<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999

                                       OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 For the transition period of _______ to _______

                           Commission File No. 1-14227

                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
             (Exact Name of Registrant as Specified in Its Charter)


<TABLE>
<S>                                                                           <C>
                         DELAWARE                                                   13-3317668
              (State or Other Jurisdiction of                                    (I.R.S. Employer
              Incorporation or Organization)                                  Identification Number)


                  399 EXECUTIVE BOULEVARD
                       ELMSFORD, NY                                                    10523
         (Address of Principal Executive Offices)                                   (Zip Code)
</TABLE>

                                 (914) 592-2355
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK, $.01 PAR VALUE PER SHARE
                                (Title of Class)

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

         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. [ ]

         The aggregate market value of the common stock, $.01 par value, held by
non-affiliates of the registrant on March 22, 2000 was $40,055,750.

         The aggregate number of shares of common stock, $.01 par value,
outstanding on March 22, 2000 was 13,636,000.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE
<PAGE>   2
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                                 1999 Form 10-K

                                TABLE OF CONTENTS
<TABLE>
<S>                                                                                                           <C>
PART I

Item 1.     Business.....................................................................................       1
Item 2.     Properties...................................................................................      15
Item 3.     Legal Proceedings............................................................................      16
Item 4.     Submission of Matters to a Vote of Security Holders..........................................      18

PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters........................      19
Item 6.     Selected Financial Data......................................................................      20
Item 7.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations....................................................................      21
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk...................................      31
Item 8.     Financial Statements and Supplementary Data..................................................      31
Item 9.     Changes in and Disagreements With Accountants on
            Accounting and Financial Disclosure..........................................................      31

PART III

Item 10.    Directors, Executive Officers and Key Employees of Registrant................................      32
Item 11.    Executive Compensation.......................................................................      35
Item 12.    Security Ownership of Certain Beneficial Owners and Management...............................      40
Item 13.    Certain Relationships and Related Transactions...............................................      41

PART IV

Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................      43

Index to Financial Statements...........................................................................      F-1
</TABLE>
<PAGE>   3
                                     PART I

ITEM 1.  BUSINESS.

American Bank Note Holographics, Inc. ("ABNH") originates, mass-produces and
markets holograms. Our holograms are used primarily for security applications
such as counterfeiting protection for credit and other transaction cards,
identification cards and documents of value, as well as for tamper resistance
and authentication of high-value consumer and industrial products. Our ability
to control the diffraction of light ("origination") using proprietary processes
in a secure, controlled manufacturing environment has enabled us to become a
market leader in security holography. Our products are used by over 200
companies worldwide, including MasterCard, VISA, American Express, Discover,
Diners Club, Europay, Merck and Eli Lilly, as well as agencies of the United
States government and certain foreign governments. We also produce non-secure
holograms for packaging and promotional applications.

We believe we have a number of strengths that provide us with a competitive
advantage in the security sector of the holography industry, including:

         -        our reputation as a quality supplier of secure holograms with
                  19 years of experience in the industry,

         -        our expertise in holographic technology and production and our
                  extensive patent portfolio,

         -        our origination laboratories, which enable us to produce
                  distinctive holograms with a variety of security features that
                  make them difficult to counterfeit, and

         -        our two efficient, ISO 9000 certified manufacturing
                  facilities, which allow us to mass produce high-quality
                  holograms at a low cost in a secure environment.

In January 1999, ABNH disclosed that its financial statements for 1996, 1997 and
the first three quarters of 1998 all required restatement. This gave rise either
directly or indirectly to several other issues that were significant to ABNH. We
have restated those financial statements, and we have devoted substantial
resources to address the various issues that arose from the need to restate the
prior financial statements.

THE HOLOGRAPHY INDUSTRY

A hologram is a laser-generated, three-dimensional reproduction of an object,
produced on a two-dimensional surface. A hologram controls the diffraction of
light at pre-determined angles to create specific visual imagery. When a
hologram is viewed from different angles, features such as depth and movement,
unseen in normal two-dimensional photographs, are seen by the viewer. Holograms
can also include information that is visible only with the aid of special
devices.

The holography market is divided into three main sectors: security, promotion
and packaging.

         SECURITY

The security sector of the holography market includes credit and other
transaction cards, product authentication and documents of value. Holography,
combining art and science, allows each customer to
<PAGE>   4
develop its own unique hologram with which to identify and protect its product.
The secure hologram can also incorporate certain covert data, which are only
machine readable, about the particular products shipped or purchased. Holograms
provide the following major benefits as security devices:

         -        the three-dimensional imagery, combined with the high degree
                  of skill and capital investment required to replicate
                  holograms and various proprietary hidden and visible security
                  features, makes exact duplication and replication of holograms
                  on a mass-production basis extremely difficult and presents
                  obstacles to counterfeiting,

         -        the unique visual aspects of a hologram are easily
                  recognizable, making authentication of products and documents
                  possible by both experts and laymen without special machinery,
                  equipment or training, and

         -        the adhesives used to affix the hologram permanently to a
                  product or a document may be specially designed to make it
                  readily apparent if there is any attempt to remove or tamper
                  with the hologram.

         The security sector of the holography market includes:

Transaction Cards. In the early 1980's, we began marketing our secure holograms
for use on credit cards and, as a result, helped to create and expand the
security sector of the holography market. Since that time, holograms have been
established as an important fraud prevention device on credit cards and other
transaction cards. They are also commonly used to enhance the brand image of a
transaction card issuer.

Product Authentication. The use of product authentication holograms is driven by
concerns regarding counterfeiting, piracy, pilfering, diversion and other
infractions that can result in lost sales, lost goodwill and product liability
claims. Holograms have gained increasing acceptance as authentication devices
in, among others, the electronics, pharmaceutical, licensed consumer products
(e.g., clothing, sporting goods and software) and entertainment event marketing
industries and in high value consumer and industrial products (e.g., laser
printers, electronic components, computer hardware and software, videocassettes
and compact discs). Product authentication holograms are either machine or
hand-applied to individual products. A holographic label that is tampered with
can become permanently damaged, leaving a visible footprint on the product.

Documents of Value. Concerns over counterfeiting and copying have led to an
increased use of holograms on documents of value, including currency, passports,
business cheques, gift certificates, vouchers, certificates of deposit, stamps
(postage and revenue), tickets and other financial instruments. We believe that
an increasing number of countries are using holograms in their currencies and we
expect the market for holograms on currency to continue to grow.

         PROMOTION

The unique visual appeal of holograms makes them attractive for use on consumer
products and for retail advertising. Promotional holography is used for "short
run," low-end products, including greeting cards, decorative clothing,
point-of-purchase displays, and for certain advertising. The manufacturing
processes utilized for the creation of promotional holograms are not as complex,
secure or proprietary as those used in creating security holograms. Competition
is based primarily on price, turn-around time, design and


                                       -2-
<PAGE>   5
reliability.

         PACKAGING

Holograms can also be used as ribbons and papers for gift-packaging and paper
and plastic wrapping for packaging of food and other products. These
lower-margin, commodity-type holograms are generally used on consumer product
packaging solely for their eye-catching appeal, including packaging for candy,
beer, toothpaste, soft-drinks and other consumer products. The manufacturing
processes utilized for the creation of packaging holograms are not as complex,
secure or proprietary as those used in creating security holograms. Customers
distinguish between suppliers primarily based upon quality, price and production
capacity.

STRATEGY

In 1999, we started to implement a strategy that included the following
components:

Build a New, Strong Management Team and Workforce. In 1999, ABNH's Chairman and
Chief Executive Officer, President and Chief Operating Officer, VP Finance,
Controller, and VP Operations all resigned from their positions with ABNH. As a
result, ABNH recruited the following persons to its management team: Kenneth
Traub, President; Salvatore D'Amato, Chairman; Russell LaCoste, Executive Vice
President of Corporate Development and Marketing; Alan Goldstein, Chief
Financial Officer; George Condos, Controller; and Peter Sorbo, Director of
Research and Development and Engineering. We also restructured operations to
improve accountability and reduce expenses. We believe that we have been
successful in retaining our most important employees and we have created a much
stronger management team and organization. We intend to continue to strengthen
our organization.

Improve Capital Structure and Reduce Debt. At the time of its initial public
offering, ABNH had approximately $5.2 million of secured bank debt and nominal
cash. Following the disclosure of the need to restate its prior period financial
statements, ABNH was notified by its commercial bankers, led by The Chase
Manhattan Bank ("Chase"), that it was in default on its bank debt. In early
1999, we implemented improved cost control and balance sheet management
initiatives in order to improve cash flow and reduce debt. We also negotiated an
amendment to the loan agreement with Chase which waived the existing defaults,
and then closed a refinancing with Foothill Capital Corporation, which enabled
us to repay the Chase facility and improve our capital structure. We believe
that this improvement to our capital structure gives us additional flexibility
to invest in the business for the long term.

Improve Operating Controls. We have implemented new financial and manufacturing
software to comply with Year 2000 issues and to improve our management reporting
capabilities. We believe these systems will significantly improve the
information available to management to manage the business. We have also put in
place new policies and procedures and changed reporting relationships and
responsibilities.

Reestablish Credibility Among Our Constituents and Within Our Industry. This
year, ABNH was under a great deal of scrutiny by concerned customers, suppliers,
employees, lenders, stockholders, lawyers, regulators and others. We hope to
reestablish our credibility through the continued execution of the strategy
described herein. We also hope to continue to enhance our reputation in our
industry through increased attention to product quality, innovation and customer
service.


                                       -3-
<PAGE>   6
Protect and Enhance Our Position in Our Core Transaction Card Business. We hold
a leadership position in the market for holograms on transaction cards as a
result of our relationships with companies such as MasterCard, VISA, Europay,
Diners Club and Discover. We have managed these relationships very closely in
1999, and hope to continue to strengthen them. This year we extended our
position in this market with a new relationship with American Express. We hope
to leverage our strong position and expertise in producing holograms for
transaction cards into other growth opportunities including identification
cards, product authentication and documents of value.

Develop New Products and Innovations. We have been a leading innovator in the
origination and mass production of secure holograms and we expect to continue to
emphasize the development of new technologies and products for our target
markets. Currently, we are seeking to develop higher resolution holograms, new
ways to increase the information stored on a hologram and improvements to
machine-readable features on our holograms. We are also developing improvements
to our products that have applications for tamper apparent seals, bank notes
(currency), personal identification documents and other markets.

Develop New Market Opportunities. We have started to pursue new applications and
markets for our products. For instance, we believe there is an increasing demand
for holograms on bank notes, and we have started to develop improved solutions
that better meet the needs and requirements of this market. We have also
recently developed a new holographic cap seal product along with a partner, and
we believe this product has important applications in the pharmaceutical and
security packaging markets.

Protect and Leverage Our Intellectual Property Position. We believe our patent
portfolio is very valuable and we intend to leverage our intellectual property
and patent rights. In 1999, we succeeded in persuading a competitor to pay past
due royalties in connection with a patent license agreement that we had entered
into previously. We intend to continue to protect our intellectual property and
enforce our patent rights.

Grow through Strategic Partnerships. While much of our time during 1999 was
spent on the issues described above, starting in 2000 we intend to pursue
strategic partnerships or acquisitions that provide operating synergies or
access to new customers or technologies.

PRODUCTS

Our secure holography products can be grouped into three categories: embossed
holograms on hot stamp foils, pressure-sensitive labels and laminates.

Embossed Holograms on Hot Stamp Foils. These holograms are designed for
permanent application to plastic (e.g., transaction cards), paper (e.g.,
currency) and other substrates through the application of heat and pressure to
the hologram. We use specific heat activated adhesives to ensure even bonding of
the hologram to the substrate, and the exposed side of the hologram is treated
with protective coatings to ensure durability and wear resistance. Our embossed
holograms on hot stamp foils also possess a degree of flexibility that helps
them to avoid problems such as cracking or flaking. Our customers for embossed
holograms on hot stamp foils include MasterCard, approved manufacturers of VISA
cards, American Express, Discover, Diners Club and Europay.

