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

                                   FORM 10-KSB

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

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004, OR

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

              FOR THE TRANSITION PERIOD FROM _________ TO _________

                         Commission file number 0-24431

                            INKSURE TECHNOLOGIES INC.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

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


                1770 N.W. 64TH STREET FORT LAUDERDALE, FL 433309
                ------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

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

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

                                                     Name of Each Exchange
       Title of Each Class                           On Which Registered
       -------------------                           -------------------


           Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $0.01 per share

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                               Yes [X]     No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).

                               Yes [_]     No [X]

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based on the average bid and asked price of
such common equity of $1.35 per share, as of March 30, 2005 was $11,501,000

At March 30, 2005, 15,011,579 shares of the Registrant's common stock, par value
$0.01 per share, were outstanding.

                       Documents Incorporated By Reference

The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-KSB: certain information required in Part
III of this Annual Report on Form 10-KSB is incorporated from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on July 7,
2005.

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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 AND PROCEDURES                                                     24
ITEM 8B      OTHER INFORMATION                                                           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                                            25
ITEM 14      PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      26

SIGNATURE PAGE                                                                           27
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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.

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     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."

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.


                                       2
<PAGE>


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

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

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

INKSURE SOLUTIONS

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

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

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

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


                                       3
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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. and with Merck KgaA, 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.

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


                                       4
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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 had revenues this year pursuant to several orders received from MTM
Guvenlik ve Holografik Kart Sistemleri A.S., a corporation incorporated under
the laws of Turkey. Pursuant to these orders, MTM Guvenlik, purchases readers
and ink for use in hologram-related products. Revenues from this agreement were
$237,000 for the fiscal year ended December 31, 2004, representing approximately
25% of our revenues for that year.

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

     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.

     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.

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.


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     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 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.

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.

     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.


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<PAGE>


     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 $1,184,000 and $775,000 for fiscal years 2003 and 2004,
respectively.

MANUFACTURING AND PRODUCTION

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

                                       7
<PAGE>


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

PATENTS AND PROPRIETARY TECHNOLOGY

     Although our policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of our
business, and although we will continue to seek the supplemental protection
afforded by patents, we generally consider protection of our products, processes
and materials to be more dependent upon proprietary knowledge, know-how and
rapid assimilation of innovations than patent protection. 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. Recently
one of our patent applications related to our RF technology was approved and a
patent was issued for such technology in the United States. In addition, the
patent application for such technology was approved in the European Union. We
are now seeking additional patent protection for such technology in certain
countries in Europe.

     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.

EMPLOYEES

     At March 30, 2005, we had 13 employees located in Israel, including seven
engineers, two sales and marketing personnel, three management and
administrative personnel, and one operations personnel. In addition, as of March
30, 2005, 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, marketing and customer support
personnel. We consider our relations with our employees to be satisfactory. We
believe our future will depend in large part on our ability to attract and
retain highly skilled employees.

                                       8
<PAGE>


     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.

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 $9,774,000 at December
31, 2004 and had a working capital (current assets less current liabilities) of
approximately $1,990,000 at December 31, 2004. We incurred losses of
approximately $2, 061,000 for the year ended December 31, 2004. We expect to
spend significant amounts to enhance our products and services, develop further
sales and operations, and fund expansion. As a result, we will need to generate
significant revenue to break even or achieve profitability. Even if we do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis.

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

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

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

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

                                       9
<PAGE>


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, 2004, sales to one of our new
customers in the United States accounted for approximately 63% of our revenues.
The loss of this 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 of products relating to the
"authentication industry." The market for providing these products and services
is highly competitive and is affected by the introduction of new products and
services that compete with the products and services offered by us. Demand for
these products and services could be affected by numerous factors outside our
control, including, among others, market acceptance by prospective customers,
the introduction of new or superior competing technologies or products and
services that are available on more favorable pricing terms than those being
offered by us, and the general condition of the economy. Any market acceptance
for our products and services may not develop in a timely manner or may not be
sustainable. New or increased competition may result in market saturation, more
competitive pricing, and lower margins. Our business, operating results and
financial condition would be materially and adversely affected if the market for
our products and services fails to grow, grows more slowly than anticipated, or
becomes more competitive or if targeted customers do not accept our products and
services and we experience a corresponding reduction in revenues, a higher loss
and a failure to generate substantial revenues in the future.

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

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

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

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

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

     Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We regard protection of our proprietary
rights as critical to our success, and rely on patent, trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
our employees, customers, partners and others to protect our proprietary rights.
We 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. Currently, only one of our patent applications related to our
RF technology has been approved in the United States. In addition, the patent
application for such technology has been approved in the European Union. We are
currently seeking additional patent protection for such technology in certain
European countries.


                                       10
<PAGE>


     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."

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.


                                       11
<PAGE>

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.

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.


                                       12
<PAGE>


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 16, 2005,
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. At the beginning of 2004 we
submitted our closing arguments to the court, and Secu-Systems replied to our
closing arguments. We expect the Court to render its decision by the end of
2005. 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.

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

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

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.

                                       13
<PAGE>

     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.

