,
which is creating a secured ticketing system for public transportation in the
City of Istanbul and providing ticket readers for public buses in the City of
Istanbul. During the fiscal year ended December 31, 2002, ISBAK purchased a
quantity of ink sufficient to produce at least 200 million tickets and 2,700
readers. During the fiscal year ended December 31, 2003, ISBAK purchased a
quantity of ink sufficient to produce an additional 90 million tickets. The term
of the agreement is three years. Revenues from this agreement were $2,000,000
for the fiscal year ended December 31, 2002, representing approximately 74% of
our revenues for that year, and $463,000 for the fiscal year ended December 31,
2003, representing approximately 76% of our revenues for such fiscal year
Currently, ISBAK is our largest customer, and the bulk of our revenues are
dependent upon the agreement with ISBAK.

     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 will work 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,
which such termination becoming effective on April 1, 2005. Revenues under this
agreement were $77,000 for the fiscal year ended December 31, 2003.

     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.

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.


                                       5
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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).

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

     Our new SortSure(TM) readers provide high-speed authentication 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.

     The readers utilize proprietary technology 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.

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, the handheld field verification SignaSure(TM)
readers, the automatic TranSure(TM) reader or 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.

     We plan to develop products that permit high volume tagging and
authentication without requiring a line of sight. See "Description of Business
-- Research and Development."

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.


                                       6
<PAGE>


     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.

     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).

     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 RF
technology, needed to deploy those products and product enhancements.

     We pursue a process-oriented strategy in which it conducts 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 $809,000 and $1,184,000 for fiscal years 2002 and 2003,
respectively.


                                       7
<PAGE>


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, 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. We have applied for
three patents covering various methods of marking documents for the purpose of
authentication and three patents related to the RF technology being developed by
us. We are also seeking protection under the Patent Cooperation Treaty.

     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 any of 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.


                                       8
<PAGE>


EMPLOYEES

     At March 25, 2004, we had 13 employees located in Israel, including seven
engineers, one sales and marketing personnel, three management and
administrative personnel, and two operations personnel. In addition, as of March
25, 2004, we had five 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 and marketing 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.

RECENT DEVELOPMENTS

     PIPE TRANSACTION

     In March 2004, we sold $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. The
private placement closed on March 26, 2004.

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; WE 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 $7,713,000 at December
31, 2003 and had a working capital (current assets less current liabilities) of
approximately $1,581,000 at December 31, 2003. We incurred losses of
approximately $2,965,000 for the year ended December 31, 2003. 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.


                                       9
<PAGE>


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 of development, 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.

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 fifteen months based upon our currently
anticipated business activities. We will need additional capital even within
fifteen 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.

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

     For the fiscal year ended December 31, 2003, our relationship with ISBAK
A.S. accounted for approximately 76% of our revenue. The loss of such customer,
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.

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

     We generate all of our revenue from sales and licensing 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.


                                       10
<PAGE>


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 have applied for three patents covering various methods of marking documents
for the purpose of authentication and three patents related to the radio
frequency authentication and security technology, or RF technology, being
developed by us, but have not received any patents. 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.

     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."


                                       11
<PAGE>


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.

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 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.


                                       12
<PAGE>


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.

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.

     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) 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.
Secu-Systems seeks, among other things, an injunction and a 50% share of profits
from the printing method at issue. We received a letter, dated March 8, 2004,
from the law firm of Yossi Avraham & Co., which stated that, based on the facts
provided to it by Supercom and InkSure Ltd., the probability is small that a
court would grant either the permanent injunction or a substantial amount of
damages in connection with Secu-Systems' complaint. On January 19, 2004 we
submitted our closing arguments to the court. Secu-Systems had until March 22,
2004 to reply to our closing arguments. We expect the Court to render its
decision in the fourth quarter of 2004. If Secu-Systems were to win the
litigation we could be forced to make a one-time payment in connection with past
damages and/or payments based on our future revenues and profits. Such payments
could have a material adverse effect on our business, operating results and
financial condition. We offered a settlement amount to Secu-Systems which was
rejected.

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. More recently, 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.


                                       13
<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.


                                       14
<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., beneficially owns, as of March 25, 2004,
4,368,394 shares of our common stock, representing approximately 36.2% of our
outstanding common stock. Such ownership interest gives ICTS 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.

WE ARE DISPUTING THE VALIDITY OF THE ISSUANCE OF AN OPTION TO PURCHASE SHARES OF
INKSURE DELAWARE COMMON STOCK, WHICH IF DETERMINED TO BE VALID WOULD INCREASE
THE NUMBER OF OUR SHARES OF COMMON STOCK OUTSTANDING ON A FULLY DILUTED BASIS.

     We are disputing the valid issuance of an option to purchase 300,480 shares
of InkSure Delaware common stock that was issued prior to the merger of our
wholly owned subsidiary and InkSure Delaware. If our position in this dispute
does not prevail we would be forced to accept the validity of the issuance of
this option and convert it into an option to purchase shares of our common
stock. As a result, the number of shares of our common stock outstanding on a
fully diluted basis would increase by 300,480 shares.

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.


                                       15
<PAGE>


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 25, 2004, our common stock traded at prices ranging from $2.00 to $0.50.
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.

"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 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.

ITEM 2.    DESCRIPTION OF PROPERTY.

     We maintain our executive offices in approximately 2,000 square feet of
space in New York, NY pursuant to a lease expiring in February 2008. Monthly
lease payments are approximately $3,600 per month. We maintain our research and
development facilities in Rehovot, Israel. The facilities we lease in Israel are
approximately 1,476 square feet pursuant to a lease expiring in July 2004.
Monthly lease payments are approximately $3,700 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) 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.
Secu-Systems seeks, among other things, an injunction and a 50% share of profits
from the printing method at issue. We received a letter, dated March 8, 2004,
from the law firm of Yossi Avraham & Co., which states that, based on the facts
provided to it by Supercom and InkSure Ltd., the chances are good that a court
would not grant the permanent injunction or award damages of a substantial
amount in connection with the litigation. On January 19, 2004 we submitted our
closing arguments to the court. Secu-Systems had until March 22, 2004 to reply
to our closing arguments. We expect the Court render a decision in the fourth
quarter of 2004.

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


     No matters were submitted during the fourth quarter of the year ended
December 31, 2003.


                                       16
<PAGE>



                                    PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

     Our common stock commenced trading on the OTC Bulletin Board beginning in
the first quarter of 1998 under the symbol "LILM". On October 30, 2002, our
common stock began trading on the OTC Bulletin Board under the symbol "INKS".
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 OTC Bulletin Board
under the symbol "LILM" for periods prior to October 30, 2002 and under the
symbol "INKS" for periods subsequent to October 30, 2002. Such quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.