Pressure Sensitive Labels. These labels are designed to be applied using
pressure by hand or by machine to create a permanent bond to the intended
substrate. We have developed proprietary and patent pending


                                      -4-
<PAGE>   7
features that make tampering apparent. If removed, the label leaves a
distinctive mark or pattern and the removed material is unusable. The labels can
be laser numbered or ink-jet numbered for security, control and traceability.
These labels are designed primarily as a security device for branded
merchandise, luxury goods and pharmaceuticals. Our customers for pressure
sensitive labels include 3M, Merck, Eli Lilly, Playboy and Sony.

Laminates. Laminates are used primarily in identification products. We have
patented our method of making the hologram visible at specific angles and
invisible at other pre-determined angles. Our patented see-through, demetallized
product also protects the information on the identification document (card,
passport or paper credential) from alteration and provides additional security.
Fully metallized laminates are used on products such as hang tags for apparel,
"full face" transaction cards and magazine covers. Adhesives for laminates can
be formulated for application through both heat and pressure as well as pressure
only, depending upon the customer's specific requirements. Our customers for
laminates include the U.S. government, China and Colombia.

PRODUCTION PROCESS

We are one of the most experienced security production companies in the
holographic industry. We have two ISO certified security production facilities
containing a total of nine origination laboratories and 17 mass replication
lines as well as extensive security and quality control procedures. We also have
a large and sophisticated distribution network for secure holographic products.

Our production process is integrated to handle most aspects of production,
including raw materials sourcing, processing, finishing, packaging, storage and
logistics. From time to time, we subcontract certain production functions to
third parties. The production process consists of the following four steps:

         DESIGN

The first step of the production process is the design of the hologram. In the
art department, our experienced personnel work with the customer to develop a
conceptual design that incorporates the necessary features, both security and
non-security, to satisfy the customer's requirements.

         ORIGINATION

After the design has been completed, various laser-ready components (magnetic
floppy disc, three dimensional sculpture, flat art, etc., referred to as
"information") are delivered to one of our nine origination studios.

The conversion from information to hologram is based on our ability to record
light in an organized format. Coherent light, which is delivered by a laser, is
best understood as light which has one wavelength of the visible spectrum and
possesses a high degree of organization. The coherent light is split into two
beams (the object beam and the reference beam) directed toward photo-resist
treated glass. The object beam is interfered with by the information before
continuing its travel toward the photo-resist treated glass. The reference beam
is not interfered with and travels directly toward the photo-resist treated
glass.

The object beam then interferes with the reference beam, creating an
interference pattern which is recorded on the light sensitive photo-resist
glass. After developing the photo-resist glass, the film is re-illuminated


                                      -5-
<PAGE>   8
approximating the original angle(s) of the reference beam. The resulting
interference pattern within the film reflects some of the light, striking it
into a re-creation of the pattern of light that originally came from the object
beam, due to a property of light called diffraction. The reflected light, now
organized and containing all information that the object beam once carried,
allows the viewer to see all of the information in three dimensions, true color
or with other desired effect.

There are less complex methods of creating a hologram origination than the
process described above. However, in our opinion, the above process produces the
clarity, depth perception, movement and mass replication properties that are
essential components of our secure holograms. We further believe that our
largest competitors in the security sector may use similar processes.

         PLATE MAKING

Once the origination process is completed, a plate is created in order to permit
mass production. The "one-on" image is "step and repeated" to a pre-determined
size with multiple identical images recorded on a photo-resist glass. The glass
is then converted to a production plate in an electrolytic process where nickel
is grown on the surface of the glass. Nickel is used because its molecular
nature allows for an exact transfer of the origination to the production plate.
We believe that our proprietary plate making process is an important component
of our ability to mass produce our secure holograms.

The electrolytic process creates different "generations" of plates prior to the
production phase. Each generation, identical to the last, creates a more wear
resistant plate for use in a mass production environment, thereby extending the
useful life of the plate. The production plate will have varying degrees of
hardness, depending upon the processes used in production.

         MASS PRODUCTION

Manufacturing specifications are determined in collaboration with the customer.
We and the customer typically enter into production planning where drawings and
overall specifications are written and distributed to the various production and
quality control departments.

We employ two methods of mass-production of holograms. Hard embossing transfers
images to an aluminum foil/polyester substrate through heat and pressure. Heat
and pressure on the holographic plate force the holographic image into the foil,
which is then converted into the final product.

The other method of production is In-Situ Polymeric Replication, which was
developed by us. Using this method, a polymer is transferred to a substrate
(polyester, polypropylene, etc.) which is then put in contact with the
holographic plate so that holographic imagery is replicated. The material is
then metallized using a vacuum deposition process.

Finishing for both methods may include some combination of demetallization,
application of adhesive, slitting, die-cutting and custom numbering. The
completed holographic material may then be applied to the customer's product.


                                      -6-
<PAGE>   9
RESEARCH AND PRODUCT DEVELOPMENT

We have devoted significant attention to research and product development to
continue to enhance our origination, replication and mass production
capabilities. Our R&D has enabled us to create new technologies and proprietary
production processes and to deliver innovative products to the marketplace.

Over the past several years, members of our staff have developed a number of new
products, including a tamper-apparent label and a tamper-apparent heat seal
laminate for use in identification card and passport products. We are seeking to
develop new ways to deliver higher resolution beyond what is currently available
in the security sector of the holography market. Additionally, the development
of machine-readable holograms has been a priority for the research and product
development department. Machine-readable technology may enable holographic
products to be compatible with optical bar code technology for a variety of
applications, including both simple product validation or authentication and
more sophisticated uses.

MANUFACTURING SUPPORT

The research and product development department assists the manufacturing
department in addressing various process and quality issues. Our research and
product development staff has also been involved in several manufacturing
process improvements, including the discovery of a means to increase
significantly the lifetime of nickel plate shims and the development of an
automated plate layout program that has reduced layout time from two weeks to
less than one day.

MANUFACTURING FACILITIES

See "Item 2. -- Properties."

SALES AND MARKETING

In 1999, we provided holographic products to over 200 customers worldwide. We
are the exclusive supplier of holograms to MasterCard and we believe we are one
of only two authorized manufacturers of VISA holograms for sale to approved
manufacturers of VISA cards. In addition, we supply holograms to American
Express, Diners Club, Discover, Europay and numerous other companies.

We currently employ an Executive Vice President of Corporate Development and
Marketing, a Vice President of Sales and Marketing, two full-time,
incentive-compensated salespeople and three sales service personnel. We also
utilize incentive-based international sales agents around the world.

All pricing decisions are made centrally by our operating executives. We focus
some of our marketing efforts on trade shows such as Expopak, the International
Holographics Manufacturers Association trade show, the International Card
Manufacturers Association trade show and the Card Tech/SecurTech trade show. In
the future, we intend to participate in security, transaction card, brand
protection, packaging, pharmaceutical, labeling and document trade shows, both
domestically and internationally.

COMPETITION

The holography industry is highly competitive and highly fragmented. A number of
our competitors are


                                      -7-
<PAGE>   10
larger or are divisions of larger companies, and have greater financial
resources, than us. In the holography industry, competition is generally based
on technology, price, product quality and customer service. We also compete with
other non-holographic methods or devices. We believe our position in the
security sector of the holography market is attributable to our technical
expertise, years of experience and reputation in the mass production of secure
holograms.

TRADEMARKS AND PATENTS

We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We currently hold approximately 35 U.S. patents and numerous foreign
patents, as well as patents pending and service marks that are used in our
business. We believe our patent portfolio is valuable and we intend to continue
to leverage the value of our intellectual property and patent rights.

There can be no assurance as to the degree of protection offered by our patents,
the success of any of our enforcement actions or the likelihood that patents
will be issued for pending applications. Competitors in the United States and
foreign countries may have applied for or obtained, or may in the future apply
for and obtain, patents that will prevent, limit or interfere with our ability
to make and sell some of our products.

In 1997, our United States patent numbers 4,728,377 and 4,913,504 (the
"Gallagher Patents"), which relate to a certain process for applying a hologram,
were invalidated by a U.S. federal court. While the invalidation of these U.S.
patents does not prevent us from producing and marketing any of our holograms,
it does prevent us from asserting these patents against parties that are making,
selling and using the claimed inventions of these patents solely in the United
States. However, the corresponding foreign patents remain valid and outstanding,
and we believe they are important patents in the international holography
industry. In 1999, we succeeded in persuading a foreign competitor to pay us
past due royalties and to resume paying royalties under a license agreement that
we had entered into previously relating to certain foreign counterparts of the
Gallagher patents. In 1999, we received in excess of $1,000,000 in past due and
current royalties in connection with the license of the foreign counterparts of
the Gallagher patents.

EMPLOYEES

As of March 15, 2000, we employed approximately 101 persons, of which 61 are
covered by collective bargaining agreements. We consider our relations with our
employees to be good.

RISK FACTORS

Important Factors Regarding Forward-Looking Statements

In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating us and our
business because such factors currently have a significant impact or may have a
significant impact on our business, operating results or financial condition.
This Form 10-K contains forward-looking statements that have been made pursuant
to the provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this form.


                                      -8-
<PAGE>   11
WE ARE DEFENDING A CLASS ACTION LAWSUIT INITIATED BY SOME OF OUR STOCKHOLDERS.

A consolidated class action complaint against ABNH, certain of its former
officers and directors, its former parent (American Banknote Corporation), the
four co-lead underwriters of our initial public offering and our auditors, has
been filed in the United States District Court for the Southern District of New
York. The complaint alleges violations of the federal securities laws and seeks
to recover damages on behalf of all purchasers of our common stock during the
class period (July 15, 1998 through February 1, 1999). The complaint seeks
recission of the purchase of shares of our common stock or alternatively,
unspecified compensatory damages, along with costs and expenses including
attorneys' fees. We and certain other defendants have separately moved to
dismiss the complaint. The plaintiffs' discovery requests as well as their
motion for class certification have been stayed pending resolution of the
respective motions to dismiss. We have commenced settlement discussions with
plaintiffs' counsel. We do not believe it is feasible to predict or determine
the outcome or resolution of these proceedings, or to estimate the amounts of,
or potential range of loss with respect thereto. In addition, the timing of the
resolution of these proceedings is uncertain. The range of possible resolutions
could include judgements against us or settlements that could require
substantial payments by us, including costs of defending such suits, which could
have a material adverse effect on our financial position, results of operations
and cash flows.

WE ARE BEING INVESTIGATED BY THE U.S. ATTORNEY'S OFFICE AND THE SECURITIES AND
EXCHANGE COMMISSION.

On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in connection with matters
giving rise to the need to restate our previously issued financial statements.
We have provided numerous documents to and continue to cooperate fully with the
SEC staff. We cannot predict the duration of such investigation or its potential
outcome.

The U.S. Attorney's Office for the Southern District of New York has commenced
an investigation in connection with matters giving rise to the need to restate
our previously issued financial statements, as well as a possible violation in
1998 of the Foreign Corrupt Practices Act. We have not been advised that we are
a target of such investigation. We have provided numerous documents to and
continue to cooperate fully with the U.S. Attorney's Office. We cannot predict
the duration of such investigation or its potential outcome.

OUR COMMON STOCK HAS BEEN DELISTED FROM THE NEW YORK STOCK EXCHANGE.