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

     ICTS International, N.V. and its affiliates beneficially own, as of March
30, 2005, 4,825,555 shares of our common stock, representing approximately 32.1%
of our outstanding common stock. Such ownership interest gives ICTS and its
affiliates substantial influence over the outcome of all matters submitted to
our stockholders, including the election of directors and the adoption of a
merger agreement, and such influence could make us a less attractive acquisition
or investment target.


                                       14
<PAGE>


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 reverse
acquisition merger at an exercise price of $ 0.50 per share. 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. We are in the process of evaluating the validity of the grant with
our legal counsel. This claim has not matured to legal proceeding at this point,
and therefore our legal counsel and management can not predict the outcome of
this claim.

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

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

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

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

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

     Our common stock is traded on the over-the-counter market with quotations
published on the NASD OTC Bulletin Board under the symbol "INKS". The trading
volume of our common stock historically has been limited and sporadic, and the
stock prices have been volatile. For example, during the twelve months prior to
March 30, 2005, our common stock traded at prices ranging from $1.90 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.


                                       15
<PAGE>


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

     Our common stock is subject to rules promulgated by the Securities and
Exchange Commission 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 that is located in Fort Lauderdale, FL pursuant to a lease which expires
in February 2007. Our monthly lease payments are approximately $2,700 per month.
We maintain our research and development facilities in Rehovot, Israel. The
facilities we lease in Israel are approximately 1,000 square feet pursuant to a
lease expiring in September 2005. Monthly lease payments for such facility are
approximately $2,800 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 16, 2005,
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. At the beginning of 2004 we submitted
our closing arguments to the court, and Secu-Systems replied to our closing
arguments. We expect the Court to render its decision by the end of 2005.

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


     No matters were submitted to a vote of our security holders during the
fourth quarter of the year ended December 31, 2004.


                                       16
<PAGE>



                                    PART II

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

PRICE RANGE OF COMMON STOCK

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

<TABLE>
<CAPTION>
                                                     HIGH         LOW
                                                     ----         ---
<S>                                                 <C>         <C>
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                                   $1.20       $0.51
      2nd Quarter                                   $1.30       $0.77
      3rd Quarter                                   $1.80       $0.98
      4th Quarter                                   $1.80       $1.20

CALENDAR YEAR 2005
      1st Quarter (through March 30, 2005)          $1.77       $1.25
</TABLE>



     As of March 30, 2005, 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
$1.40 and $1.35 respectively and there were approximately 107 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, 2004. 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                                   FUTURE ISSUANCE UNDER EQUITY
                        ISSUED UPON EXERCISE OF        WEIGHTED-AVERAGE EXERCISE   COMPENSATION PLANS (EXCLUDING
                     OUTSTANDING OPTIONS, WARRANTS       PRICE OF OUTSTANDING         SECURITIES REFLECTED IN
                               AND RIGHTS            OPTIONS, WARRANTS AND RIGHTS           COLUMN (A))

   PLAN CATEGORY                  (A)                             (B)                           (C)
<S>                            <C>                               <C>                         <C>

Equity
compensation plans
approved by
security holders               1,276,347                         $0.996                      2,223,653
Equity
compensation plans
not approved by
security holders               4,390,338(1)                      $1.460                           0
                               ---------                                                     ----------
       TOTAL                   5,666,685                                                     2,223,653

</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.

     o    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.

     o    In connection with a private placement which we closed on April 8,
          2004, we issued warrants to purchase an aggregate of 1,904,411 shares
          of our common stock at a price of $1.00 per share.

     o    In connection with services rendered to us, on March 15, 2005 we
          issued warrants to purchase 50,000 shares of our common stock to Mr.
          Jerry Falkner. The warrants are exercisable for 10 years and have an
          exercise price of $1.40 per share.


                                       18
<PAGE>


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:

SEPTEMBER 2002 PRIVATE PLACEMENT OF UNITS

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

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

APRIL 2004 PRIVATE PLACEMENT OF UNITS

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

JULY 2004 PRIVATE PLACEMENT

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

MARCH 2005 WARRANT ISSUANCE

     In connection with services rendered to us, on March 15, 2005 we issued
warrants to purchase 50,000 shares of our common stock to Mr. Jerry Falkner. The
warrants are exercisable for 10 years and have an exercise price of $1.40 per
share

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.

     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.


                                       19
<PAGE>


OVERVIEW

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

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

     FACTORS AFFECTING FUTURE RESULTS

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

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

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

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

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

     REVENUES

     We are currently concentrating on entering and implementing large-scale
projects. These potential contracts are subject to a long sales cycle and the
timetable is lengthy for entering and implementing such projects. These projects
involve high volume sales through multiple-year sales contracts. In the 2004
fiscal year we entered into two sales agreements of this type, and we have also
completed several successful field trials during the last year related to other
projects. In the 2004 fiscal year approximately 65% of our revenues were earned
from customers located in the United States. Sales related to our project with
MTM in Turkey represented 25% of our sales in the 2004 fiscal year. Sales
related to our agreement with Sun Chemical represented approximately 6% of our
sales in fiscal year 2004.


                                       20
<PAGE>


     COSTS AND OPERATING EXPENSES

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

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

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

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

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

     We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to December 31, 2004. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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


                                       21
<PAGE>


     INVENTORIES. Inventories are stated at the lower of cost or net realizable
value. Cost is determined by calculating raw materials using the "first in,
first out" method, work in process and finished products on the basis of direct
manufacturing costs with the addition of allocable indirect manufacturing costs.