<TABLE>
<CAPTION>

                                                    High           Low
                                                    ----           ---
<S>                                                <C>            <C>
CALENDAR YEAR 2002
      1st Quarter                                  $0.722         $0.296
      2nd Quarter                                  $2.037         $0.296
      3rd Quarter                                  $2.13          $1.87
      4th Quarter                                  $2.50          $1.30

CALENDAR YEAR 2003
      1st Quarter                                  $2.45          $1.45
      2nd Quarter                                  $2.00          $1.30
      3rd Quarter                                  $1.50          $1.30
      4th Quarter                                  $1.40          $1.05

CALENDAR YEAR 2004
      1st Quarter (through March 25, 2003)         $1.20          $0.50
</TABLE>



     As of March 25, 2004, the high and low bid prices per share of common stock
as reported by the Over the Counter Bulletin Board under the symbol "INKS" were
$0.88 and $0.88 respectively and there were approximately 100 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, 2003. 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.


                                       17
<PAGE>

<TABLE>
<CAPTION>

                                                                                        Number of securities
                                                                                      remaining available for
                       Number of securities to be       Weighted-average exercise   future issuance under equity
                        issued upon exercise of           price of outstanding     compensation plans (excluding
                     outstanding options, warrants       options, warrants and        securities reflected in
                               and rights                       rights                        column (a))
<S>                                 <C>                           <C>                           <C>
   PLAN CATEGORY                        (A)                         (B)                           (C)
Equity
compensation plans
approved by
security holders                      548,047                     $1.177                        2,951,953

Equity
compensation plans
not approved by
security holders                    2,485,928(1)                  $1.814                                0
                                    -----------                                                -----------
       TOTAL                        3,033,975                                                   2,951,953
</TABLE>




(1) Does not include options to purchase 300,840 shares of InkSure Delaware
common stock which we believe was not validly issued.


     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.

     o    Commonwealth Associates, L.P. warrants, dated July 5, 2002, July 31,
          2002 and September 6, 2002: 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.

     o    Elie Housman option, dated February 6, 2002: options to purchase
          shares 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.

     In connection with the September 2002 private placement, InkSure Delaware
issued 67 five-year warrants to the investors in such private placement. In the
aggregate, this represented the issuance of warrants to purchase 1,456,526
Shares of InkSure Delaware common stock at a price of $2.17 per share. In
connection with the merger of InkSure Delaware with our wholly owned subsidiary,
all warrants to purchase shares of InkSure Delaware common stock were converted
into warrants to purchase shares of our common stock.

EQUITY TRANSACTIONS

     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:


                                       18
<PAGE>


JANUARY 2002 PRIVATE PLACEMENT

     In January 2002, InkSure Delaware issued 356,630 shares of its common
stock, for a purchase price of $250,000 in cash. In connection with the merger
of InkSure Delaware with our wholly owned subsidiary, the shares of InkSure
Delaware common stock were converted into shares of our common stock.

FEBRUARY 2002 PRIVATE PLACEMENT

     In February 2002, InkSure Delaware issued 142,653 shares of its common
stock for a purchase price of $100,000. In connection with the merger of InkSure
Delaware with our wholly owned subsidiary, the shares of InkSure Delaware common
stock were converted into shares of our common stock.

MARCH 2002 SALE OF SERIES A CONVERTIBLE PREFERRED STOCK

     On March 4, 2002, InkSure Delaware, entered into a Stock Purchase Agreement
with Supercom Ltd. and El-Ad Ink LLC. Pursuant to the Stock Purchase Agreement,
Supercom Ltd. sold 1,141,553 shares of InkSure Delaware Series A Preferred Stock
which it owned to El-Ad Ink LLC and InkSure Delaware issued 171,232 shares of
Series A Preferred Stock to El-Ad Ink LLC. The Series A Preferred stock had a
liquidation preference of $0.876 per share and was convertible into an aggregate
of 1,498,613 shares of InkSure Delaware common stock, subject to adjustment
under certain circumstances. In connection with the merger of InkSure Delaware
with our wholly owned subsidiary, all of the shares of InkSure Delaware Series A
Preferred Stock converted into shares of our common stock and was subsequently
exchanged for shares of our common stock.

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.

MARCH 2004 PRIVATE PLACEMENT OF UNITS

In March 2004, we sold $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. The private placement
closed on March 26, 2004.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

     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.


                                       19
<PAGE>


     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.

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'
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 iother 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.


                                       20
<PAGE>


     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. We have
completed several successful field trials during the last year related to these
projects. Our revenues in 2003 consisted of revenues from ink sales under our
multiple-year sales agreement related to the transportation project in Turkey;
initial sales related to the agreement with Sun Chemical; a new project in
Turkey; and an initial order from Mercury Tickets that is related to sports
tickets.

     COSTS AND OPERATING EXPENSES

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

     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 and the development of new products
related to customer projects. 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, 2003. 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.


                                       21
<PAGE>


     In November 2002, the Emerging Issues Task Force, or EITF, reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables".
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003.
Additionally, companies will be permitted to apply the consensus guidance in
this issue to all existing arrangements as the cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes". The adoption of EITF Issue No. 00-21 did not have a material impact
upon our financial position, cash flows or results of operations in 2003.

     INVENTORIES. Inventories are stated at the lower of cost or net realizable
value. Cost is determined by calculating raw materials, work in process and
finished products using the "first in, first out" method.

     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
uncertainties related to the our ability to utilize some portion of the deferred
tax assets, a valuation allowance of approximately $960,000 has been recorded as
of December 31, 2003.

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:

<TABLE>
<CAPTION>

                           YEAR ENDED DECEMBER 31,

                             2003     2002
                             ----     ----
<S>                          <C>       <C>
Revenues                      100%     100%
Cost of Revenues               22       15
                             ----     ----
Gross profit                   78       85

Operating expenses:
Research and development      195       30
Selling and marketing         256       61
General and administrative    120       18
                             ----     ----
Total operating expenses      571      109

Operating loss               (493)     (24)
Financial income, net           6        1
                             ----     ----
Net loss                     (487)     (23)
                             ====     ====
</TABLE>


YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002

                                       22
<PAGE>

     REVENUES. Revenues consist of gross sales of products less discounts and
refunds. 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 2003. Our revenues decreased by $2,085,000, or 77%, to $608,000
in 2003 from $2,693,000 in 2002, primarily due to the long sales cycle required
for entering into new sales agreements. Revenue in 2002 consisted primarily of
the first shipments of equipment and ink and the provision of implementation
services in connection with the transportation project in Turkey; whereas in
2003 our revenues under this agreement consisted primarily of sales of ink.
Accordingly, revenues from this agreement were approximately $2,000,000 for the
fiscal year ended December 31, 2002 and $463,000 for the fiscal year ended
December 31, 2003. As this is our largest customer, such a drop in revenues has
a large impact on our overall revenues.