Our common stock was suspended from trading on the New York Stock Exchange in
August 1999 and has subsequently been delisted from the NYSE. We intend to seek
to have our common stock traded on another stock exchange or quoted on Nasdaq.
Current pricing information on our common stock has been available in the "pink
sheets" published by National Quotation Bureau, LLC. The "pink sheets" is an
unorganized over-the-counter market which generally provides significantly less
liquidity than established stock exchanges or the Nasdaq National Market, and
quotes for stocks included in the "pink sheets" are not listed in the financial
sections of newspapers as are those for established stock exchanges and the
Nasdaq National Market. Therefore, prices for securities traded solely in the
"pink sheets" may be difficult to obtain, and our stockholders may find it
difficult to resell their shares.


                                      -9-
<PAGE>   12
WE DEPEND ON CREDIT CARD MANUFACTURERS FOR A SUBSTANTIAL PORTION OF OUR
BUSINESS.

During 1999 and 1998, sales to credit card companies accounted for approximately
73% and 70%, respectively, of our total sales, including MasterCard and approved
manufacturers of VISA brand credit cards, which together accounted for
approximately 45% and 56% of our total sales in 1999 and 1998, respectively. If
either MasterCard or VISA were to terminate its respective relationship with us,
or if we were to lose a substantial portion of our business with either of these
entities, there would be a material adverse effect on our business, financial
condition and results of operations. See "Business -- Sales and Marketing." We
provide holograms to MasterCard pursuant to an agreement which expires in
February 2003, subject to automatic renewal if not terminated by either party.
During 1999, MasterCard informed us that it believes that ABNH breached certain
terms of the agreement in 1997 and 1998. We have been working closely with
MasterCard to address issues raised by MasterCard, and we believe our
relationship with MasterCard is good.

Currently, we are one of two companies authorized to manufacture and sell VISA
brand holograms to manufacturers of VISA brand credit cards. There can be no
assurance that we can continue to successfully meet the needs of our customers.
In addition, failure to obtain anticipated orders or delays or cancellations of
orders or significant pressure to reduce prices from key customers could have a
material adverse effect on our future financial performance.

WE DEPEND ON SINGLE SUPPLIERS FOR SOME KEY PRODUCT COMPONENTS.

We have historically purchased certain key materials used in the manufacture of
our holograms from single suppliers with which we do not have supply contracts.
Any problems that occur with respect to the delivery, quality or cost of any
such materials could have a material adverse effect on our financial condition,
results of operations and cash flows.

OUR MANAGEMENT TEAM IS NEW TO OUR COMPANY.

During 1999 we experienced substantial and significant turnover in our senior
management and our board of directors. Consequently, we have only recently
assembled our management team. The transition in management could have an impact
on our relationship with our employees, suppliers, customers and other
constituents.

RECENT EVENTS MAY CAUSE US TO LOSE EXISTING AND POTENTIAL CUSTOMERS AND
SUPPLIERS.

We have received inquiries from some of our customers and suppliers relating to
the previously disclosed adverse events affecting ABNH. Our reputation has been
adversely impacted and may continue to be affected by these events. As a
consequence, our relationships with existing customers and suppliers may be
strained. In addition, our ability to develop potential customers or suppliers
to maintain and grow our business may be adversely affected.

OUR QUARTERLY OPERATING RESULTS CAN FLUCTUATE.

Our future operating results are likely to fluctuate substantially from quarter
to quarter. Since a significant portion of our business is derived from orders
placed by a limited number of large customers, variations in the timing of such
orders could cause significant fluctuations in our operating results. Other
factors that


                                      -10-
<PAGE>   13
may result in fluctuations in operating results include:

         -        customers' promotions,

         -        inventory replenishment,

         -        card expiration patterns,

         -        delivery schedules,

         -        changes in the cost of materials or labor,

         -        increased R&D expenses,

         -        competitive pricing pressures,

         -        expenses associated with stockholder litigation and government
                  investigations, and

         -        financing costs.

WE ARE IN A COMPETITIVE, HIGHLY-FRAGMENTED INDUSTRY WITH MANY COMPANIES
COMPETING TO DELIVER A HIGHLY-SPECIALIZED PRODUCT.

The holography industry is highly competitive. Our competitors, which are
numerous and may have more resources than us, may take away market share or
compete with us on the basis of price, which may erode our prices and margins.
Increasing competition in the market for our security holograms has resulted in
declining sales prices for these products over the past few years.

Competition is based on a number of factors, such as:

         -        technology,

         -        price,

         -        product quality, and

         -        customer service.

In addition, an increased use of non-holographic methods or devices in place of
our products could reduce demand for our products. A number of competitors are
larger or are divisions of larger companies, and have greater financial
resources, than us.

WE HAVE RECENTLY IMPLEMENTED NEW INFORMATION AND ACCOUNTING SYSTEMS, AND WE ARE
STILL IMPLEMENTING ADDITIONAL IMPROVEMENTS TO OUR SYSTEMS.

We have implemented new financial and manufacturing software to comply with Year
2000 issues and to improve our management reporting capabilities. We believe
these systems will significantly improve the


                                      -11-
<PAGE>   14
information available to management to manage the business. The implementation
of these new systems is time-consuming and expensive. Any problems that we have
in running these systems or that our employees have in adapting to these new
systems could materially and adversely affect our business, financial condition
and results of operations.

OUR BUSINESS DEPENDS UPON OUR INTELLECTUAL PROPERTY WHICH MAY NOT BE
SUFFICIENTLY PROTECTED FROM INFRINGERS.

We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted access and other forms of intellectual
property protection, to safeguard certain of our proprietary technology and
processes. We also hold certain trademarks with respect to certain products and
services. We cannot be certain as to the degree of protection offered by any of
our patents or as to the likelihood that patents will be issued for any of our
pending applications. There can be no assurance that we will be able to maintain
the confidentiality of our trade secrets or that our confidentiality agreements
will provide meaningful protection of our trade secrets or other proprietary
information. See "Business -- Trademarks and Patents."

In addition, litigation may be necessary in the future to enforce our
intellectual property rights or to determine the validity and scope of our
patents or of the proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.
Furthermore, our business activities may infringe upon the proprietary rights of
others, and in the past third parties have claimed, and may in the future claim,
infringement by our products. Any such claims, with or without merit, could
result in significant litigation costs and diversion of management attention,
and could require us to enter into royalty and license agreements that may be
disadvantageous to us or suffer other harm to our business. If litigation is
successful against us, it could result in invalidation of our proprietary rights
and liability for damages, which could have a harmful effect on our business.

WE MAY BE SUBJECT TO SIGNIFICANT PRODUCT LIABILITY IN CONNECTION WITH THE
PRODUCTS WHICH WE PROVIDE TO OUR CUSTOMERS.

We provide holograms in connection with a wide range of our customers' products,
in which case it is possible that we are subjecting ourselves to product
liabilities in association with those products or in connection with the
holograms used with those products. Although we maintain product liability
insurance, there can be no assurance that such insurance would be available to
cover any such claim or available in amounts sufficient to cover all potential
liabilities. As a result, product liability claims could have a material adverse
effect on our business, financial condition and results of operations.

SINCE A SIGNIFICANT PERCENTAGE OF OUR SALES ARE DERIVED FROM OVERSEAS CUSTOMERS,
OUR EXPORTS AND BUSINESS MAY BE SUBJECT TO SOME RISKS RELATED TO DOING BUSINESS
INTERNATIONALLY.

In 1999 and 1998, 32% and 28%, respectively, of our sales were derived from
customers outside the United States. All export sales are denominated in U.S.
dollars. International sales are subject to risks, including:

         -        United States and international regulatory requirements and
                  policy changes,

         -        political and economic instability,

         -        difficulties in accounts receivable collection,


                                      -12-
<PAGE>   15
         -        tariffs and other barriers, and

         -        difficulty in attracting, retaining and managing international
                  representatives.

We cannot be certain that any of these factors will not have a material adverse
effect on our business, financial condition or results of operations. See "Item
7. -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."

OUR BUSINESS IS SUBJECT TO ENVIRONMENTAL REGULATION AND IS ALWAYS SUBJECT TO
ENVIRONMENTAL LIABILITY.

Our operations are subject to federal, state and local environmental laws and
regulations. If we fail to comply with applicable rules and regulations, we
could be subject to monetary damages and injunctive action, which could
materially and adversely affect our business, financial condition or results of
operations. We believe that we are currently in material compliance with
applicable laws and regulations. However, 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.

OUR FORMER PARENT COMPANY, ABN, HAS EXPERIENCED FINANCIAL DIFFICULTY DURING
1999, AND WE MAY HAVE RISKS ASSOCIATED WITH ABN'S POTENTIAL INABILITY TO PAY ITS
OBLIGATIONS TO US AND TO THIRD PARTIES.

Our former parent company, ABN, has experienced financial difficulty during
1999. On December 8, 1999, ABN filed a petition and plan of reorganization in
federal bankruptcy court pursuant to Chapter 11 of the U.S. Bankruptcy Code. The
proposed plan seeks approval for a financial restructuring resulting in the
cancellation of certain of ABN's outstanding indebtedness in exchange for equity
in ABN as well as the amendment of the repayment terms of certain other
outstanding indebtedness of ABN. The proposed plan does not seek to affect ABN's
trade obligations or payables in the ordinary course. We have submitted a
substantial claim in the proceeding for certain amounts claimed to be owed to us
by ABN. Because of ABN's financial difficulties, it may be difficult for us to
collect on these claims or any future liabilities of ABN to us.

In addition, we are co-defendants with ABN in some ongoing litigation in which
we could be held jointly and severally liable along with ABN. In such an event
the plaintiffs may be unable to collect any money from ABN and may instead
attempt to pursue collection from us. For more details on this litigation, see
"Item 3. -- Legal Proceedings." Any inability of ABN to pay its liabilities to
us or to pay any liabilities for which we are jointly and severally liable could
have a material adverse effect on our financial position, results of operations
and cash flows.

WE CURRENTLY HAVE NO INTENTION OF PAYING DIVIDENDS AND ANY DIVIDENDS WE MAY PAY
WILL DEPEND ON CERTAIN FACTORS.

We intend to retain all earnings, if any, for use in our business. We do not
anticipate paying cash dividends in the foreseeable future.

SHARES CURRENTLY HELD BY STOCKHOLDERS MAY BE SUBJECT TO DILUTION DUE TO THE
POTENTIAL ISSUANCE OF PREFERRED STOCK.

Our certificate of incorporation permits the issuance of up to 5,000,000 shares
of preferred stock and


                                      -13-
<PAGE>   16
permits the board of directors to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by our
stockholders. Although we have no current plans to issue shares of preferred
stock, the potential issuance of preferred stock may have the effect of:

         -        delaying, deferring or preventing a change in control of our
                  company,

         -        may discourage bids for the common stock at a premium over the
                  market price of the common stock, and

         -        may adversely affect the market price of, and the voting and
                  other rights of the holders of the common stock.


                                      -14-
<PAGE>   17
ITEM 2.  PROPERTIES.

We maintain secure hologram manufacturing facilities in Elmsford, New York and
Huntingdon Valley, Pennsylvania. We believe that our existing facilities are
adequate to meet our current requirements and that additional suitable space
will be available as needed.

Our 57,200 square foot facility at Elmsford, New York serves as our headquarters
and includes our art department, origination facilities, plate making facilities
and the manufacturing site for the mass production of numerous holographic
products. Our origination facilities include nine laser laboratories.

Our 30,000 square foot facility at Huntingdon Valley, Pennsylvania is dedicated
to the mass production of security holograms primarily for transaction cards.

Both facilities are constantly monitored for security, and have uniformed
security personnel on site, 24 hours a day, seven days a week. The Director of
Security is responsible for the physical security of both facilities, access and
egress, monitoring employee integrity, and safeguarding of machinery, materials,
work-in-process and finished product until shipping. The security department
witnesses material destruction and supervises the transfer of security
shipments. Each facility is equipped with full perimeter alarms enhanced by
window glass break sensors, internal motion detectors and closed circuit video
monitoring of security sensitive areas.