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

     DEFERRED INCOME TAXES. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets and any
valuation allowance recorded against net deferred tax assets. Due to the fact
that the Company has history of losses it is likely that the deferred tax will
not be realized, therefore a valuation allowance of approximately $3,078,000 has
been recorded as of December 31, 2004.

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,

                                    2004            2003
                                    ----            ----
<S>                                 <C>             <C>
Revenues                             100%            100%
Cost of Revenues                      43              22
                                    ----            ----

Gross profit                          57              78

Operating expenses:
Research and development              81             195
Selling and marketing                130             256
General and administrative            62             120
                                    ----            ----

Total operating expenses             273             571

Operating loss                      (216)           (493)
Financial income, net                  0               6
                                    ----            ----

Net loss                            (216)           (487)
                                    ====            ====
</TABLE>



YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003

     REVENUES. Revenues consist of gross sales of products. We are currently
concentrating on entering and implementing large-scale projects. These potential
contracts are subject to a long sales cycle and the timetable for entering and
implementing such projects fluctuates. This affected our results in 2004. Our
revenues increased by $347,000, or 57%, to $955,000 in 2004 from $608,000 in
2003, primarily due to one of our new customers located in the United States and
the new MTM project in Turkey. As of December, 31 2004, revenues in the amount
of $123,000 were deferred to 2005 due to the implementation of EITF No. 00-21
"Revenue Arrangements with Multiple Deliverables".


                                       22
<PAGE>


     COST OF REVENUES. Cost of revenues consist of materials, sub-contractors
and compensation costs. Cost of revenues increased by $279,000, or 208%, to
$413,000 in 2004 from $134,000 in 2003. The increase in cost of revenues is
mainly due to the increase of sales and the increase of cost as a percentage of
revenues. Cost of revenues as a percentage of sales was 43 % in 2004, compared
with 22% in 2003. The increase in cost of revenues as a percentage of revenues
is related to the mix of sales. Our revenues in 2004 consisted of sales of
readers and ink, and our sales in 2003 consisted primarily of sales of ink, in
which the cost of revenues is much lower.

     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
decreased by $409,000, or 35%, to $775,000 in 2004 from $1,184,000 in 2003. This
decrease in research and development expenses is primarily related to our need
to use fewer subcontractors in connection with the development of new products
and new generations of our existing products.

     SELLING AND MARKETING EXPENSES, NET. Selling and marketing expenses, net
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, net decreased by $321,000, or 21%, to $1,239,000
in 2004 from $1,560,000 in 2003. This decrease in selling and marketing
expenses, net was primarily due to the higher marketing expenses we faced in
2003 which were related to several marketing agreements we had entered into. We
believe that our significant investment in sales and marketing activities over
time will contribute to our short-term and long-term sales levels.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of compensation costs for administration, finance and general
management personnel, office maintenance, insurance, legal, accounting and
administrative costs. General and administrative expenses decreased by $140,000,
or 19%, to $590,000 in 2004 from $730,000 in 2003. This decrease was primarily a
result of lower legal expenses.

     FINANCIAL INCOME, NET. Financial income, net decreased by $34,000, or 97%,
to $1,000 in 2004 from $35,000 in 2003 due to changes in the exchange rate
between the United States Dollar and the Israeli New Shekel.

     NET LOSS. We had a net loss of $2,061,0000 in 2004, compared with a net
loss of $2,965,000 in 2003, which is a decrease of $904,000, or 31%. The
decrease in net loss in 2004 in comparison with 2003 is primarily due to our
increase in revenues and decrease in operating expenses.

B.   LIQUIDITY AND CAPITAL RESOURCES

     We have incurred substantial losses since our inception in May 2000. We had
an accumulated deficit of approximately $9,774,000 at December 31, 2004, and had
a working capital (current assets less current liabilities) of approximately
$1,990,000 at December 31, 2004.

     Capital expenditures were approximately $72,000 in 2004 and $33,000 in
2003. 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.

     As of December 31, 2004, we had cash, cash equivalents and short-term
deposits of approximately $1,648,000, compared to $1,453,000 in 2003. This
increase is the result of the amounts we raised in the two private placement
transactions we completed during 2004 as such amounts are offset by our
continuing investments in research and development and selling and marketing
expenses. We had $0 short-term bank credit in each of 2004 and 2003. We
generated negative cash flow from operating activities of approximately
$2,112,000 in 2004 compared to $2,788,000 in 2003.

     Our investing activities used cash of $51,000 in 2004 and provided cash of
$4,065,000 in 2003. Our policy is to invest our funds in short-term deposits.

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


                                       23
<PAGE>


     On July 19, 2004 we closed a private placement of $1,125,000 of shares of
its common stock, par value $0.01 per share, at the price of $1.00 per share.

     We believe that cash generated from operations and cash from the 2004
private placements will provide sufficient cash resources to finance our
operations and the projected expansion of our marketing and research and
development activities for the next twelve 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 $809,000 in 2002,
$1,184,000 in 2003 and $775,000 in 2004. To date, all research and development
expenses have been charged to operating expense as incurred. We currently hold
five pending patents on our technologies and we have been issued one patent
related to our RF technology in the United States. In addition a patent
application for such technology has been approved in the European Union.
Currently we are seeking additional protection for such technology in certain
European countries.