     COST OF REVENUES. Cost of revenues consists of materials, sub-contractors
and compensation costs. Cost of sales decreased by $268,000, or 67%, to $134,000
in 2003 from $402,000 in 2002. The decrease in cost of revenues is mainly due to
the decrease of sales. Cost of revenues as a percentage of sales was 22% in
2003, compared with 15% in 2002.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
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 $375,000, or 46%, to $1,184,000 in 2003 from $809,000 in 2002. This
increase was primarily a result of the expenses related to the new SignaSure(TM)
reader that had been developed during 2003.

     SELLING AND MARKETING EXPENSES, NET. 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 decreased by $81,000, or 5%, to $1, 560,000 in 2003 from
$1,641,000 in 2002. This decrease was primarily a result of the decrease of
sales. We believe that the significant investment in pre-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 increased by $242,000,
or 49%, to $730,000 in 2003 from $488,000 in 2002. This increase was primarily a
result of the merger at the end of 2002 and the higher D&O insurance, legal and
accounting costs related to our being a public company.

     FINANCIAL INCOME, NET. Financial income, net increased by $11,000, or 42%,
to $37,000 in 2003 from $26,000 in 2002 due to the interest earned on capital
raised in the third quarter of the fiscal year ended December 31, 2002.

     NET LOSS. We had a net loss of $2,965,000 in 2003, compared with a net loss
of $621,000 in 2002, which is an increase of $2,344,000, or 377%. The increase
in net loss in 2003 in comparison with 2002 is primarily due to our decrease in
sales and to a lesser extent attributable to the various other factors described
above.

B.   LIQUIDITY AND CAPITAL RESOURCES

     We have incurred substantial losses since our inception in May 2000. We had
an accumulated deficit of approximately $7,713,000 at December 31, 2003, and had
a working capital (current assets less current liabilities) of approximately
$1,581,000 at December 31, 2003.

     Capital expenditures were approximately $33,000 in 2003 and $32,000 in
2002. These expenditures were principally for machinery, computers and research
and development equipment purchases. We do not have any material commitments for
capital expenditures for the year ending December 31, 2004.

     At December 31, 2003, we had cash, cash equivalents and short term deposits
of approximately $1,453,000 ($4,276 in 2002) and $0 short-term bank credit ($0
in 2002). The differences from December 31, 2003 to December 31, 2002 is due to
decrease in sales and due to the continuing investments in research and
development and sales and marketing expenses. We generated negative cash flow
from operating activities of approximately $2,788,000 during 2003 compared to
$1,034,000 during 2002.


                                       23
<PAGE>


     Our investing activities provided cash of $4,065,000 during 2003 and used
cash of $4,032,000 in 2002. In 2002 we invested approximately $4,000,000 in
short term bank deposits and in 2003 we used the proceeds from these bank
deposits to finance our operations. Our policy is to invest our funds in short
term deposits.

     In March 2004, we sold $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. The
private placement closed on March 26, 2004.

     We believe that cash generated from operations and cash from the March 2004
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 fifteen 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.

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 $874,000 in 2001,
$809,000 in 2002 and $1,184,000 in 2003. To date, all research and development
expenses have been charged to operating expense as incurred. We currently hold
six pending patents on our technologies.

D.   CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     Our contractual obligations and commitments at December 31, 2003
principally include obligations associated with our future-operating lease
obligations and the lease of several automobiles. Our total future obligation is
$412,000 until 2008. See Note 7 to the Consolidated Financial Statements. We
expect to finance these contractual commitments from cash on hand and cash
generated from operations.

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.

     On October 28, 2002, we decided to dismiss Berenson & Company LLP as our
independent auditor and decided to engage Kost, Forer, Gabbay & Kasierer, a
member of Ernst and Young Global, to audit our financial statements since the
2002 fiscal year. Kost, Forer, Gabbay & Kasierer had been the auditors of
InkSure Delaware since its incorporation, and following the consummation of the
merger, our management decided to continue to use InkSure Delaware's former
independent auditors.

     The dismissal of Berenson & Company LLP was effective upon completion of
its work related to our unaudited financial statements that were filed in
connection with our Form 10-QSB for the third fiscal quarter that we filed with
the Securities and Exchange Commission on November 14, 2002.

     The reports of Berenson & Company LLP on our financial statements for the
years ended December 31, 2000 and December 31, 2001, did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit score or accounting principles.


                                       24
<PAGE>


     During our two most recent fiscal years ended December 31, 2003, other than
in connection with the merger, we did not consult with Kost, Forer, Gabbay &
Kasierer regarding any of the matters or events set forth in Item 304(a)(2)(i)
and (ii) of Regulation S-B.

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.

                                    PART III

ITEM 9.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information set forth under the captions "Management", "Section 16(a)
Beneficial Ownership Reporting Compliance" 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, 2004 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, 2004 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, 2004 is hereby incorporated by reference.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information set forth under the captions "Certain Relationships and
Related Transactions" and "Executive Compensation--Employment Agreements,
Termination of Employment and Change of Control Arrangements" in our Proxy
Statement to be furnished in connection with our Annual Meeting of Stockholders
to be held on or about July 7, 2004 is hereby incorporated by reference.


                                       25
<PAGE>


ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K.

     (a)  Exhibits


<TABLE>
<CAPTION>

Exhibit No.          Description
-----------          -----------
<S>                  <C>
2.1                  Agreement and Plan of Merger, dated July 5, among the Company, LILM Acquisition and InkSure
                     Delaware.  (Incorporated by reference 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.
                     (Incorporated by reference to the Company's report filed on Form 8-K, filed with the Commission
                     on November 8, 2002.)
3.2                  Certificate of Amendment of Articles of Incorporation of the Company. (Incorporated by
                     reference to the Company's report filed on Form 8-K, filed with the Commission on November 8,
                     2002.)
3.3                  Articles of Incorporation of the Company.  (Incorporated by reference to the Company's Form
                     10-SB, filed with the Commission on June 10, 1998.)
3.4                  Amendment to By-Laws of the Company.  (Incorporated by reference 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.  (Incorporated by reference to the Company's Form 10-SB, filed with the
                     Commission on June 10, 1998.)
10.1                 2002 Employee, Director and Consultant Stock Option Plan.  (Incorporated by reference to the
                     Company's Quarterly Report on Form 10-QSB, filed with the Commission on November 14, 2002)
10.2                 Employment Agreement, dated as of February 6, 2002, by and between the Company and Elie
                     Housman.  (Incorporated by reference to the Company's Quarterly Report on Form 10-QSB, filed
                     with the Commission on November 14, 2002.)
16.1                 Letter from Berenson & Company, LLP.  (Incorporated by reference to the Company's Periodic
                     Report on Form 8-K, filed with the Commission on November 25, 2002.)
21.1                 Subsidiaries of the Registrant.*
23.1                 Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst and Young Global*
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                 Certification of Chief Executive and Financial Officers Pursuant to Section 906 of the
                     Sarbanes-Oxley Act of 2002.*
</TABLE>

*    Attached as an exhibit to this Form 10-KSB

     (B)  REPORTS ON FORM 8-K

     No matters were reports on Form 8-K were filed with the Commission during
the fourth quarter of the year ended December 31, 2003.