                                      -15-
<PAGE>   18
ITEM 3.  LEGAL PROCEEDINGS.

On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation, designating officers to take testimony
and requiring the production of certain documents, in connection with matters
giving rise to the need to restate ABNH's previously issued financial
statements. We have provided numerous documents to and continue to cooperate
fully with the SEC staff. We cannot predict the duration of such investigation
or its potential outcome.

The U.S. Attorney's Office for the Southern District of New York has commenced
an investigation in connection with matters giving rise to the need to restate
our previously issued financial statements, as well as a possible violation in
1998 of the Foreign Corrupt Practices Act. We have not been advised that ABNH is
a target of such investigation. We have provided numerous documents to and
continue to cooperate fully with the U.S. Attorney's Office. We cannot predict
the duration of such investigation or its potential outcome.

On January 20, 2000, ABN announced in an SEC filing that it was advised by the
U.S. Attorney's Office for the Southern District of New York that it is a target
of an investigation relating to the revenue recognition issues involving ABNH.
In addition, ABN announced that, in connection with the same issues, the staff
of the SEC is prepared to recommend to the SEC that enforcement proceedings be
commenced against ABN in U.S. District Court seeking injunctive relief and
monetary disgorgement. ABN also announced that it was advised by counsel to
Morris Weissman, its Chairman of the Board and Chief Executive Officer and our
former Chairman of the Board and Chief Executive Officer, that such counsel had
received similar notification from the U.S. Attorney's Office for the Southern
District of New York and the staff of the SEC with respect to Mr. Weissman.

A consolidated class action complaint against ABNH, certain of its former
officers and directors, ABN, the four co-lead underwriters of our IPO and our
auditors, has been filed in the United States District Court for the Southern
District of New York. The complaint alleges violations of the federal securities
laws and seeks to recover damages on behalf of all purchasers of our common
stock during the class period (July 15, 1998 through February 1, 1999). The
complaint seeks rescission of the purchase of shares of our common stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorneys' fees. We and certain other defendants have separately moved
to dismiss the complaint. The plaintiffs' discovery requests as well as their
motion for class certification have been stayed pending resolution of the
respective motions to dismiss. We have commenced settlement discussions with
plaintiffs' counsel. We do not believe it is feasible to predict or determine
the outcome or resolution of these proceedings, or to estimate the amounts of,
or potential range of loss with respect thereto. In addition, the timing of the
resolution of these proceedings is uncertain. The range of possible resolutions
could include judgements against us or settlements that could require
substantial payments by us, including costs of defending such suits, which could
have a material adverse effect on our financial position, results of operations
and cash flows.

On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics, Inc.,
Holotron Corp., Meadows Games, Inc. and Fire Diamond, Inc. commenced an
adversary proceeding in the United States Bankruptcy Court for the Western
District of Washington at Seattle against International Banknote Company, Inc.,
ABN and us. The complaint alleged that the defendants were indebted to the
bankruptcy estate for royalty payments under a 1981 license and that we were
liable for unpaid royalties for the period from January 1, 1990 through July
1992 in the amount of approximately $1.6 million, plus attorney's fees and
interest on


                                      -16-
<PAGE>   19
unpaid amounts. The defendants and Trustee entered into a settlement agreement
which was approved by an order of the bankruptcy court on September 10, 1999,
whereby the defendants agreed to pay the Trustee $150,000, which has been fully
paid. The full amount of the settlement was accrued at December 31, 1998.

In 1994, plaintiffs, K.A.H. Company, Inc. and Kenneth A. Haines, filed suit
against us, ABN and ABNH Research Co., Inc. in the Supreme Court of the State of
New York, County of New York. A judgment was entered on March 19, 1999 for
$175,639, with attorneys' fees still to be assessed. Such judgment was entered
only against ABN, which contended that we should contribute to the payment of
the judgment. On February 2, 2000, the plaintiffs and defendants settled all
claims, including attorneys' fees, for $300,000, of which $110,000 has been paid
through March 15, 2000 with the remaining $190,000 to be paid by March 31, 2000.
The full amount of this settlement was accrued at December 31, 1998.

On August 17, 1999, we commenced an action in the Supreme Court of the State of
New York, County of Westchester, seeking recovery of approximately $350,000 on a
claim arising from amounts owed to us for holographic materials sold and
delivered in July 1999. The defendant removed the action to the United States
District Court for the Southern District of New York. On December 1, 1999, we
received the defendant's answer to our complaint and counterclaims alleging
millions of dollars in damages arising from ABNH's alleged breach of a 1993
agreement pursuant to which ABNH sold holographic material to the defendant and
alleged failure to fulfill a May 1998 purchase order. On January 7, 2000, the
court granted our motion for summary judgment with respect to our claim. On
March 15, 2000, we entered into a settlement agreement with the defendant under
which the defendant paid $346,000 to us and the parties exchanged general
releases of all claims. We also agreed that we will resume shipments under the
May 1998 purchase order.

In 1998, ABNH fulfilled an order for holograms for approximately $600,000. In
1999, the customer alleged that ABNH breached its contract with such customer
based on problems that the ultimate user was experiencing with the holograms,
and claimed potential damages in excess of $6 million. We do not believe that
the agreement was breached, and we are in discussions with this customer in an
attempt to resolve this dispute amicably. There can be no assurance, however,
that this matter will be resolved amicably, or that this dispute will not lead
to litigation with the customer. We have begun settlement negotiations with the
customer, and based on those settlement negotiations we reserved $775,000 during
1999 for a breach of contract claim relating to warranties.

We currently and from time to time are involved in litigation (as both plaintiff
and defendant) incidental to the conduct of our business; however, other than
the shareholder litigation described above, we are not a party to any lawsuit or
proceeding which, in our opinion, is likely to have a material impact on our
financial position, results of operations or cash flows.


                                      -17-
<PAGE>   20
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.


                                      -18-
<PAGE>   21
                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS.

Our common stock was traded on the New York Stock Exchange under the symbol
"ABH" from the time of our initial public offering on July 15, 1998 to August 3,
1999, when trading in our common stock was suspended. Our common stock was
subsequently delisted from the NYSE. The following table sets forth the high and
low closing prices of our common stock for each quarter of 1998 and 1999 during
which it traded on the NYSE.


<TABLE>
<CAPTION>
                                                                       High                    Low
                                                                       ----                    ---
<S>                                                                  <C>                     <C>
1998
Third Quarter (from July 15, 1998).................                  $   8.56                $  4.88
Fourth Quarter.....................................                     18.00                   5.81

1999
First Quarter......................................                   $ 17.00                $  1.63
Second Quarter.....................................                      3.88                   2.06
Third Quarter (through August 2, 1999).............                      3.06                   1.63
</TABLE>

Following the suspension of trading of our common stock on the NYSE, our common
stock has been traded in the over-the-counter market.

The following table sets forth the high and low closing prices of our common
stock for each quarter of 1999 during which it has traded on the
over-the-counter market.


<TABLE>
<CAPTION>
                                                                       High                    Low
                                                                       ----                    ---
<S>                                                                  <C>                     <C>
1999
Third Quarter (from August 3, 1999)................                   $  3.06                $  1.25
Fourth Quarter.....................................                   $  3.05                $  1.50

2000
First Quarter (through March 24, 2000).............                    $ 3.25                 $ 1.69
</TABLE>

The price of our common stock has been quoted on the "pink sheets" published by
the National Quotation Bureau, LLC (ticker symbol: "ABHH"). The "pink sheets" is
an unorganized over-the-counter market which provides significantly less
liquidity than established stock exchanges or the Nasdaq National Market, and
quotes for stocks included in the "pink sheets" are not listed in the financial
sections of newspapers as are those for established stock exchanges and the
Nasdaq National Market.

As of March 22, 2000, there were approximately 60 holders of record of our
common stock. Because many of our shares of common stock are held of record by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of beneficial stockholders represented by these record
holders.

We currently anticipate that our 2000 annual meeting of stockholders will be
held in August 2000.


                                      -19-
<PAGE>   22
ITEM 6.  SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                              ------------------------------------------------------------------
                                               1995          1996          1997           1998            1999
                                              -------       -------       -------       --------        --------
<S>                                           <C>           <C>           <C>           <C>             <C>
STATEMENT OF INCOME DATA:
   Revenue:
     Sales(a) .........................       $27,865       $27,516       $23,085       $ 28,669        $ 20,695
     Royalty income ...................           103           128           785            554             535
                                              -------       -------       -------       --------        --------
                                               27,968        27,644        23,870         29,223          21,230
   Costs and expenses:
     Cost of goods sold ...............        13,787        14,710        12,153         19,064          11,508
     Selling and administrative (b) ...         4,576         4,711         5,813          6,291           9,304
     Depreciation and amortization ....         1,203         1,141         1,136          1,080           1,026
                                              -------       -------       -------       --------        --------
                                               19,566        20,562        19,102         26,435          21,838
                                              -------       -------       -------       --------        --------

   Operating (loss) income ............         8,402         7,082         4,768          2,788            (608)
   Other income .......................            10            68            36             --              24
   Interest, net ......................           305           305           146           (400)           (985)
                                              -------       -------       -------       --------        --------

   (Loss) income before taxes on income         8,717         7,455         4,950          2,388          (1,569)
   Taxes on income (benefit) ..........         3,663         3,117         2,130          1,269            (494)
                                              -------       -------       -------       --------        --------

   Net (loss) income ..................       $ 5,054       $ 4,338       $ 2,820       $  1,119        $ (1,075)
                                              =======       =======       =======       ========        ========

   Net (loss) income per share:
     Basic and diluted ................       $  0.37       $  0.32       $  0.21       $   0.08        $  (0.08)

   Weighted average shares outstanding:
     Basic ............................        13,636        13,636        13,636         13,636          13,636
     Diluted ..........................        13,636        13,636        13,636         13,691          13,636
</TABLE>


<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                    ---------------------------------------------------------------
                                     1995          1996          1997          1998          1999
                                    -------       -------       -------       -------       -------
<S>                                 <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
   Working capital ..........       $11,208       $ 9,431       $ 8,684       $ 2,023       $ 2,051
   Total assets .............        29,366        27,742        27,515        30,820        22,425
   Total debt ...............            --            --           674         5,968         1,268
   Total stockholders' equity        25,452        22,434        21,165        14,530        13,455

</TABLE>

------------
(a)      In the first quarter of 1998, ABNH recorded sales of $6.5 million
         related to a customer order that was transferred to ABNH's on-site
         facility

(b)      During the year ended December 31, 1999, we incurred costs of $3.5
         million, net of $0.6 million of insurance reimbursements, in connection
         with the audit committee investigation and related restatement efforts
         and defense of litigation. Also during 1999, we determined that we
         would not establish our own post-retirement health care plan and
         reversed a $404,000 accrued liability in this regard. The costs and
         reversal are included in selling and administrative expenses.


                                      -20-
<PAGE>   23
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with "Item
6. -- Selected Financial Data" and our financial statements, including the notes
thereto, appearing elsewhere in this report.

During the year ended December 31, 1999, we were confronted with many
significant issues that had an impact on our business. In early 1999, we were
notified by our commercial bankers that we were in default on our bank debt. As
a result, we operated with very limited liquidity for most of the year and
devoted a great deal of effort and expense to refinance this debt. We also
replaced the key members of our management team including the Chairman,
President, VP Finance and Controller and reorganized our workforce in 1999. We
were also named as a defendant in class action litigation, the SEC and the U.S.
Attorney's Office initiated investigations and the NYSE delisted our common
stock. Addressing these issues has been costly and a distraction to our new
management. Furthermore, as a result of the above issues, we were under a great
deal of scrutiny by concerned customers, suppliers, employees, creditors,
stockholders and others. These factors had a negative impact on 1999 operating
performance, and we expect that these factors will continue to have a smaller
negative impact on 2000 operating performance.