D.   CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     Our contractual obligations and commitments at December 31, 2004
principally include obligations associated with our future-operating lease
obligations and the lease of several automobiles. Our total future obligation is
$237,000 until 2007. 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.

     None.

ITEM 8A. CONTROLS AND PROCEDURES.

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

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


                                       24
<PAGE>


ITEM 8B. OTHER INFORMATION.

      None.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information set forth under the captions "Directors, Executive
Officers, Promoters and Control Persons", "Compliance with Section 16(a) of the
Exchange Act" and "Code of Ethics" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held on or about July
7, 2005 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, 2005 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, 2005 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, 2005 is hereby incorporated by reference.

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.
</TABLE>


                                       25
<PAGE>

<TABLE>
<CAPTION>
<S>                  <C>
21.1                 Subsidiaries of the Registrant.  (Attached as an exhibit to this Form 10-KSB.)

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>


     (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, 2004.

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, 2005 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 30, 2005
------------------
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 30, 2005
------------------         (Principal Executive Officer)
Yaron Meerfeld


/s/ Elie Housman           Chairman and Director                                    March 30, 2005
------------------
Elie Housman

/s/ Eyal Bigon             Chief Financial Officer (Principal Financial and         March 30, 2005
------------------         Accounting Officer)
Eyal Bigon

/s/ James Lineberger       Director                                                 March 30, 2005
------------------
James Lineberger

/s/ Philip Getter          Director                                                 March 30, 2005
------------------
Philip Getter

/s/ Michael Acks           Director                                                 March 30, 2005
------------------
Michael Acks

/s/ Albert Attias          Director                                                 March 30, 2005
------------------
Albert Attias

/s/ David Sass             Director                                                 March 30, 2005
------------------
David Sass
</TABLE>


                                       27
<PAGE>


                 INKSURE TECHNOLOGIES INC. AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2004


                            U.S. DOLLARS IN THOUSANDS




                                      INDEX


<TABLE>
<CAPTION>
                                                                PAGE
                                                             -------------
<S>                                                         <C>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM         F - 2

CONSOLIDATED BALANCE SHEET                                  F - 3 - F - 4

CONSOLIDATED STATEMENTS OF OPERATIONS                           F - 5

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                   F - 6

CONSOLIDATED STATEMENTS OF CASH FLOWS                           F - 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  F - 8 - F - 25
</TABLE>

<PAGE>


[ERNST & YOUNG LOGO]



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


                             TO THE STOCKHOLDERS OF

                            INKSURE TECHNOLOGIES INC.


     We have audited the accompanying consolidated balance sheet of InkSure
Technologies Inc. ("the Company") and its subsidiaries as of December 31, 2004,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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, 2004, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.




Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
March 27, 2005                                  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,
                                                               2004
                                                              ------
<S>                                                           <C>
    ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                   $1,648

  Trade receivables                                              317
  Other accounts receivable and prepaid expenses (Note 3)        111

  Inventories (Note 4)                                           530
                                                              ------


TOTAL current assets                                           2,606
                                                              ------

SEVERANCE PAY FUND                                               115
                                                              ------

PROPERTY AND EQUIPMENT, NET (Note 5)                             264
                                                              ------

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

GOODWILL                                                         271
                                                              ------

TOTAL assets                                                  $3,256
                                                              ======
</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

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                                    2004
                                                                                  --------
<S>                                                                               <C>
    LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Trade payables                                                                  $    381
  Employees and payroll accruals                                                       121
  Accrued expenses                                                                     114
                                                                                  --------

TOTAL current liabilities                                                              616
                                                                                  --------


ACCRUED SEVERANCE PAY                                                                  115
                                                                                  --------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

STOCKHOLDERS' EQUITY:
  Stock capital (Note 8):
    Preferred stock of $ 0.01 par value -
      Authorized: 10,000,000 shares in 2004; Issued and outstanding: 0 shares
    Common stock of $ 0.01 par value -
      Authorized: 35,000,000; Issued and outstanding: 15,011,579                       150
  Additional paid-in capital                                                        12,031
  Accumulated other comprehensive income                                               118

  Accumulated deficit                                                               (9,774)
                                                                                  --------


TOTAL stockholders' equity                                                           2,525
                                                                                  --------

TOTAL liabilities and stockholders' equity                                        $  3,256
                                                                                  ========
</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,
                                                                                  ------------------------------
                                                                                     2004              2003
                                                                                  ------------      ------------
<S>            <C>                                                                <C>               <C>
Revenues (Note 11)                                                                $        955      $        608

Cost of revenues                                                                           413               134
                                                                                  ------------      ------------


Gross profit                                                                               542               474
                                                                                  ------------      ------------

Operating expenses:

  Research and development                                                                 775             1,184
  Selling and marketing, net                                                             1,239             1,560
  General and administrative                                                               590               730
                                                                                  ------------      ------------


TOTAL operating expenses                                                                 2,604             3,474
                                                                                  ------------      ------------