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, 2004 is
incorporated by reference.


                                       26
<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.


<TABLE>
<CAPTION>

     Signature                                     Title                                    Date
     ---------                                     -----                                    ----


<S>                                  <C>                                                <C>
/s/ Yaron Meerfeld                   Chief Executive Officer and Director               March 25, 2004
---------------------
Yaron Meerfeld
</TABLE>



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


<TABLE>
<CAPTION>

     Signature                                     Title                                    Date
     ---------                                     -----                                    ----

<S>                                  <C>                                                <C>
/s/ Yaron Meerfeld                   Chief Executive Officer and Director               March 25, 2004
---------------------                (Principal Executive Officer)
Yaron Meerfeld

/s/ Elie Housman                     Chairman and Director                              March 25, 2004
---------------------
Elie Housman

/s/ Eyal Bigon                       Chief Financial Officer (Principal Financial and   March 25, 2004
---------------------                Accounting Officer)
Eyal Bigon

/s/ James Lineberger                 Director                                           March 25, 2004
---------------------
James Lineberger

/s/ Philip Getter                    Director                                           March 25, 2004
---------------------
Philip Getter

/s/ Michael Acks                     Director                                           March 25, 2004
---------------------
Michael Acks

/s/ Albert Attias                    Director                                           March 25, 2004
---------------------
Albert Attias

/s/ David Sass                       Director                                           March 25, 2004
---------------------
David Sass
</TABLE>


                                       27
<PAGE>

                                                                    EXHIBIT 21.1

                         SUBSIDIARIES OF THE REGISTRANT



InkSure Inc., Delaware
InkSure RF, Inc., Delaware
InkSure Ltd., Israel
IST Operating Inc., Delaware

<PAGE>

                                                                    EXHIBIT 23.1

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement on
Form SB-2 (Registration No. 333-104790) of InkSure Technologies Inc. and the
related Prospectuses of our report dated March 25, 2004, with respect to the
consolidated financial statements of InkSure Technologies Inc. included in the
Annual Report on Form 10-KSB for the year ended December 31, 2003.




                                             /s/ Kost Forer Gabbay and Kasierer
                                               Kost Forer Gabbay and Kasierer
                                             A member of Ernst & Young Global


Tel-Aviv, Israel
March 28, 2003


<PAGE>



                                                                    EXHIBIT 31.1


                                  CERTIFICATION


     I, Yaron Meerfeld, certify that:


     1. I have reviewed this annual report on Form 10-KSB of InkSure
Technologies Inc.;


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


     3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;


     4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


     a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;


     b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and


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


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


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


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




Date: March 25, 2004                     By: /s/ Yaron Meerfeld
                                         ----------------------
                                         Yaron Meerfeld
                                         Chief Executive Officer

<PAGE>


                                                                    EXHIBIT 31.2


                                  CERTIFICATION


     I, Eyal Bigon, certify that:


     1. I have reviewed this annual report on Form 10-KSB of InkSure
Technologies Inc.;


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


     3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;


     4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


     a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;


     b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and


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


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


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


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




Date: March 25, 2004                    By: /s/ Eyal Bigon
                                        ------------------
                                        Eyal Bigon
                                        Chief Financial Officer

<PAGE>


                                                                    EXHIBIT 32.1

                                  CERTIFICATION

            Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
                                  States Code)




     Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of InkSure Technologies Inc., a Delaware corporation
(the "Company"), does hereby certify, to such officer's knowledge, that:


     The Annual Report for the fiscal year ended December 31, 2003 (the "Form
10-KSB") of the Company fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, and the information contained in
the Form 10-KSB fairly presents, in all material respects, the financial
condition and results of operations of the Company.




         Dated: March 25, 2004           /s/ Yaron Meerfeld
                                         ------------------
                                         Yaron Meerfeld, Chief Executive Officer


         Dated: March 25, 2004           /s/ Eyal Bigon
                                         ------------------
                                         Eyal Bigon, Chief Financial Officer




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

<PAGE>





                 INKSURE TECHNOLOGIES INC. AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2003


                                 IN U.S. DOLLARS




                                      INDEX

<TABLE>
<CAPTION>

                                                                     Page
                                                                ----------------
<S>                                                                  <C>
REPORT OF INDEPENDENT AUDITORS                                         2

CONSOLIDATED BALANCE SHEET                                           3 - 4

CONSOLIDATED STATEMENTS OF OPERATIONS                                  5

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)             6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                7 - 8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          9 - 23
</TABLE>





                              - - - - - - - - - - -

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS

                             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, 2003,
and the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows for each of the two years in the period then
ended. 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 audits in accordance with auditing standards generally
accepted in the 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes 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, 2003, and the consolidated
results of their operations and cash flows for each of the two years in the
period then ended, in conformity with accounting principles generally accepted
in the United States.



Tel-Aviv, Israel                                 KOST FORER GABBAY & KASIERER
March 25, 2004                                 A Member of Ernst & Young Global


                                      F - 2
<PAGE>


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

<TABLE>
<CAPTION>

                                                         December 31,
                                                             2003
                                                            ------
<S>                                                         <C>
    ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                 $1,432
  Short-term bank deposits                                      21
  Trade receivables                                            499
  Other accounts receivable and prepaid expenses (Note 3)      137
  Inventories (Note 4)                                         105
                                                            ------

TOTAL current assets                                         2,194
                                                            ------


SEVERANCE PAY FUND                                              96
                                                            ------

PROPERTY AND EQUIPMENT, NET (Note 5)                           303
                                                            ------

TECHNOLOGY, NET (Note 6)                                        75
                                                            ------

GOODWILL                                                       271
                                                            ------

TOTAL assets                                                $2,939
                                                            ======
</TABLE>




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 (EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>

                                                                                                     December 31,
                                                                                                         2003
                                                                                                        -------
<S>                                                                                                     <C>
    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Trade payables                                                                                        $   362
  Employees and payroll accruals                                                                            127
  Accrued expenses                                                                                          124
                                                                                                        -------

TOTAL current liabilities                                                                                   613
                                                                                                        -------


ACCRUED SEVERANCE PAY                                                                                       119
                                                                                                        -------




 COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

STOCKHOLDERS' EQUITY:
  Stock capital (Note 8):
    Preferred stock of $ 0.01 par value -
      Authorized: 10,000,000 shares at December 31, 2003; Issued and outstanding: 0 shares at
      December 31, 2003
    Common stock of $ 0.01 par value -
      Authorized: 35,000,000 shares at December 31, 2003; Issued and outstanding: 11,982,166 shares
      at December 31, 2003                                                                                  119
  Additional paid-in capital                                                                              9,683
  Accumulated other comprehensive income                                                                    118
  Accumulated deficit                                                                                    (7,713)
                                                                                                        -------