OVERVIEW

ABNH was, until July 20, 1998, a wholly-owned subsidiary of ABN. On that date,
ABN completed the sale of 13,636,000 shares of our common stock in a public
offering, representing ABN's entire investment in ABNH. We did not receive any
proceeds from the IPO. Additionally, in connection with the IPO, the amounts due
from ABN and affiliates of approximately $33.9 million were cancelled and deemed
to be a dividend. Immediately following our IPO, we had approximately $5.2
million of secured bank debt and nominal cash. As a wholly-owned subsidiary, we
were provided certain corporate and administrative services by ABN, including
financial reporting, treasury functions, tax planning and compliance, risk
management, human resources and legal services. Additionally, because ABN
managed cash and financing requirements centrally, interest expense and
financing requirements prior to the IPO were based on the existing capital
structure. Our results prior to the IPO might have differed from the results
that might have been achieved had we operated as an independent entity.

ABNH originates, mass-produces and markets holograms. Our holograms are used
primarily for security applications such as counterfeiting protection for credit
and other transaction cards, identification cards and documents of value, as
well as for tamper resistance and authentication of high-value consumer and
industrial products. Our ability to control the diffraction of light
("origination") using proprietary processes in a secure, controlled
manufacturing environment has enabled us to become a market leader in security
holography. Our products are used by over 200 companies worldwide. We also
produce non-secure holograms for packaging and promotional applications. Our
sales of holograms for credit card security applications generally carry higher
gross margins than sales for other applications.

Concerns regarding counterfeiting, piracy and other infractions that can result
in lost sales, lost goodwill and product liability claims drive the use of
product authentication holograms. Companies in various industries have utilized
holograms as authentication devices to reduce potential losses. Also, concerns
over counterfeiting and copying have led to an increased use of holograms on
documents of value, including currency, passports, business cheques, gift
certificates, vouchers, certificates of deposit, stamps (postage and revenue),
tickets and other financial instruments.


                                      -21-
<PAGE>   24
A significant portion of our business is derived from orders placed by certain
credit card companies, including MasterCard and manufacturers of VISA brand
credit cards, and variations in the timing of such orders can cause significant
fluctuations in our sales. Sales to MasterCard for the years ended December 31,
1999, 1998 and 1997 were approximately 27%, 30%, and 35%, respectively. We are
the exclusive supplier of holograms to MasterCard pursuant to an agreement, as
amended, that extends until February 2003. The agreement provides for automatic
two-year renewal periods if not terminated by either party. During 1999, we were
informed by MasterCard that it believes that we breached certain terms of the
agreement in 1998 and 1997. We have been working closely with MasterCard to
address issues raised by MasterCard, and believe our relationship with
MasterCard is good. Beginning in January 2000 we have agreed to lower our
selling price to MasterCard by approximately 12%. Such reduction will have a
negative impact on our sales and gross margins. Sales to Visa card manufacturers
were approximately 18%, 26%, and 27%, respectively, of sales for the years ended
December 31, 1999, 1998 and 1997. We do not have long-term purchase contracts
with VISA and we supply holograms to approximately 50 VISA authorized card
manufacturers pursuant to purchase orders. Currently we are one of two companies
authorized to manufacture and sell VISA brand holograms to manufacturers of VISA
brand credit cards. If either MasterCard or VISA were to terminate its
respective relationship with us or substantially reduce their orders, there
would be a material adverse effect on our business, financial condition, results
of operations and cash flows.

Holograms are sold under purchase orders and contracts with customers. Sales and
the related cost of goods sold are generally recognized at the latter of the
time of shipment or when title passes to customers. In some situations, we have
shipped product with the right of return where we are unable to reasonably
estimate the level of returns and/or the sale is contingent upon the customers'
use of the product. In these situations, we do not recognize sales upon product
shipment, but rather when the buyer of the product informs us that the product
has been used. Additionally, pursuant to terms with a certain customer,
completed items are stored on behalf of the customer at our on-site secured
facility and, in that instance, sales are recognized when all of the following
have occurred: the customer has ordered the goods, the manufacturing process is
complete, the goods have been transferred to the on-site secured facility and
are ready for shipment, the risk of ownership has passed to the customer and the
customer has been billed for the order. During the first quarter of 1998, we
recorded sales of approximately $6.5 million under this arrangement. At December
31, 1999 accounts receivable from this customer totaled $0.5 million. There were
no accounts receivable from this customer at December 31, 1998.

We have historically purchased certain key materials used in the manufacture of
our holograms from single suppliers, with which we do not have supply contracts.
Any problems that occur with respect to the delivery, quality or cost of any
such materials could have a material adverse effect on our financial position,
results of operations and cash flows.

During 1999, 1998 and 1997, export sales accounted for approximately 32%, 28%
and 25%, respectively, of total sales. All of our export sales are presently
denominated in U.S. dollars.

Sales may fluctuate from quarter to quarter due to changes in customers'
ordering patterns. Customers do not typically provide us with precise forecasts
of future order quantities. Quarterly demand for holograms may be materially
influenced by customers' promotions, inventory replenishment, card expiration
patterns, delivery schedules and other factors which may be difficult for us to
anticipate.


                                      -22-
<PAGE>   25
Cost of goods sold includes raw materials such as nickel, foils, films and
adhesives; labor costs; manufacturing overhead; and hologram origination costs
(which represent costs of a unique master hologram that is made to customer
specifications and is an integral part of the production process). As a result,
costs of goods sold are affected by product mix, manufacturing yields, costs of
hologram originations and changes in the cost of raw materials and labor.

Selling and administrative expenses primarily consist of salaries, benefits and
commissions for our corporate, sales, marketing and administrative personnel and
marketing and advertising expenses for our services and products.

In accordance with a tax allocation agreement in effect through the date of our
IPO, we were included in the consolidated U.S. Federal income tax return and, in
certain instances, consolidated or combined state and local income tax returns
of ABN and made payments to ABN based on the amounts which would be payable as
Federal, state and local income taxes as if consolidated or combined returns
were not filed. We computed our Federal, state and local income tax provision as
if we were filing separate income tax returns, without regard to the tax
allocation agreement. In October 1999, an affiliate of ABN received an
assessment for approximately $0.9 million of taxes and interest from the City of
New York relating to the years ended December 31, 1990, 1991 and 1992. We were
included in the combined City of New York income tax returns of ABN for the
periods covered by the assessment and had previously made payments to ABN based
on amounts which would have been payable if the combined income tax returns were
not filed. We are contingently liable, jointly and severally, for U.S. Federal,
state and local income taxes for periods in which we are included in the
consolidated or combined income tax returns of ABN. Amounts paid to ABN in
excess of amounts which would have been payable had we filed separate tax
returns have been charged to Due from Former Parent and affiliates. We filed our
own U.S. Federal and Pennsylvania state income tax returns for 1998. Our New
York State income tax return for 1998 has not been filed.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998

Sales. Sales decreased by $8.0 million, or 27.8%, from $28.7 million in 1998 to
$20.7 million in 1999. The decrease in sales was primarily due to a decrease in
sales of security holograms for credit cards of $5.7 million, as a result of
$3.0 million in sales in the fourth quarter of 1998 at a discount from normal
selling prices in exchange for immediate payment, generally lower purchases of
security holograms for credit cards by card manufacturers due to higher
purchases by our customers in 1998 due to concerns regarding potential Year 2000
issues and the distractions and impact to our business associated with the need
to restate the prior financial statements.

Royalty Income. Royalty income remained relatively unchanged from 1998 to 1999.
As a percentage of sales, royalty income increased from 1.9% in 1998 to 2.6% in
1999.

Cost of Goods Sold. Cost of goods sold decreased by $7.6 million, or 39.8%, from
$19.1 million in 1998 to $11.5 million in 1999. As a percentage of sales, cost
of goods sold decreased from 66.6% in 1998 to 55.6% in 1999. The decrease
reflects decreases in the amortization of origination costs of 10% relating to
the 1998 amortization of origination costs due to lower volumes of sales than
had originally been estimated and amortization costs incurred in anticipation of
orders that did not materialize, decreased provisions for obsolete and excess
inventory of 2% due to improved product quality and a decrease in royalty
expenses of 2% related to the royalty litigation settlement reserved for in
1998, offset by an increase in warranty


                                      -23-
<PAGE>   26
expense of 3%, primarily resulting from a $0.8 million provision for settlement
of a breach of contract claim relating to warranties.

Selling and Administrative Expenses. Selling and administrative expenses
increased by $3.0 million, or 47.6%, from $6.3 million in 1998 to $9.3 million
in 1999. As a percentage of sales, selling and administrative expenses increased
from 21.9% in 1998 to 45.0% in 1999. This increase in selling and administrative
expenses was due primarily to costs incurred related to the audit committee
investigation and related restatement efforts and defense of litigation of $3.5
million, net of insurance reimbursements of $0.6 million, and an increase in
administrative salaries and benefits of $0.4 million, offset by a decrease in
sales expenses of $0.5 million due to lower remuneration, travel and
transportation expenses and the reversal of a liability for post-retirement
health care benefits of $0.4 million since we decided not to establish our own
plan.

Depreciation and Amortization. Depreciation and amortization remained relatively
unchanged from 1998 to 1999. As a percentage of sales, depreciation and
amortization increased from 3.8% in 1998 to 5.0% in 1999.

Other Income.  Other income remained relatively unchanged from 1998 to 1999.

Interest, net. Interest, net increased by $0.6 million from $0.4 million in 1998
to $1.0 million in 1999. The increase was due to an increase in interest expense
due to the write off of deferred financing costs of $0.6 million related to the
amendments to and repayment of our credit agreement with Chase Manhattan Bank,
offset by a reduction of interest expense, which resulted from the decrease in
the revolving loan balances of $0.2 million and a decrease in interest income of
$0.2 million as a result of the cancellation of the $5.3 million note receivable
from ABN that bore interest at 7.75% per annum, which was included in the deemed
dividend discussed above.

Taxes on Income (Benefit). Taxes on income (benefit) for periods prior to the
IPO are based on taxes that would have been paid had we operated on a
stand-alone basis. Income taxes decreased by $1.8 million from $1.3 million in
1998 to $(0.5) million in 1999, as a result of the loss incurred due to the
factors described above. For a reconciliation of income taxes from the federal
statutory rate to our effective rate, see Note 5 to our financial statements.

Net (Loss) Income. As a result of the foregoing, net (loss) income decreased by
$2.2 million from net income of $1.1 million in 1998 to a net loss of $1.1
million in 1999.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997

Sales. Sales increased by $5.6 million, or 24.2%, from $23.1 million in 1997 to
$28.7 million in 1998. The increase in sales was due primarily to an increase in
sales of security holograms for credit cards of $2.9 million and other security
holograms of $2.7 million. Sales in the fourth quarter of 1998 were impacted by
approximately $3.0 million in sales (including the sale of goods originally
shipped on consignment) at discounts from normal selling prices in exchange for
immediate payment. We believe that, in the absence of such discounts, a portion
of these sales would have occurred in 1999. The contractual net unit sales price
applicable to MasterCard was reduced in September 1998 by approximately 5%. At
December 31, 1998, we had customer advances approximating $1.5 million which
represented payments received from customers for products, at a discount from
the normal sales price in exchange for immediate payment, which have not


                                      -24-
<PAGE>   27
yet been shipped ($1.2 million) and for products shipped with the right of
return ($0.3 million) where we are unable to reasonably estimate the level of
returns.

Royalty Income. Royalty income decreased $0.2 million or 29.4%, from $0.8
million in 1997 to $0.6 million in 1998. The decrease was due to lower reported
licensee revenue in 1998 than 1997.