Operating loss                                                                          (2,062)           (3,000)
Financial income, net (Note 10)                                                              1                35
                                                                                  ------------      ------------


Net loss                                                                          $     (2,061)     $     (2,965)
                                                                                  ============      ============

                                                                                  ============      ============

Basic and diluted net loss per share                                              $      (0.15)     $      (0.24)
                                                                                  ============      ============

Weighted average number of shares of Common stock used in computing basic and
  diluted net loss per share                                                        13,956,864        11,982,166
                                                                                  ============      ============
</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
                                                                      ADDITIONAL      OTHER         TOTAL
                                                           SHARE       PAID-IN     COMPREHENSIVE  ACCUMULATED  STOCKHOLDERS'
                                                          CAPITAL      CAPITAL        INCOME       DEFICIT        EQUITY
                                                          --------     --------      --------      --------      --------
<S>                   <C>                                 <C>          <C>           <C>           <C>           <C>
Balance as of January 1, 2003                             $    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

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

Balance as of December 31, 2004                           $    150     $ 12,031      $    118      $ (9,774)     $  2,525
                                                          ========     ========      ========      ========      ========
</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,
                                                                               --------------------
                                                                                2004         2003
                                                                               -------      -------
<S>                                                                            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                     $(2,061)     $(2,965)
  Adjustments required to reconcile net loss to net cash used in operating
    activities:
    Depreciation and amortization                                                  186          151
    Accrued severance pay, net                                                     (22)          19
    Decrease in trade receivables                                                  182          231
    Decrease  in other accounts receivable and prepaid expenses                     26           89
    Increase in inventories                                                       (425)         (17)
    Increase (decrease) in trade payables                                           19         (108)
    Increase (decrease) in employees and payroll accruals                           (7)          17
    Decrease in accrued expenses                                                   (10)        (156)
    Accumulated interest on short-term bank deposits                                 -          (49)
                                                                               -------      -------

Net cash used in operating activities                                           (2,112)      (2,788)
                                                                               -------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                               (72)         (33)
  Investment in short-term bank deposits                                             -       (1,224)
  Proceeds from short-term bank deposits                                            21        5,315
  Proceeds from sale of property and equipment                                       -            7
                                                                               -------      -------

Net cash provided by (used in) investing activities                                (51)       4,065
                                                                               -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of Common stock and warrants, net                                     2,379            -
  Issuance expenses in respect of reverse acquisition                                -          (58)
                                                                               -------      -------

Net cash provided by (used in) financing activities                              2,379          (58)
                                                                               -------      -------

Increase in cash and cash equivalents                                              216        1,219
Cash and cash equivalents at the beginning of the year                           1,432          213
                                                                               -------      -------

Cash and cash equivalents at the end of the year                               $ 1,648      $ 1,432
                                                                               =======      =======
</TABLE>


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


                                     F - 7
<PAGE>


                                                       INKSURE TECHNOLOGIES INC.
                                                            AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE 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 2004, the Company
          generated most of its revenues from major customers (see also Note
          11).

          The Company conducts its operations and business with and through its
          direct and indirect subsidiaries, InkSure Inc., a Delaware corporation
          incorporated in March 2000; IST Operating Inc., a Delaware
          corporation, incorporated in May 2000 (formerly: InkSure Technologies
          Inc.) (as of December 31, 2004, 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, 2004, InkSure RF Inc. is inactive).

     b.   According to the agreement signed in 2002 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 an 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 stock capital 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 - 8
<PAGE>


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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

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

          a.   Use of estimates:

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

          b.   Financial statements in U.S. dollars:

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

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

               Through 1999, the financial statements of InkSure Ltd., whose
               functional currency was the 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 as of the date
               acquired.


                                     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 (CONT.)

          e.   Inventories:

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

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

          f.   Property and equipment, net:

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

<TABLE>
<CAPTION>
                                                                                     %
                                                                  -----------------------------------------

<S>                                                               <C>
               Computers and peripheral equipment                                 20 - 33
               Office furniture and equipment                                      6 - 20
                                                                  Over the shorter of the term of the lease
               Leasehold improvements                                     Or the life of the asset
</TABLE>

          g.   Goodwill:

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

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

               As of December 31, 2004, no impairment losses have been
               identified.

          h.   Technology:

               Intangible assets acquired in a business combination for which
               the 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 three years.


                                     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.)

          i.   Impairment of long-lived assets

               The Company's long-lived assets and certain identified
               intangibles are reviewed for impairment in accordance with
               Statement of Financial Accounting Standard No. 144, "Accounting
               for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
               144") whenever events or changes in circumstances indicate that
               the carrying amount of an asset may not be recoverable.
               Recoverability of assets to be held and used is measured by a
               comparison of the carrying amount of an asset to the future
               undiscounted cash flows expected to be generated by the assets.
               If such assets are considered to be impaired, the impairment to
               be recognized is measured by the amount by which the carrying
               amount of the assets exceeds the fair value of the assets. As of
               December 31, 2004, no impairment losses have been identified.

          j.   Severance pay:

               Pursuant to section 14 of the Severance Compensation Act, 1963
               ("section 14"), the employees of the Company are entitled to
               monthly deposits, at a rate of 8.33% of their monthly salary,
               made in their name with insurance companies. Section 14 allows
               the Company to make yearly deposits in the severance pay fund
               according to the employees' current salary. Furthermore, the fund
               is made available to the employee at the time when the
               employer-employee relationship ends, regardless of cause of
               termination.