TOTAL stockholders' equity                                                                                2,207
                                                                                                        -------

TOTAL liabilities and stockholders' equity                                                              $ 2,939
                                                                                                        =======
</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,
                                                                                    ------------------------------
                                                                                            2003              2002
                                                                                    ------------      ------------
<S>                                                                                 <C>               <C>

Revenues (Note 11)                                                                  $        608      $      2,693
Cost of revenues                                                                             134               402
                                                                                    ------------      ------------

Gross profit                                                                                 474             2,291
                                                                                    ------------      ------------

Operating expenses:
  Research and development                                                                 1,184               809
  Selling and marketing, net                                                               1,560             1,641
  General and administrative                                                                 730               488
                                                                                    ------------      ------------

TOTAL operating expenses                                                                   3,474             2,938
                                                                                    ------------      ------------

Operating loss                                                                            (3,000)             (647)
Financial income, net (Note 10)                                                               35                26
                                                                                    ------------      ------------

Net loss                                                                                  (2,965)             (621)
Redeemable Preferred A shares deemed dividend (Note 8b)                                        -              (200)
                                                                                    ------------      ------------

Net loss applicable to Common stockholders                                          $     (2,965)     $       (821)
                                                                                    ============      ============

Basic and diluted net loss per share                                                $      (0.24)     $      (0.10)
                                                                                    ============      ============

Weighted average number of Common stock used in computing basic and diluted net
  loss per share                                                                      11,982,166         7,921,971
                                                                                    ============      ============
</TABLE>




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


                                      F - 5
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

                                                                                                  Accumulated              Total
                                                                Receipts  Additional  Deferred      other              shareholders'
                                                      Share   on account    paid-in    stock    comprehensive Accumulated  equity
                                                     capital   of shares    capital  compensation   income     deficit  (deficiency)
                                                     -------    -------     -------     -------     -------    -------     -------

<S>                                                  <C>        <C>         <C>         <C>         <C>        <C>         <C>
Balance as of January 1, 2002                        $    57    $   250     $ 1,997     $   (61)    $   118    $(3,927)    $(1,566)

  Issuance of  Common stock and warrants, net             48       (250)      5,972           -           -          -       5,770
  Issuance of Common stock in respect of
    reverse acquisition, net                              14          -         153           -           -          -         167
  Capital surplus in respect of transaction
    between InkSure Delaware and Supercom Ltd.             -          -       1,480           -           -          -       1,480
  Reversal of deferred stock compensation due
    to forfeiture of stock options to employees            -          -         (61)         61           -          -           -
  Deemed dividend upon conversion of Common stock
    to Redeemable Preferred A shares (Note 8b)             -          -         200           -           -       (200)          -
  Net loss                                                 -          -           -           -           -       (621)       (621)
                                                     -------    -------     -------     -------     -------    -------     -------

Balance as of December 31, 2002                          119          -       9,741           -         118     (4,748)      5,230
  Issuance expenses in respect of reverse
    acquisition                                            -          -         (58)          -           -          -         (58)
  Net loss                                                 -          -           -           -           -     (2,965)     (2,965)
                                                     -------    -------     -------     -------     -------    -------     -------

Balance as of December 31, 2003                      $   119       $  -     $ 9,683     $     -     $   118    $(7,713)    $ 2,207
                                                     =======    =======     =======     =======     =======    =======     =======
</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,
                                                                             ------------------
                                                                                2003       2002
                                                                             -------    -------
<S>                                                                          <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                   $(2,965)   $  (621)
  Adjustments required to reconcile net loss to net cash used in operating
    activities:
    Depreciation and amortization                                                151        147
    Accrued severance pay, net                                                    19        (13)
    Decrease (increase) in trade receivables                                     231       (418)
    Decrease (increase) in other accounts receivable and prepaid expenses         89        (18)
    Decrease (increase) in inventories                                           (17)       125
    Increase (decrease) in trade payables                                       (108)       144
    Increase (decrease) in employees and payroll accruals                         17        (82)
    Decrease in accrued expenses                                                (156)      (235)
    Accumulated interest on short-term bank deposits                             (49)       (63)
                                                                             -------    -------

Net cash used in operating activities                                         (2,788)    (1,034)
                                                                             -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                             (33)       (32)
  Investment in short-term bank deposits                                      (1,224)    (4,000)
  Proceeds from short-term bank deposits                                       5,315          -
  Proceeds from sale of property and equipment                                     7          -
                                                                             -------    -------

Net cash provided by (used in) investing activities                            4,065     (4,032)
                                                                             -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term bank credit, net                                                      -       (410)
  Issuance of Common stock and warrants, net                                       -      5,770
  Principal payment of long-term loan from related party                           -       (250)
  Issuance of Common stock in respect of reverse acquisition, net                  -        167
  Issuance expenses in respect of reverse acquisition                            (58)         -
                                                                             -------    -------

Net cash provided by (used in) financing activities                              (58)     5,277
                                                                             -------    -------

Increase in cash and cash equivalents                                          1,219        211
Cash and cash equivalents at the beginning of the year                           213          2
                                                                             -------    -------

Cash and cash equivalents at the end of the year                             $ 1,432    $   213
                                                                             =======    =======
</TABLE>



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


                                      F - 7
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                            --------------------
                                                                                2003       2002
                                                                            -----------   ------
<S>                                                                         <C>           <C>
NON-CASH TRANSACTIONS:
  Capital surplus in respect of transactions between InkSure Delaware and
    Supercom Ltd.                                                           $         -   $1,480
                                                                            ===========   ======

  Redeemable Preferred A shares deemed dividend                             $         -   $  200
                                                                            ===========   ======

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
  Cash paid during the year for:
    Interest                                                                $         -   $   26
                                                                            ===========   ======
</TABLE>







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


                                      F - 8
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

NOTE 1:-      GENERAL

     a.   InkSure Technologies Inc. (formerly: Lil Marc 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 2003, the Company
          generated most of its revenues from two 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, 2003, 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, 2003, InkSure RF Inc. is inactive).

     b.   According to the agreement between LILM (a subsidiary of Lil Marc
          Inc.) and InkSure Technologies (Delaware) Inc. ("InkSure Delaware"),
          Lil Marc Inc., a public shell, issued 10,541,086 shares of Common
          stock to the former holders of equity interest in InkSure Delaware. As
          a result of this transaction, the shareholders of InkSure Delaware own
          approximately 88% of the combined company, while the shareholders of
          Lil Marc own approximately 12%.

          The merger was accounted for as a reverse acquisition of Lil Marc by
          InkSure Delaware. Although Lil Marc is the surviving legal entity, for
          financial reporting purposes, the entity whose stockholders hold in
          excess of 50% of the combined company, InkSure Delaware, is treated as
          the continuing accounting entity. The reverse acquisition is treated
          as a capital stock transaction in which InkSure Delaware is deemed to
          have issued the Common stock held by the Lil Marc stockholders for the
          net assets (comprised of cash only) of Lil Marc.