Cost of Goods Sold. Cost of goods sold increased by $6.9 million, or 56.6%, from
$12.2 million in 1997 to $19.1 million in 1998. As a percentage of sales, cost
of goods sold increased from 52.8% in 1997 to 66.6% in 1998. This increase
reflects increases in the amortization of origination costs (which are charged
to costs of goods sold based on the total number of holographic images estimated
to be produced) due to lower volumes of sales than had been originally estimated
(5%), increases in origination costs which were incurred in anticipation of
orders which did not materialize (5%), increased provisions for obsolete and
excess inventory due primarily to quality considerations and lower of cost or
market adjustments (7%), the effects on gross margin of the sales discounts
referred to above (1%), an increase in warranty expense (1%), and increases in
royalty expenses (2%), offset by an increase in the gross margins on our sales
mix (7%).

Selling and Administrative Expenses. Selling and administrative expenses
increased by $0.5 million, from $5.8 million in 1997 to $6.3 million in 1998. As
a percentage of sales, selling and administrative expenses decreased from 25.1%
in 1997 to 22.0% in 1998. The increase in expenses is primarily attributable to
increased sales commissions of $0.4 million relating to the increase in sales,
increased administrative salaries of $0.2 million relating to new hires and
salary increases, and increased costs relating to shareholder communications and
other costs associated with public ownership of $0.4 million, offset by a
decrease in provisions for bad debts of $0.4 million.

Depreciation and Amortization. Depreciation and amortization remained relatively
unchanged in 1998 compared to 1997. As a percentage of sales, depreciation and
amortization decreased from 4.9% in 1997 to 3.8% in 1998.

Other Income. Other income remained relatively unchanged in 1998 compared to
1997.

Interest, net. Interest, net decreased by $0.5 million from $0.1 million in net
income in 1997 to $0.4 million net expense in 1998. This decrease was due to
increased interest expense under the revolving credit facility of $0.4 million
and a reduction in interest income from ABN of $0.1 million as a result of the
cancellation of the $5.3 million note receivable from ABN that bore interest at
5.75% per annum, which was included in the deemed dividend discussed above.

Income Taxes. Income taxes for periods prior to the IPO are based on taxes that
would have been paid had we operated on a stand-alone basis. Income taxes
decreased by $0.8 million, from $2.1 million in 1997 to $1.3 million in 1998, as
a result of lower taxable income due to the factors described above. For a
reconciliation of income taxes from the federal statutory rate to our effective
rate, see Note 5 to our financial statements.

Net Income. As a result of the foregoing, net income decreased by $1.7 million,
or 60.7%, from $2.8 million in 1997 to $1.1 million in 1998.

SEASONALITY


                                      -25-
<PAGE>   28
Our sales have not generally exhibited substantial seasonality. However, our
sales and operating results to date have, and future sales and therefore
operating results may, continue to fluctuate from quarter to quarter. The degree
of fluctuation will depend on a number of factors, including the timing and
level of sales, any change in the pricing of our products and the mix of
products sold. Because a significant portion of our business is expected to be
derived from orders placed by a limited number of large customers, variations in
the timing of such orders could cause significant fluctuations in our operating
results. Customers do not typically provide us with precise forecasts of future
order quantities. Quarterly demand for holograms may be materially influenced by
customers' promotions, inventory replenishment, card expiration patterns,
delivery schedules and other factors which may be difficult for us to
anticipate. Other factors that may result in fluctuations in operating results
include the timing of new product announcements and the introduction of new
products and new technologies by us or our competitors, delays in research and
development of new products, increased R&D expenses, availability and cost of
materials from our suppliers, competitive pricing pressures and financing costs.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, we had $0.3 million of cash and cash equivalents and
working capital of $2.1 million. At December 31, 1998, we had $4.3 million in
cash and cash equivalents and working capital of $2.0 million. The 1998 cash
balance included cash generated from sales in the fourth quarter of 1998 at a
discount from the normal sales price in exchange for immediate payment and from
customer advances, as well as the effects of an increase in accounts payable. A
substantial portion of this cash was subsequently utilized for repayments under
our revolving credit agreement, the payment of trade payables, and for costs
relating to the audit committee investigation discussed above. The total amount
incurred in connection with the audit committee investigation and related
restatement efforts and defense of litigation approximated $3.5 million, net of
insurance reimbursements of $0.6 million. These costs were charged to operations
as incurred and had an adverse impact on 1999 operating results and cash flows.

On July 20, 1998, contemporaneously with our IPO, we entered into a $30.0
million credit facility agreement, consisting of a $20.0 million acquisition
facility and a $10.0 million working capital facility, maturing on July 20,
2004, which replaced a facility we had entered into with an affiliate of ABN.
Substantially all of our assets were secured under the terms of the credit
agreement. At the time of the IPO, approximately $5.2 million was due and owing
under the credit agreement. At December 31, 1998, the $5.6 million outstanding
under the credit agreement exceeded the maximum permitted borrowings, as
defined, pursuant to the borrowing base formula, as defined, under the credit
agreement. In February 1999, the lenders notified us that we were in default
under the credit agreement. On March 31, 1999, the credit agreement was amended,
whereby the maximum permitted borrowings was reduced to the lesser of $4.5
million or the maximum permitted borrowings under a borrowing base formula, as
defined. Borrowings under the amended credit agreement bore interest at the
lender's alternate base rate, as defined, plus 0.5%. On July 20, 1999, the
amended credit agreement was further amended, whereby (1) all existing events of
default were waived, (2) the latest maturity date of all loans outstanding was
changed to January 20, 2000 and (3) the maximum permitted borrowings was reduced
to $4.0 million, which was to decline monthly until December 31, 1999 when the
maximum permitted borrowings was to be $2.6 million. The second amended credit
agreement provided for borrowings under a revolving credit line bearing interest
at the lender's alternate base rate, as defined, plus 2% (8.0% at December 31,
1998), subject to a borrowing base formula, as defined. As consideration for the
second amended credit agreement, we paid a fee of $40,000 and issued warrants to
purchase up to 781,645 shares of our common stock, subject to anti-dilution
rights, at $4.50 per share. Such warrants were terminated on September 29, 1999
pursuant to the second amended credit


                                      -26-
<PAGE>   29
agreement when amounts outstanding under the second amended credit agreement
were repaid, as described below.

On September 29, 1999, amounts then outstanding under the second amended credit
agreement were repaid when we entered into a loan and security agreement with
Foothill Capital Corporation, a subsidiary of Wells Fargo Bank, maturing on
September 29, 2004. The loan and security agreement, which is secured by
substantially all of our assets, provides for borrowings in an aggregate amount
up to $10.0 million (which may be increased to $15.0 million with the consent of
the parties), subject to a borrowing base formula, under a revolving credit
facility, term loan and capital expenditure loan. Borrowings under the loan and
security agreement bear interest at the lender's reference rate, as defined,
plus 1.5% (10.0% at December 31, 1999), which may decrease to 1.25%, 1.00%, or
0.5% under certain circumstances. Under the terms of the loan and security
agreement, the maximum amounts of the term and capital expenditure loans are
approximately $1.0 million and $2.0 million, respectively, and are repayable in
sixty equal monthly installments. At December 31, 1999, we had $74,000
outstanding on the revolving credit facility and $1.0 million outstanding on the
term loan, which is payable in monthly installments of $16,667 beginning
January, 2000. No loans were outstanding on the capital expenditure loan at
December 31, 1999. In addition, we had $0.3 million of availability under the
revolving credit facility at December 31,1999.

The loan and security agreement contains covenants customary for credit
facilities of a similar nature, including limitations on our ability to, among
other things, (1) declare dividends or repurchase or redeem stock, (2) prepay,
redeem or repurchase debt, incur liens and engage in sale-leaseback
transactions, (3) make loans and investments, (4) incur additional debt, (5)
amend or otherwise alter material agreements or enter into restrictive
agreements, (6) make capital expenditures in any fiscal year in excess of $2.5
million, (7) engage in mergers, acquisitions and asset sales, (8) engage in
certain transactions with affiliates and (9) materially alter the nature of our
business. Additionally, under the terms of the loan and security agreement, we
are required to comply with specified financial covenants and ratios. The loan
and security agreement also provides for events of default customary for
transactions of this type, including nonpayment, misrepresentation, breach of
covenant, cross-defaults, bankruptcy, adverse judgments in excess of $0.2
million, and change of ownership and control.

During 1999, we wrote-off unamortized deferred financing costs of approximately
$0.6 million relating to the amendments to and repayment of our credit agreement
with Chase.

During both 1999 and 1998, the weighted average interest rate of outstanding
borrowings was 8.4%. The average aggregate borrowings during 1999 and 1998 was
approximately $3.3 million and $5.2 million, respectively.

Prior to our IPO, our cash accounts had been controlled on a centralized basis
by ABN and, accordingly, cash receipts and disbursements had been received or
made through ABN and were recorded as due from ABN and affiliates. Subsequent to
our IPO, we maintain our own centralized cash management system. Prior to our
IPO, cash had been provided to ABN in the ordinary course of business by way of
intercompany advances to service its debt obligations and for general corporate
purposes. Upon consummation of our IPO, these intercompany advances were
cancelled and included in the deemed dividend to ABN of $33.9 million.
Immediately following our IPO, we had approximately $5.2 million of secured bank
debt and nominal cash.


                                      -27-
<PAGE>   30
For the year ended December 31, 1999, our operating activities provided cash
flow of $1.5 million compared to $7.4 million and $4.0 million of cash flow
provided by operating activities in 1998 and 1997, respectively. The decrease in
cash flows was primarily due to decreased earnings of $2.2 million and a
decrease in cash provided by reductions in accounts payable, accrued expenses
and customer advances of $7.3 million offset by increases in cash provided by
accounts receivable, inventory and prepaid expenses and other of $2.3 million
and in adjustments to reconcile net income to net cash provided by operations of
$1.3.

Investing activities for the years ended December 31, 1999, 1998 and 1997 used
cash flows of approximately $0.5 million, $0.4 million, and $0.5 million,
respectively. These activities primarily reflected capital expenditures for the
respective years. We anticipate that capital expenditures in 2000 and 2001 will
be approximately $0.7 million and $1.0 million, respectively. These amounts
relating to capital expenditures required to improve production capabilities.

Financing activities for the years ended December 31, 1999, 1998 and 1997 used
cash flows of $5.1 million, $3.0 million and $3.4 million, respectively. The
activity in 1999 was comprised of repayment of revolving credit and notes
payable of $5.7 million and incurring deferred financing costs of $0.4 million,
offset by borrowings under the term loan of $1.0 million. The activity in 1998
and 1997 was comprised principally of advances to ABN and affiliates of $7.8
million and $4.1 million, respectively, borrowings under the Revolving Credit
Agreement of $4.9 million and $0.7 million, respectively, and in 1998, included
$0.4 million of borrowings under notes payable and $0.5 million of deferred
financing costs.

We believe that cash flows from operations, together with cash balances and
availability of funds under the loan and security agreement, will be sufficient
to meet working capital needs, service debt and fund capital expenditures for
the next twelve months.

We are a party to certain legal proceedings that may affect our financial
position. For a description of these proceedings, see "Item 3. -- Legal
Proceedings."

On August 3, 1999, the New York Stock Exchange suspended trading in our common
stock for failure to deliver our Annual Report on Form 10-K for the year ended
December 31, 1998 and our Quarterly Report on Form 10-Q for the three months
ended March 31, 1999 on a timely basis. Following the suspension, the NYSE
notified us that it delisted our common stock. Our common stock will not resume
trading on the NYSE, but we intend to seek to have our common stock traded on
another stock exchange or quoted on Nasdaq.