               Severance expenses for the years ended December 31, 2004 and 2003
               amounted to $ 24 and $ 44, respectively.


                                     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.)

          k.   Revenue recognition:

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

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

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

               The Company recognizes revenues from sales arrangements of which
               all the products are being delivered in accordance with EITF
               00-21 guidelines.

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

          l.   Warranty:

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

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

          m.   Research and development costs:

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

          n.   Government grants:

               The Company has received non-royalty-bearing grants amounted to $
               0 and $ 12, during the years ended December 31, 2004 and 2003,
               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 reduction in sales and marketing
               expenses.


                                     F - 12
<PAGE>


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


          o.   Basic and diluted net loss per share:

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

               All outstanding stock options and warrants have been excluded
               from the calculation of the diluted net loss per share of Common
               stock because all such securities are anti-dilutive for the
               periods presented. The total number of shares related to the
               outstanding options and warrants excluded from the calculations
               of diluted net loss per share, was 4,581,313 and 3,305,261 for
               the years ended December 31, 2004 and 2003, respectively.


                                     F - 13
<PAGE>


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


NOTE 2:- SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

          p.   Income taxes:

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

          q.   Concentrations of credit risk:

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

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

               The trade receivables of the Company are mainly derived from
               sales to customers located in the United States. The Company
               performs ongoing credit evaluations of its customers and to date
               has not experienced any material losses. An allowance for
               doubtful accounts is determined with respect to those amounts
               that the Company has determined to be doubtful of collection. As
               of December 31, 2004 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.

          r.   Fair value of financial instruments:

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

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


                                     F - 14
<PAGE>


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


NOTE 2:- SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

          s.   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 2004 and 2003 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>
                                                                        YEAR ENDED
                                                                        DECEMBER 31
                                                                 -------------------------
                                                                  2004              2003
                                                                 -------           -------
<S>                                                              <C>               <C>
                      Dividend yield                               0%                 0%
                      Expected volatility                         1.04               2.1
                      Risk-free interest                          3.7%                3%
                      Expected life of up to                     5 years           5 years
</TABLE>


                                     F - 15
<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.)

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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                             --------------------
                                                               2004         2003
                                                             -------      -------
<S>                                                          <C>          <C>
Net loss as reported                                         $(2,061)     $(2,965)
Total stock-based employee compensation determined under
   fair value based method for all awards                       (229)        (138)
                                                             -------      -------

Pro forma net loss                                           $(2,290)     $(3,103)
                                                             =======      =======

Net loss per share:
   Basic and diluted as reported                             $ (0.15)     $ (0.24)
                                                             =======      =======

   Basic and diluted pro-forma                               $ (0.16)     $ (0.26)
                                                             =======      =======
</TABLE>

          t.   Advertising expenses:

               Advertising expenses are charged to the statements of operations
               as incurred. Immaterial advertising expenses were incurred in
               2004 and 2003.

          u.   Impact of recently issued accounting pronouncements:

               In November 2004, the FASB issued Statement of Financial
               Accounting Standard No. 151, "Inventory Costs, an Amendment of
               ARB No. 43, Chapter 4." ("SAFS 151"). SFAS 151 amends Accounting
               Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that
               abnormal amounts of idle facility expense, freight handling costs
               and wasted materials (spoilage) should be recognized as
               current-period charges. In addition, SFAS 151 requires that the
               allocation of fixed production overheads to the costs of
               conversion be based on the normal capacity of the production
               facilities. SAFS 151 is effective for inventory costs incurred
               during fiscal years beginning after June 15, 2005. As of December
               31, 2004, the Company does not expect that the adoption of SFAS
               151 will have a material effect on its financial position or
               results of operations.


NOTE 2:- SIGNIFICANT ACCOUNTING PRINCIPLES (CONT.)

     On December 16, 2004, the Financial Accounting Standards Board (FASB)
     issued Statement No. 123 (revised 2004), SHARE-BASED PAYMENT ("Statement
     123R"), which is a revision of FASB Statement No. 123, ACCOUNTING FOR
     STOCK-BASED COMPENSATION ("Statement 123"). Generally, the approach in
     Statement 123(R) is similar to the approach described in Statement 123.
     However, Statement 123 permitted, but did not require, share-based payments
     to employees to be recognized based on their fair values while Statement
     123(R) requires all share-based payments to employees to be recognized
     based on their fair values. Statement 123R also revises, clarifies and
     expands guidance in several areas, including measuring fair value,
     classifying an award as equity or as a liability and attributing
     compensation cost to reporting periods. The new standard will be effective
     for the Company in the first interim period beginning after December 15,
     2005. Since December 31, 2004, the Company has been and is currently
     evaluating the impact from this standard on it results of operations and
     financial position.