          Upon consummation of the merger, the Company's board of directors and
          management resigned and were replaced by InkSure Delaware's board of
          directors and management, and the Company began to carry on InkSure
          Delaware's business activities.

          On October 28, 2002, as part of the Company's amendment of its
          Articles of Incorporation, the Company changed its name from Lil Marc
          Inc. to InkSure Technologies Inc.

          As of October 30, 2002, the OTC Bulletin Board stock symbol of the
          Company's Common stock was changed from LILM to INKS.


                                      F - 9
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA


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" or "dollars"). 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. Company's management believes that the dollar is the
          primary currency of the 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.

          Through 1999, the financial statements of InkSure Ltd., whose
          functional currency was not the new Israeli shekels ("NIS"), have been
          translated into U.S. dollars. Assets and liabilities have been
          translated at year end exchange rates in effect at the balance sheet
          date. Statement of operations items have been translated at average
          exchange rates prevailing during the year. The resulting translation
          adjustments were recorded as a separate component of shareholders'
          equity in accumulated other comprehensive income. Effective January 1,
          2000, due to a change in its business environment the subsidiary
          adopted the U.S. dollar as its functional currency.

     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 and the date acquired.

     e.   Short-term bank deposits:

          Short-term bank deposits are deposited with maturities of more than
          three months but less than one year. Short-term bank deposits are in
          U.S. dollars and bear an average annual interest of 2%. Short-term
          bank deposits are presented at their cost, including accrued interest.


                                     F - 10
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA


NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     f.   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. Finished products - on the basis of direct manufacturing costs
          with the addition of allocable indirect manufacturing costs.

     g.   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, at the following annual
          rates:

<TABLE>
<CAPTION>

                                                                  %
                                                     ---------------------------
<S>                                                            <C>
          Computers and peripheral equipment                   20 - 33
          Office furniture and equipment                        6 - 20
          Leasehold improvements                      over the term of the lease
</TABLE>

     h.   Goodwill:

          Goodwill represents excess of the costs over the 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 on adoption
          and at least annually thereafter 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, 2003, no impairment losses have been identified.

          During 2003, the goodwill balance did not change.

     i.   Technology:

          Intangible assets acquired in a business combination for which date is
          on or after July 1, 2001, should be amortized over their useful life,
          using the method of amortization that reflects the pattern in which
          the economic benefits of the intangible assets are consumed or
          otherwise used up, in accordance with SFAS No. 142.

          Technology is amortized over a period of 3 years.


                                     F - 11
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA


NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     j.   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,
          2003, no impairment losses were recognized.

     k.   Severance pay:

          The liability of the Israeli subsidiary for severance pay is
          calculated pursuant to Israeli severance pay law based on the most
          recent salary of the employees multiplied by the number of years of
          employment as of the balance sheet date. Employees are entitled to one
          month's salary for each year of employment, or a portion thereof. The
          subsidiary's liability is fully provided by monthly deposits with
          severance pay funds, insurance policies and by an accrual. The value
          of these policies was recorded as an asset in the Company's balance
          sheet.

          The deposited funds include profits accumulated up to the balance
          sheet date. The deposited funds may be withdrawn only upon the
          fulfillment of the obligation pursuant to Israeli severance pay law or
          labor agreements. The value of the deposited funds is based on the
          cash surrendered value of these policies, and includes immaterial
          profits.

          Severance expenses for the years ended December 31, 2003 and 2002
          amounted to $ 44 and $ 49, respectively.

     l.   Revenue recognition:

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

          The Company and its subsidiaries have also adopted Staff Accounting
          Bulletin No. 104, "Revenue Recognition in Financial Statements ("SAB
          No. 104"). Revenues from product sales are recognized in accordance
          with 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.


                                     F - 12
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA


NOTE 2:-      SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          In November 2002, Emerging Issues Task Force reached a consensus on
          Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
          ("EITF No. 00-21"). EITF No. 00-21 provides guidance on how to account
          for arrangements that involve the delivery or performance of multiple
          products, services and/or rights to use assets. The provisions of EITF
          Issue No. 00-21 applied to revenue arrangements entered into in fiscal
          periods beginning after June 15, 2003. Additionally, companies will be
          permitted to apply the consensus guidance in this issue to all
          existing arrangements as the cumulative effect of a change in
          accounting principle in accordance with APB Opinion No. 20,
          "Accounting Changes". The adoption of EITF Issue No. 00-21 did not
          have a material impact upon the Company's financial position, cash
          flows or results of operations in 2003.

     m.   Warranty:

          The Company provides a warranty for its products. The term of the
          warranty is the earlier of:

          (a)  one year from the day system is installed or

          (b)  fifteen months from the date of delivery of the system.

          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.

     n.   Research and development costs:

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

     o.   Selling and marketing costs:

          The Company has received non-royalty-bearing grants amounted to $12
          and $31, during the years ended December 31, 2003 and 2002,
          respectively, from the Israeli Fund for Encouragement of Marketing
          Activity. 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 deduction of selling and marketing expenses.

     p.   Basic and diluted net loss per share:

          Basic net earnings (loss) per share is computed based on the weighted
          average number of Common stock outstanding during each year. Diluted
          net earnings per share is computed based on the weighted average
          number of shares of Common stock outstanding during the year, in
          accordance with Statement of Accounting Financial Standards No. 128,
          "Earnings Per Share" ("SFAS No. 128").

          All outstanding stock options and warrants have been excluded from the
          calculation of the diluted net loss per 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 from
          the calculations of diluted net loss per share, was 2,990,473 and
          2,859,953 for the years ended December 31, 2003 and 2002,
          respectively.


                                     F - 13
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA


NOTE 2:-      SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

     q.   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 and its subsidiaries provides a
          valuation allowance, if necessary, to reduce deferred tax assets to
          their estimated realizable value.

     r.   Concentrations of credit risk:

          Financial instruments that potentially subject the Company to
          concentrations of credit risk consist principally of cash and cash
          equivalents, short-term bank deposits and trade receivables.

          Cash and cash equivalents, and short-term bank deposits 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 primarily in Turkey. 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 and its subsidiaries
          have determined to be doubtful of collection. 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.

     s.   Fair value of financial instruments:

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

          The carrying amounts of cash and cash equivalents, short-term bank
          deposits, trade receivables, and trade payables approximate their fair
          value due to the short-term maturity of such instruments.