YEAR 2000 DISCLOSURE

The Year 2000 issue is the result of computer systems and programs using two
digits rather than four to identify a given year. As a result, computer systems
or programs that are not Year 2000 compliant may not be able to distinguish
whether "00" means 1900 or 2000, which could result in a variety of failures and
other errors. In preparation for Year 2000, we tested our software and hardware
and performed remedial work on our software to ensure Year 2000 compliance.

To date we have not experienced any material difficulties associated with the
Year 2000. To our knowledge, no third party upon which we depend has experienced
a material Year 2000 problem. Our vendors of material hardware and software
components, infrastructure, and systems indicated that the products we use are
Year 2000 compliant. However, it is still possible that errors or defects may
remain


                                      -28-
<PAGE>   31
undetected, or that dates other than January 1, 2000 may trigger Year 2000
problems. If this occurs with respect to our software or computer systems, or
those of third parties on which we rely, our reputation, business, operating
results and financial condition could suffer.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires the recognition of all derivatives in the balance sheets as either
assets or liabilities measured at fair value. We will adopt SFAS No. 133 for the
2001 fiscal year. We are currently evaluating the impact SFAS No. 133 will have
on our financial position, results of operations and cash flows.

IMPACT OF INFLATION

In recent years, inflation has not had a significant impact on our historical
operations. There can be no assurance that inflation will not adversely affect
our operations in the future, particularly in emerging markets where
inflationary conditions tend to be more prevalent.

UNAUDITED QUARTERLY RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999
AND 1998.


<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 1999 (a)
                                    --------------------------------------------------------------------------------
                                    FIRST QUARTER        SECOND QUARTER        THIRD QUARTER          FOURTH QUARTER
                                    -------------        --------------        -------------          --------------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                 <C>                  <C>                   <C>                    <C>
Sales .................               $ 5,232                $5,743               $ 5,487                $ 4,233
Cost of goods sold ....                 3,397                 2,462                 2,560                  3,089
Net (loss) income .....                (1,452)                  609                  (405)                   173
Net (loss) income per
share-basic and diluted               $ (0.11)               $ 0.04               $ (0.03)               $  0.01
</TABLE>


<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1998
                               ----------------------------------------------------------------------------
                               FIRST QUARTER       SECOND QUARTER       THIRD QUARTER        FOURTH QUARTER
                               -------------       --------------       -------------        --------------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                            <C>                 <C>                  <C>                  <C>
Sales (b) ................         $10,176               $4,636               $5,091             $  8,766
Cost of goods sold .......           4,609                2,100                1,930               10,425
Net income (loss) ........           2,510                  387                  294               (2,072)
Net income (loss) per
share-basic and diluted...         $  0.18               $ 0.03               $ 0.02             $  (0.15)
</TABLE>



                                      -29-
<PAGE>   32
---------------------
(a)      During the year ended December 31, 1999, we incurred costs of $3.5
         million, net of $0.6 million in insurance reimbursements in connection
         with the audit committee investigation and related restatement effort
         and defense of litigation. Also during 1999, we determined that we
         would not establish our own post-retirement health care plan and
         reversed a $404,000 accrued liability in this regard. The costs and
         reversal are included in selling and administrative expenses.

(b)      In the first quarter of 1998, ABNH recorded sales of $6.5 million
         related to a customer order that was transferred to ABNH's on-site
         secured facility (see note 1 to the financial statements).


                                      -30-
<PAGE>   33
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not engage in significant activity with respect to market risk sensitive
instruments. Accordingly, our risk with respect to market risk sensitive
instruments is immaterial.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Financial Statements and Supplementary Data required by this item are filed
as part of this Form 10- K. See Index to Financial Statements on page F-1 of
this Form 10-K.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE.

Not applicable.


                                      -31-
<PAGE>   34
                                    PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT.

         The following table sets forth certain information concerning our
directors, executive officers and key employees. All directors hold office until
the next annual meeting of stockholders or until their successors have been
elected and qualified. Officers are appointed by the board of directors and
serve at the discretion of the board.


<TABLE>
<CAPTION>
                 NAME                            AGE                              POSITION(S)
---------------------------------------       ---------       ---------------------------------------------------
<S>                                           <C>             <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Kenneth H. Traub.......................          38           President, Chief Executive Officer and Director
Salvatore F. D'Amato...................          71           Chairman of the Board
Stephen A. Benton*.....................          58           Director
Fred J. Levin*.........................          37           Director
Russell LaCoste........................          49           Executive Vice President, Corporate
                                                              Development and Marketing
Alan Goldstein.........................          53           Vice President and Chief Financial Officer
KEY EMPLOYEES:
Michael T. Banahan.....................          42           Vice President, Sales and Marketing
George Condos..........................          37           Controller
</TABLE>

-------------------

*  Member of the audit committee.

Kenneth H. Traub has served as our President and Chief Executive Officer since
March 2000 and as a director since April 1999. From February 1999 through March
2000, Mr. Traub served as our President and Chief Operating Officer, and from
January 1999 through February 1999 he served as our consultant. Previously, Mr.
Traub co-founded Voxware, Inc., a developer of digital speech processing
technologies, and served on its board of directors from February 1995 to January
1998 and as its Executive Vice President, Chief Financial Officer and Secretary
from February 1995 to April 1998. Prior thereto, Mr. Traub was Vice President of
Trans-Resources, Inc., a diversified multinational holding company. Mr. Traub
holds an M.B.A. from the Harvard Graduate School of Business Administration and
a B.A. from Emory University.

Salvatore F. D'Amato has served as our Chairman of the Board since April 1999
and as a director since March 1999. He was also our Chairman of the Board and
President from 1983 to 1990 and was a consultant for us from time to time
between 1990 and April 1999. Mr. D'Amato was President and a director of ABN,
our former parent corporation, from 1977 to 1983. Prior thereto he served as
Vice President, Engineering and Senior Vice President, Operations with ABN. Mr.
D'Amato holds a masters degree in Engineering from Columbia University.


                                      -32-
<PAGE>   35
Stephen A. Benton has served as a director since July 1998. Dr. Benton is the
founding head of the Spatial Imaging Group at the Massachusetts Institute of
Technology, where he has been a faculty member since 1982. He is a fellow of the
Optical Society of America and the Society for Imaging Science and Technology.
Dr. Benton holds a Ph.D. in Applied Physics from Harvard University.

Fred J. Levin has served as a director since February 2000. Mr. Levin has been
the President of the Concord Watch Division of Movado Group, Inc., a
manufacturer and marketer of watches, since March 1998. Mr. Levin also served
with Movado Group, Inc. as Senior Vice President, International from April 1995
to February 1998 and as Vice President, Distribution from February 1994 to March
1995. Prior thereto, Mr. Levin was a management consultant with McKinsey &
Company. Mr. Levin holds a B.S. in Industrial Engineering from Northwestern
University and an M.B.A. from the Harvard Graduate School of Business
Administration.

Russell LaCoste has served as our Executive Vice President, Corporate
Development and Marketing since October 1999. He also served as our Vice
President, Sales and Marketing from 1984 to 1992. Mr. LaCoste was Vice President
of Sales and Marketing of Kurz Transfer Products, a manufacturer of specialty
printing products, from September 1995 to October 1999. From 1992 to September
1995, he was President of Optigraphics Corporation, a specialty printer. Mr.
LaCoste holds a B.S. in Marketing from the University of Vermont and an M.B.A.
from the University of Bridgeport.

Alan Goldstein has served as our Vice President and Chief Financial Officer
since April 1999. Mr. Goldstein served as our consultant from February 1999
through April 1999. Mr. Goldstein was Vice President and Chief Accounting
Officer of Complete Management, Inc., a physician management company, from June
1997 to July 1998, and Vice President and Chief Financial Officer of RF
International, Inc., a multinational transportation services holding company,
from July 1994 to December 1996. During other periods Mr. Goldstein acted as an
independent consultant. Mr. Goldstein holds a B.S. in Business Administration
from Boston University and a M.S. in Accounting from Long Island University. Mr.
Goldstein is a Certified Public Accountant.

Michael T. Banahan has served as our Vice President, Sales and Marketing since
May 1999. He also served as a senior member of our sales department from 1989 to
May 1999. Mr. Banahan holds a B.A. in Marketing Management from the University
of Rhode Island.

George Condos has served as our Controller since May 1999 and as our consultant
since February 1999. Mr. Condos was Controller of PSR Logistics, a
transportation company, from January 1997 to August 1998. From February 1995 to
January 1997, he was District Controller and Office Manager at Browning- Ferris
Industries, a waste management and recycling company. From 1991 to February
1995, he was Controller of United Carting Company, a waste services company. Mr.
Condos holds a B.S. in Accounting from Fairleigh Dickinson University.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) under the Securities Exchange Act of 1934 requires our executive
officers and directors, and persons who beneficially own more than ten percent
of our common stock, to file initial reports of ownership and reports of changes
in ownership with the SEC. Executive officers, directors and greater than ten
percent beneficial owners are required by the SEC to furnish us with copies of
all Section 16 forms they file.


                                      -33-
<PAGE>   36
Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that the
reporting requirements of Section 16, as amended, applicable to our executive
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis for all transactions that occurred during 1999, except
that Alan Goldstein and Russell LaCoste, each of whom became an officer of ABNH
in 1999, failed to timely report such events on Form 3. These events have been
subsequently reported.


                                      -34-
<PAGE>   37
ITEM 11.  EXECUTIVE COMPENSATION.

The following table provides information concerning compensation paid to or
earned during 1997, 1998 and 1999 by each individual who served as our CEO or in
a similar capacity during 1999 and the next two most highly compensated
executive officers during 1999 (the "Named Executive Officers"). None of our
other executive officers earned salary and bonus in excess of $100,000 during
1999.

                                         SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                                    LONG-TERM
                                                                   ANNUAL COMPENSATION                             COMPENSATION
                                                  -------------------------------------------------------       --------------------
                                                                                                                SHARES OF COMMON
                                                                                           OTHER ANNUAL         STOCK UNDERLYING
                                                   SALARY              BONUS             COMPENSATION (1)            OPTIONS
                NAME                     YEAR       ($)                 ($)                     ($)                    (#)
-------------------------------------    ----     -------             -------            ----------------       ----------------
<S>                                      <C>      <C>                 <C>                <C>                    <C>
Morris Weissman (2)..................    1997          --                  --                     --                     --
                                         1998          --                  --                     --                 400,000
                                         1999          --                  --                     --                     --
Kenneth H. Traub (3).................    1997          --                  --                     --                     --
President and Chief Executive            1998          --                  --                     --                     --
    Officer                              1999     253,846             150,000                  6,280                 350,000
Salvatore F. D'Amato (4).............    1997          --                  --                     --                     --
Chairman of the Board                    1998          --                  --                     --                     --
                                         1999     100,100              40,000                 54,990                 175,000
Alan Goldstein (5)...................    1997          --                  --                     --                     --
Chief Financial Officer                  1998          --                  --                     --                     --
                                         1999     112,718              45,000                  4,656                 100,000
</TABLE>

-------------------

(1)  Other Annual Compensation for Mr. D'Amato consisted of $6,690 for the use
     of an automobile paid for by us and $48,300 that he received from us for
     his work as a consultant prior to becoming an employee. Other Annual
     Compensation for Messrs. Traub and Goldstein consisted of the use of
     automobiles paid for by us.

(2)  Mr. Weissman served as Chairman of the Board and Chief Executive Officer
     from 1990 to April 1999.

(3)  Mr. Traub has served as President and Chief Executive Officer since March
     2000. He served as President and Chief Operating Officer from February 1999
     to March 2000.

(4)  Mr. D'Amato has served as Chairman of the Board since April 1999.

(5)  Mr. Goldstein has served as Vice President and Chief Financial Officer
     since April 1999.