                                     F - 16
<PAGE>


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


NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                        2004
                                                        ----
<S>                                                     <C>
               Government authorities                   $ 86
               Prepaid expenses                           14
               Other                                      11
                                                        ----

                                                        $111
                                                        ====


NOTE 4:- INVENTORIES

               Raw materials, parts and supplies        $252
               Work in progress                           97
               Finished products                         181
                                                        ----

                                                        $530
                                                        ====


NOTE 5:- PROPERTY AND EQUIPMENT, NET

              Cost:
                 Computers and peripheral equipment     $374
                 Office furniture and equipment          115
                 Leasehold improvements                  116
                                                        ----

                                                         605
                                                        ----
              Accumulated depreciation:
                 Computers and peripheral equipment      218
                 Office furniture and equipment           52
                 Leasehold improvements                   71
                                                        ----

                                                         341
                                                        ----

              Depreciated cost                          $264
                                                        ====
</TABLE>


     Depreciation expenses for the years ended December 31, 2004 and 2003,
     amounted to $ 111 and $ 79, respectively.

     As for charges, see Note 7b.

NOTE 6:- TECHNOLOGY, NET

<TABLE>
<CAPTION>
                                    DECEMBER 31,
                                       2004
                                       ----
<S>                                    <C>
Original amounts:
   Technology                          $219
   Less - accumulated amortization      219
                                       ----

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

     Amortization expenses amounted to $ 75 and $ 72 for the years ended
     December 31, 2004 and 2003, respectively.


                                     F - 17
<PAGE>


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


NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES

     a.   Lease commitments:

          The Company leases its facilities and certain motor vehicles under
          various operating lease agreements, which expire on various dates, the
          latest of which is in 2007. The annual minimum future rental payments
          under non-cancelable operating leases as of December 31, 2004, are as
          follows:

          YEAR ENDED DECEMBER 31,

<TABLE>
<CAPTION>
<S>                       <C>
                 2005     $106
                 2006       82
                 2007       49
                          ----

                          $237
                          ====
</TABLE>

          Total rent expenses for the years ended December 31, 2004 and 2003,
          were approximately $ 126 and $ 89, respectively.

          Motor vehicle lease expenses for the years ended December 31, 2004 and
          2003 were approximately $ 71 and $ 78, respectively.

     b.   Charges and guarantees:

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


                                     F - 18
<PAGE>


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


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

     c.   Other contingencies:

          1.   On December 12, 1999, Secu-Systems filed a lawsuit with the
               District Court in Tel-Aviv-Jaffa against Supercom Ltd. (InkSure
               Delaware's, former parent company) and InkSure Ltd. seeking a
               permanent injunction and damages. The plaintiff asserted in its
               suit that the printing method applied to certain products that
               have been developed by InkSure Ltd. constitutes inter alia: (a) a
               breach of a confidentiality agreement between the plaintiff and
               Supercom; (b) unjust enrichment of Supercom and InkSure Ltd; (c)
               breach of fiduciary duties owed to the plaintiff by Supercom and
               InkSure Ltd.; and (d) a tort of misappropriation of trade secrets
               and damages to the plaintiff's property. Secu-Systems seeks,
               among other things, an injunction and a 50% share of profits from
               the printing method at issue. In 2004 all parties submitted their
               arguments to the court. The Company expects the court will render
               a decision in 2005. 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 and that the amount can
               not be reasonably measured. Accordingly, the Company did not
               record any provision.

          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. The Company is in the process of
               evaluating the validity of the grant with its legal counsel. This
               claim has not matured to legal proceeding at this point, and
               therefore the company's legal counsel and management cannot
               predict the outcome of this claim


                                     F - 19
<PAGE>


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


NOTE 8:- STOCK CAPITAL

     a.   Stockholders' rights:

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

     b.   Private placements:

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

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

     c.   Stock options:

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

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

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

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

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

          As of December 31, 2004, an aggregate of 2,223,653 options are still
          available for future grant under the Company's stock option plans.


                                     F - 20
<PAGE>


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


NOTE 8:- STOCK CAPITAL (CONT.)

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

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                     ------------------------------------------------
                                               2004                      2003
                                     ----------------------     ---------------------
                                                    WEIGHTED                  WEIGHTED
                                                    AVERAGE                   AVERAGE
                                       AMOUNT       EXERCISE     AMOUNT       EXERCISE
                                     OF OPTIONS      PRICE     OF OPTIONS      PRICE
                                     ----------      -----     ----------      -----
<S>                                   <C>            <C>        <C>            <C>
Outstanding at beginning of year      1,026,514      $1.08        863,256      $1.00

   Granted                              809,500      $1.10        174,000      $1.45
   Forfeited                            (81,200)     $1.13        (10,742)     $1.20
                                     ----------                ----------


Outstanding at end of year            1,754,814      $1.09      1,026,514      $1.08
                                     ==========      =====     ==========      =====

Exercisable at end of year              693,842      $1.07        714,918      $1.05
                                     ==========      =====     ==========      =====
</TABLE>


          The options outstanding as of December 31, 2004, 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            2004         LIFE (YEARS)      PRICE       2004          EXERCISABLE
------------      ---------          -----          -----     ---------          -----
<C>               <C>                 <C>           <C>         <C>              <C>
$ 0.8 - 1.2       1,511,814           4.77          $0.91       539,846          $0.96
$ 1.45 - 1.61       243,000           3.00          $1.52       153,996          $1.52
                  ---------          -----          -----     ---------


                  1,754,814            4.6          $1.09       693,842          $1.07
                  =========          =====          =====     =========          =====
</TABLE>

          No compensation expenses were recognized by the Company for the years
          ended December 31, 2004 and 2003.