                                     F - 14
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-      SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

     t.   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 2003 and 2002 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:
<TABLE>
<CAPTION>

                                                    2003               2002
                                               ---------------    --------------
<S>                                                   <C>                <C>
          Dividend yield                              0%                 0%
          Expected volatility                         2.1               0.5
          Risk-free interest                          3%                3.5%
          Expected life of up to                      5                 5
</TABLE>


                                     F - 15
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

NOTE 2:-      SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

          Pro forma information under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>

                                                                   The Company
                                                             ----------------------
                                                             Year Ended December 31,
                                                             ----------------------
                                                                  2003         2002
                                                             -------------    -----
<S>                                                          <C>              <C>
Net loss applicable to Common stockholders as reported       $      (2,965)   $(821)
                                                             =============    =====
Total stock-based compensation determined under fair value
   based method for all awards                               $        (138)   $(164)
                                                             =============    =====

Pro forma net loss                                           $      (3,103)   $(985)
                                                             =============    =====

Net loss per share:
   Basic and diluted as reported                             $       (0.24)   $(0.10)
                                                             =============    =====

   Basic and diluted pro-forma                               $       (0.26)   $(0.12)
                                                             =============    =====
</TABLE>

     u.   Advertising expenses:

          Advertising expenses are charged to the statements of operations as
          incurred. Immaterial advertising expenses were incurred in 2003 and
          2002.


NOTE 3:-      OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
<TABLE>
<CAPTION>

                                               December 31,
                                                  2003
                                                  ----

<S>                                               <C>
               Government authorities             $ 50
               Prepaid expenses                     11
               Other                                76
                                                  ----

                                                  $137
                                                  ====


NOTE 4:-      INVENTORIES

              Raw materials, parts and supplies   $ 61
              Finished products                     44
                                                  ----

                                                  $105
                                                  ====
</TABLE>


                                     F - 16
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 5:-      PROPERTY AND EQUIPMENT, NET

<TABLE>
<CAPTION>

                                                                                  December 31,
                                                                                      2003
                                                                                      ----
<S>                                                                                   <C>
              Cost:
                 Computers and peripheral equipment                                   $307
                 Office furniture and equipment                                        112
                 Leasehold improvements                                                115
                                                                                      ----

                                                                                       534
                                                                                      ----
              Accumulated depreciation:
                 Computers and peripheral equipment                                    170
                 Office furniture and equipment                                         37
                 Leasehold improvements                                                 24
                                                                                      ----

                                                                                       231
                                                                                      ----

              Depreciated cost                                                        $303
                                                                                      ====

              Depreciation expenses for the years ended December 31, 2003 and 2002,
              amounted to $ 79 and $ 75, respectively

              As for charges, see Note 7b


NOTE 6:-      TECHNOLOGY, NET

              Original amounts:
                 Technology                                                           $219
                 Less - accumulated amortization                                       144
                                                                                      ----

              Amortized cost                                                          $ 75
                                                                                      ====
</TABLE>



          Amortization expenses amounted to $72 for the years ended December 31,
          2003 and 2002. Estimated amortization expenses for the year ended
          December 31, 2004 is $ 75.


NOTE 7:-      COMMITMENTS AND CONTINGENT LIABILITIES

     a.   Lease commitments:

          The Company rents its facilities and certain motor vehicles under
          various operating lease agreements, which expire on various dates, the
          latest of which is in 2008. The minimum rental payments under
          non-cancelable operating leases as of December 31, 2003 are as
          follows:


<TABLE>
<CAPTION>

                                Year Ended
                               December 31,
                            -------------------

<S>                                <C>
                2004               $129
                2005                100
                2006                100
                2007                 76
                2008                  7
                                   ----

                                   $412
                                   ====
</TABLE>


                                     F - 17
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 7:-      COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

          Total rent expenses for the years ended December 31, 2003 and 2002,
          were approximately $ 89 and $ 72, respectively.

          Motor vehicle lease expenses for the years ended December 31, 2003 and
          2002 were approximately $ 78 and $ 107, respectively.

     b.   Charges and guarantees:

          The Company obtained bank guarantees in the amount of $ 34, to secure
          its lease commitment.

     c.   Litigation:

          1.   On December 12, 1999, Secu-Systems filed a lawsuit with the
               District Court in Tel-Aviv-Jaffa against Supercom (InkSure
               Delaware, 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)
               breach of fiduciary duties owed to the plaintiff by Supercom and
               InkSure Ltd.; and (d) a tort of misappropriation of trade secrets
               and damage to plaintiff's property. Secu-Systems seeks, among
               other things, an injunction and a 50% share of profits from the
               printing method at issue. The Company's legal counsel and
               management are of the opinion that, based on the facts provided
               by Supercom and InkSure Ltd., the chances are good that the court
               will not grant the permanent injunction or award damages of a
               substantial amount in connection with this litigation. In 2004
               all parties submitted their arguments to the court. The Company
               expects the court render adecision in the fourth quarter of 2004.

          2.   The Company is disputing the valid issuance of an option to
               purchase 300,480 shares of InkSure Delaware Common stock that was
               issued prior to the reverse acquisition at an exercise price of $
               0.5 per share. If the Company's position in this dispute does not
               prevail it would be forced to accept the validity of the issuance
               of this option and convert it into an option to purchase shares
               of the Company's Common stock. However, the Company's management
               believes that it will not cause a material impact on its results
               of operations.

NOTE 8:-      SHARE CAPITAL

     a.   Stockholders' rights:

          Shares of Common stock confer upon the holders the 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 January 2002, InkSure Delaware issued 356,630 shares of Common
          stock, in consideration of $ 250, which were invested by a private
          investor during 2001.

          In February 2002, InkSure Delaware issued 142,653 shares of Common
          stock in return for an amount of $ 100 invested in InkSure Delaware by
          a private investor.


                                     F - 18
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 8:-      SHARE CAPITAL (CONT.)

          In March 2002, the Company converted 1,141,553 shares of Common stock
          held by Supercom Ltd. into 1,141,553 Redeemable Preferred A shares.
          Those shares were sold to EL-AD Inc. LLC (a privately held investment
          company). In addition, InkSure Delaware issued 171,232 Redeemable
          Preferred A shares to EL-AD Inc. LLC, in consideration for $ 150. The
          Company recorded a deemed dividend in the amount of $ 200, which was
          calculated as the difference between the fair value of the Redeemable
          Preferred A shares and the fair value of the Common stock at the date
          of conversion. The deemed dividend was recognized as a charge to
          paid-in capital against net loss applicable to Ordinary stockholders,
          without any effect on total stockholders' equity. During July 2002,
          all Redeemable Preferred A shares were converted on a one-to-one basis
          into Common stock.

          On July 8, 2002, InkSure Delaware closed the first round of its
          private placement of 2,531,065 shares of Common stock and of 885,865
          five-year warrants to purchase Common stock at an exercise price of $
          2.17 per share, and raised gross proceeds of $ 4,075.

          On July 31, 2002, InkSure Delaware closed the second round of its
          private placement of 1,319,880 shares of Common stock and of 461,966
          five-year warrants to purchase Common stock at an exercise price of $
          2.17 per share and raised gross proceeds of $ 2,125.

          On September 6, 2002, InkSure Delaware closed the third round of its
          private placement of 310,560 Common stock and of 108,695 five-year
          warrants to purchase Common stock at an exercise price of $ 2.17 per
          share, and raised gross proceeds of $ 500.

          In connection with the placement, Commonwealth Associated L.P., the
          exclusive Placement Agent in the Offering received a commission equal
          to 8.5% of the aggregate gross proceeds. In addition, InkSure Delaware
          issued to Commonwealth Associates L.P., five-year warrants to purchase
          Common stock equal to 10% of the total number of Common stock and
          warrants sold in the placement. Commonwealth Associates L.P., received
          550,933 warrants at an exercise price of $ 1.61 per share.

     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.


                                     F - 19
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 8:-      SHARE CAPITAL (CONT.)

          As of December 31, 2003, an aggregate of 2,473,486 Common shares of
          the Company 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,
                                ----------------------------------------------------
                                        2003                        2002
                                -----------------------   --------------------------
                                             Weighted                      Weighted
                                              average                      average
                                  Amount      exercise      Amount         exercise
                                of options    price       of options         price
                                ----------    ---------   ----------      ----------
<S>                                <C>          <C>          <C>          <C>
Outstanding at beginning of
   year                            863,256      $   1.00     469,830      $   0.62
   Granted                         174,000      $   1.45     733,706      $   1.03
   Forfeited                       (10,742)     $   1.20    (340,280)     $   0.53
                                ----------                ----------

Outstanding at end of year       1,026,514      $   1.08     863,256      $   1.00
                                ==========      =====     ==========      =====

Exercisable at end of year         714,918      $   1.05     555,777      $   0.95
                                ==========      =====     ==========      =====
</TABLE>



          The options outstanding as of December 31, 2003, 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               2003         life (years)           price       2003      exercisable
---------------         -------        ----                 --------    -------     --------
<S>                     <C>               <C>              <C>         <C>         <C>
$     0.8 - 1.2         752,514           6.26             $   0.92    628,787     $   0.98
$     1.45 - 1.61       274,000           4.03             $   1.51     86,131     $   1.51
                      ---------                               -----  ---------

                      1,026,514                            $   1.08    714,918     $   1.05
                      =========                            ========    =======     ========
</TABLE>



          No compensation expenses were recognized by the Company for the years
          ended December 31, 2003 and 2002. In 2003 all options were granted
          with exercise price equal to the market price of the stock on the date
          of grant and the weighted average fair value of the options at date of
          grant was $ 1.42.

     d.   Stock warrants:

          The Company has issued warrants, as follows:


<TABLE>
<CAPTION>

                      Outstanding              Exercisable
                         as of                  as of
                      december 31,   Exercise  december 31,  Exercisable
Issuance date            2003          price      2003         through
-------------          ---------       -----   ---------       -------
<S>                    <C>           <C>       <C>           <C>
July 2002 (1)          1,347,831     $   2.17  1,347,831     July 2007
September 2002 (1)       108,695     $   2.17    108,695     September 2007
September 2002 (2)       550,933     $   1.61    550,933     September 2007
                       ---------               ---------
                       2,007,459               2,007,459
                      ==========              ==========
</TABLE>


                                     F - 20
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 8:-      SHARE CAPITAL (CONT.)

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

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

     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.


NOTE 9:-      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 and its
          subsidiaries' deferred tax assets are as follows:

<TABLE>
<CAPTION>

                                                     Year ended december 31,
                                                      --------------------
                                                       2003         2002
                                                      -------      -------

<S>                                                   <C>          <C>
Net operating loss carryforward                       $ 1,529      $ 1,426
Other deductions for tax purposes                       1,975        1,036
                                                      -------      -------

Net deferred tax asset before valuation allowance       3,504        2,462
Valuation allowance                                    (3,504)      (2,462)
                                                      -------      -------

Net deferred tax asset                            $         -  $         -
                                                      =======      =======
</TABLE>


                                     F - 21
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 9:-      TAXES ON INCOME (CONT.)

          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. During fiscal 2003, the
          Company increased its valuation allowance by $ 1,042 to $ 3,504.

          Net loss consists of the following:


<TABLE>
<CAPTION>

             Year ended december 31,
             -------      -------
               2003        2002
             -------      -------

<S>          <C>          <C>
Domestic     $(1,299)     $  (611)
Foreign       (1,666)         (10)
             -------      -------

             $(2,965)     $  (621)
             =======      =======
</TABLE>



     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.

     d.   Tax loss carryforwards:

          Net operating loss carryforwards as of December 31, 2003 are as
          follows:

<TABLE>
<CAPTION>

<S>                  <C>
Israel               $2,665
United States *)      2,969
                     ------

                     $5,634
                     ======
</TABLE>



          Net operating losses in Israel may be carried forward indefinitely.
          Net operating losses in the U.S. are available through 2023.

          *)   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 accumulated net operating losses carry forward among the two
          subsidiaries due to the uncertainty of the realization of such tax
          benefits.


                                     F - 22
<PAGE>


                                                     INKSURE TECHNOLOGIES INC.
                                                          AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA

NOTE 10:-     FINANCIAL INCOME, NET

<TABLE>
<CAPTION>

                                          Year ended december 31,
                                             --------------
                                             2003      2002
                                             ----      ----
<S>                                          <C>       <C>
Interest, bank charges and fees              $ 44      $ 16
Foreign currency translation differences       (9)       10
                                             ----      ----

                                             $ 35      $ 26
                                             ====      ====
</TABLE>


NOTE 11:-     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 revenues for the years ended
          December 31, 2003 and 2002, based on customer's location and
          long-lived assets as of December 31, 2003 and 2002:


<TABLE>
<CAPTION>

                         2003                   2002
                   -----------------     -----------------
                              Long-                  Long-
                    Total     lived      Total       lived
                   revenues   assets    revenues    assets
                   ------     ------     ------     ------

<S>            <C>            <C>        <C>        <C>
United States  $        -     $  384     $  650     $  445
Export:
   Israel               -        265          3        329
   Turkey             464          -      2,009          -
   Netherlands         77          -          -          -
   Other               67          -         31          -
                   ------     ------     ------     ------

                   $  608     $  649     $2,693     $  774
                   ======     ======     ======     ======
</TABLE>



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


<TABLE>
<CAPTION>
           Year ended december 31,
               -----------
               2003   2002
               ----   ----
<S>            <C>     <C>
Customer A     76%     74%
Customer B      -      21%
Customer C     11%      -
</TABLE>


NOTE 12:-     SUBSEQUENT EVENTS (UNAUDITED)

          Subsequent to the balance sheet date, the Company entered into an
          investment agreement with certain investors. According to the above
          agreement the Company will issue in a private placement up to $ 1,295
          of Common stock, $ 0.01 par value and five year warrants to purchase
          shares of Common stock at an exercise price of $ 1 per share.

                              - - - - - - - - - - -


                                     F - 23