          Weighted average fair value and weighted average exercise prices of
          options granted during the years ended December 31, 2004 and 2003
          whose exercise price is equal to or exceeds the market price of the
          shares at the date of grant, are as follows:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                          --------------------------------------
                                               2004                   2003
                                          ---------------     ------------------
                                                   WEIGHTED                WEIGHTED
                                         WEIGHTED  AVERAGE    WEIGHTED     AVERAGE
                                         AVERAGE   EXERCISE   AVERAGE      EXERCISE
                                        FAIR VALUE  PRICE    FAIR VALUE     PRICE
                                          -----     -----     --------      ----
<S>                                       <C>       <C>       <C>           <C>
Equals market price at date of grant      $0.81     $1.05     $    1.42     $1.45
                                          =====     =====     =========     =====

Exceeds market price at date of grant     $0.38     $2.17     $       -     $   -
                                          =====     =====     =========     =====
</TABLE>


                                     F - 21
<PAGE>


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


NOTE 8:- STOCK CAPITAL (CONT.)

     d.   Stock warrants:

          The Company has issued warrants, as follows:

<TABLE>
<CAPTION>
                       OUTSTANDING                   EXERCISABLE
                         AS OF                           AS OF
                       DECEMBER 31,                  DECEMBER 31,
ISSUANCE DATE            2004        EXERCISE PRICE      2004     EXERCISABLE 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
April 2004 (3)         1,904,412     $        1.00     1,904,412     April 2009
                       ---------                       ---------

                       3,911,871                        3,911,871
                       =========                        =========
</TABLE>

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

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

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

     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 deferred tax assets
          are as follows:


                                     F - 22
<PAGE>


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

NOTE 9:-      TAXES ON INCOME (CONT.)

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                      --------------------
                                                        2004         2003
                                                      -------      -------
<S>                                                   <C>          <C>
Net operating loss carryforward                       $ 1,994      $ 1,529
Other deductions for tax purposes                       1,084        1,975
                                                      -------      -------

Net deferred tax asset before valuation allowance       3,078        3,504
Valuation allowance                                    (3,078)      (3,504)
                                                      -------      -------

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

          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 2004, the
          Company decreased its valuation allowance by $ 426 to $ 3,078.

          Net loss consists of the following:

<TABLE>
<CAPTION>
                            YEAR ENDED DECEMBER 31,
                             --------------------
                               2004         2003
                             -------      -------
<S>                          <C>          <C>
                Domestic     $(1,043)     $(1,299)
                Foreign       (1,018)      (1,666)
                             -------      -------

                             $(2,061)     $(2,965)
                             =======      =======
</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.


                                     F - 23
<PAGE>


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


NOTE 9:- TAXES ON INCOME (CONT.)

     d.   Tax loss carryforwards:

          Net operating loss carryforwards as of December 31, 2004 are as
          follows:

<TABLE>
<CAPTION>
<S>                                  <C>
                Israel               $2,454
                United States *)      3,698
                                     ------

                                     $6,152
                                     ======
</TABLE>

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

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

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


     f.   Reduction in corporate tax rate:

          In June 2004, the Israeli Parliament approved an amendment to the
          Income Tax Ordinance (No. 140 and Temporary Provision) (the
          "Amendment"), which progressively reduces the regular corporate tax
          rate from 36% to 35% in 2004, 34% in 2005, 32% in 2006 and to a rate
          of 30% in 2007. The amendment was signed and published in July 2004
          and is, therefore, considered enacted in July 2004.


NOTE 10:- FINANCIAL INCOME, NET

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                             --------------
                                                             2004      2003
                                                             ----      ----
<S>                                                          <C>       <C>
                Interest, bank charges and fees              $  5      $ 44
                Foreign currency translation differences       (4)       (9)
                                                             ----      ----

                                                             $  1      $ 35
                                                             ====      ====
</TABLE>


                                     F - 24
<PAGE>


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

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 revenue for the years ended December 31,
     2004 and 2003, based on the customer's location and long-lived assets as of
     December 31, 2004 and 2003:

<TABLE>
<CAPTION>
                       2004              2003
                   -------------     -------------
                            LONG-             LONG-
                   TOTAL    LIVED    TOTAL    LIVED
                 REVENUES  ASSETS  REVENUES  ASSETS
                   ----     ----     ----     ----
<S>                <C>      <C>      <C>      <C>
United States      $619     $312     $  -     $384
Export:
   Israel             -      259        -      265
   Turkey           237        -      464        -
   Netherlands        -        -       77        -
   Other             99        -       67        -
                   ----     ----     ----     ----

                   $955     $571     $608     $649
                   ====     ====     ====     ====
</TABLE>


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

<TABLE>
<CAPTION>
           YEAR ENDED DECEMBER 31,
               ------------
               2004    2003
               ----    ----
<S>            <C>     <C>
Customer A     *)      76%
Customer B     63%      -
Customer C     25%     *)
Customer D     *)      11%
</TABLE>



     *) Represent a percentage lower than 10%


                                     F - 25