                                      -35-
<PAGE>   38
The following table provides information concerning option grants during 1999 to
the Named Executive Officers. No options were exercised during 1999.

                              OPTION GRANTS IN 1999

<TABLE>
<CAPTION>
                                                                                                         POTENTIAL REALIZABLE
                                                                                                           VALUE AT ASSUMED
                                                                                                        ANNUAL RATES OF STOCK
                                                                                                        PRICE APPRECIATION FOR
                                                        INDIVIDUAL GRANTS                                    OPTION TERM
                                    -----------------------------------------------------------       -----------------------------
                                        SHARES OF     PERCENT OF
                                         COMMON         TOTAL
                                          STOCK        OPTIONS
                                       UNDERLYING     GRANTED TO      EXERCISE
                                         OPTIONS      EMPLOYEES        PRICE        EXPIRATION            5%                 10%
              NAME                         (#)         IN 1999       ($/SHARE)         DATE              ($)                 ($)
--------------------------------       ----------     ----------     ---------      -----------        -------             -------

<S>                                    <C>            <C>            <C>            <C>                <C>                 <C>
Morris Weissman (1).............              --            --            --               --               --                  --
Kenneth H. Traub (2)............         250,000          20.1          1.75         02/02/09          275,141             697,262
                                         100,000           8.0          2.50         05/10/09          157,224             398,436
Salvatore F. D'Amato (3)........         175,000          14.1          2.50         04/16/09          275,141             697,262
Alan Goldstein (4)..............         100,000           8.0          2.50         05/10/09          157,224             398,436
</TABLE>

-------------------

(1)  Mr. Weissman served as Chairman of the Board and Chief Executive Officer
     from 1990 to April 1999.

(2)  Mr. Traub has served as President and Chief Executive Officer since March
     2000. He served as President and Chief Operating Officer from February 1999
     to March 2000.

(3)  Mr. D'Amato has served as Chairman of the Board since April 1999.

(4)  Mr. Goldstein has served as Vice President and Chief Financial Officer
     since April 1999.

The following table provides information concerning the number and value of
unexercised options held by each of the Named Executive Officers on December 31,
1999.

                           1999 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                   SHARES OF COMMON STOCK UNDERLYING             VALUE OF UNEXERCISED IN-THE-MONEY
                                                        UNEXERCISED OPTIONS                       OPTIONS AT DECEMBER 31, 1999
                                                                (#)                                         ($) (1)
                                                   ---------------------------------             ----------------------------------
                  NAME                             EXERCISABLE         UNEXERCISABLE             EXERCISABLE        UNEXERCISABLE
----------------------------------------           -----------         -------------             -----------        -------------
<S>                                                <C>                 <C>                       <C>                <C>
Morris Weissman (2).....................               --                   --                          --                --
Kenneth H. Traub........................               --              350,000                          --                --
Salvatore F. D'Amato....................               --              175,000                          --                --
Alan Goldstein..........................               --              100,000                          --                --
</TABLE>

-------------------

(1)  Based on the difference between $1.59, which was the closing price per
     share on December 31, 1999, and the exercise price per share of the
     options.

(2)  Mr. Weissman served as Chairman of the Board and Chief Executive Officer
     from 1990 to April 1999.


                                      -36-
<PAGE>   39
1998 STOCK INCENTIVE PLAN

Subsequent to our IPO, we adopted the 1998 Stock Incentive Plan for the purpose
of granting various stock incentives to our key employees. The board of
directors (or a committee appointed by the board of directors) has discretionary
authority, subject to certain restrictions, to administer the plan. The total
number of shares reserved for issuance under the plan, as amended, is 1,863,000
shares of common stock. Options to purchase 1,375,000 shares of common stock
were outstanding under the plan as of March 15, 2000. Options to purchase an
additional 165,000 shares of common stock were outstanding outside the plan as
of March 15, 2000. The exercise price of options granted under the plan may not
be less than 100% of the fair market value of our common stock on the date such
option was granted. Generally, the unexercised portion of any option
automatically terminates upon the termination of the optionee's employment with
us, unless otherwise determined by the board of directors; provided, however,
that any extension shall not extend beyond the expiration of the option,
generally ten years. Upon a change in control, outstanding options will
generally become fully vested and may be exercised immediately.

We intend to file a registration statement on Form S-8 under the Securities Act
of 1933, as amended, to register all shares of Common Stock issuable under the
1998 Stock Incentive Plan.

RETIREMENT PLANS

Certain of our employees participate in an affiliate of ABN's defined benefit
pension plan. Benefits under the plan were frozen in 1992 and were based on
years of service and average final compensation. The liability for benefits
under this plan, which is substantially funded, is the responsibility of an
affiliate of ABN. The total pension expense relating to our employees in the
aggregate for the past three years was less than $10,000.

Retirement benefits were provided by ABN to eligible employees through the
defined contribution retirement plan of ABN; the aggregate contributions to such
plan that have been charged to our operations was approximately $0.2 million in
each of the years ended 1998 and 1997. We continued to be a participating
employer in this plan through September 30, 1999, at which time we implemented
our own defined contribution plan. Contributions for the year ended December 31,
1999 aggregated $0.1 million.

DIRECTOR COMPENSATION

Each member of the board of directors who is not an employee of ABNH will
receive compensation of $12,000 per year for serving on the board of directors.
Each of these directors will also receive $1,000 for each board meeting attended
in person, $500 for each telephonic board meeting attended and $500 for each
committee meeting attended. We also will reimburse directors for any expenses
incurred in attending meetings of the board of directors and the committees
thereof. Upon their initial election to the board of directors, each
non-employee Board member is granted options to purchase 25,000 shares of our
common stock. Such options are exercisable at the fair market value of the
common stock at the date of grant. These options become vested and exercisable
for up to 20% of the total option shares upon the first anniversary of the grant
of the options and for an additional 20% of the total option shares upon each
succeeding anniversary until the option is fully exercisable at the end of the
fifth year.

EMPLOYMENT AGREEMENTS

We entered into an employment agreement with Salvatore F. D'Amato in April 1999
for an initial term of


                                      -37-
<PAGE>   40
two years. As amended, the agreement provides for a base salary of $180,000 per
year. In addition, Mr. D'Amato is eligible to receive bonuses at the discretion
of our board of directors, including a target bonus of $10,000 per quarter. The
quarterly bonus is required to be paid unless the Board determines otherwise
based on certain factors. Also in connection with the agreement, we granted to
Mr. D'Amato options to purchase up to 175,000 shares of our common stock at an
exercise price of $2.50 per share. In the event of Mr. D'Amato's termination for
any reason other than for cause, as defined in the agreement, or in the event of
his resignation for good reason, as defined in the agreement, we are required to
continue to pay his salary then in effect, together with any bonus that may have
accrued, for the remainder of his employment term. Upon termination of Mr.
D'Amato's employment following a change of control, or Mr. D'Amato's resignation
for good reason within one year of a change of control, we are required to pay
him an amount equal to his annual salary and bonus. In connection with his
employment agreement, Mr. D'Amato agreed not to compete with us during his term
of employment and for one year thereafter.

We entered into an employment agreement with Kenneth Traub in February 1999 for
an initial term of one year. As amended, the agreement provides for an annual
base salary of $300,000, to be increased by not less than 3% per year upon
renewal. In addition, Mr. Traub is eligible to receive bonuses at the discretion
of our board of directors, including a target bonus of $25,000 per quarter. The
quarterly bonus is required to be paid unless the Board determines otherwise
based on certain factors. Also in connection with the agreement, we granted to
Mr. Traub options to purchase up to 250,000 shares of our common stock at an
exercise price of $1.75 per share. In May 1999, Mr. Traub was granted additional
options to purchase up to 100,000 shares of our common stock at an exercise
price of $2.50 per share. In the event of Mr. Traub's termination for any reason
other than for cause, as defined in the agreement, or in the event of his
resignation for good reason, as defined in the agreement, (1) we are required to
pay him his salary then in effect with any bonus which may have been accrued or
which otherwise would have been granted by the board to him for a period of two
years following such termination, (2) we are required to continue any benefits
to Mr. Traub and (3) all unvested options to purchase common stock granted
under the 1998 Stock Incentive Plan to him will vest immediately. Upon
termination of Mr. Traub's employment following a change of control, or Mr.
Traub's resignation for a good reason, as defined in the agreement, following
a change in control, we are required to pay him as severance an amount equal to
twice his annual salary and bonus then in effect if such termination or
resignation is within one year of such change of control and an amount equal to
three times his salary and bonus then in effect if such termination or
resignation is more than one year after such change of control. In connection
with his employment agreement, Mr. Traub agreed not to compete with us during
his term of employment and for one year thereafter.

We entered into an employment agreement with Alan Goldstein in April 1999 for an
initial term of one year. The agreement provides for an annual base salary of
$160,000, to be increased by not less than 3% per year upon renewal. In
addition, Mr. Goldstein is eligible to receive bonuses at the discretion of our
board of directors, including a target bonus of $10,000 per quarter. In
connection with the agreement, we granted to Mr. Goldstein options to purchase
up to 100,000 shares of our common stock at an exercise price of $2.50 per
share. In the event of Mr. Goldstein's termination for any reason other than for
cause, as defined in the agreement, or in the event of his resignation for good
reason, as defined in the agreement, (1) we are required to pay him his salary
then in effect with any bonus which may have been accrued or which otherwise
would have been granted by the board to him for a period of six months following
such termination or resignation for good reason, (2) we are required to continue
any benefits to Mr. Goldstein and (3) all unvested options to purchase common
stock granted under the 1998 Stock Incentive Plan to him will vest immediately.
Upon termination of Mr. Goldstein's employment following a change of control, or
Mr.


                                      -38-
<PAGE>   41
Goldstein's resignation for a good reason, as defined in the agreement,
following a change in control, we are required to pay him as severance an amount
equal to nine months of his salary then in effect. In connection with his
employment agreement, Mr. Goldstein agreed not to compete with us during his
term of employment and for one year thereafter.

We entered into an employment agreement with Russell LaCoste in September 1999.
The agreement provides for a base salary of $225,000 per year. In addition, Mr.
LaCoste is eligible to receive bonuses at the discretion of our board of
directors, including a target bonus of $10,000 per quarter. Also in connection
with the agreement, we granted to Mr. LaCoste options to purchase up to 150,000
shares of our common stock at an exercise price of $2.50 per share. In the event
of Mr. LaCoste's termination for any reason other than for cause, we are
required to continue to pay him his salary then in effect for a period of three
months following such termination. Upon termination of Mr. LaCoste's employment
within three months before or after a change of control, we are required to pay
him an amount equal to $250,000.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Matters concerning executive officer compensation are addressed by our entire
board of directors because we do not have a compensation committee. No
interlocking relationship exists between our board of directors and the board of
directors or compensation committee of any other company.


                                      -39-
<PAGE>   42
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT.

The following table sets forth as of March 15, 2000 certain information
regarding beneficial ownership of our common stock by (1) each person who is
known to us to be the beneficial owner of more than 5% of the outstanding shares
of our common stock, (2) each director, (3) each of the Named Executive Officers
and (4) all directors and executive officers as a group. All persons listed have
sole voting and investment power with respect to their shares unless otherwise
indicated. The address of all persons listed is c/o American Bank Note
Holographics, Inc., 399 Executive Boulevard, Elmsford, NY 10523 unless otherwise
indicated.


<TABLE>
<CAPTION>
                        NAME AND ADDRESS                                      NUMBER (1)                PERCENTAGE
-----------------------------------------------------------------             ----------                ----------
<S>                                                                           <C>                       <C>
Putnam Investments, Inc. (2).....................................              1,920,102                    14.1%
    One Post Office Square
    Boston, MA 02109
Libra Advisors, LLC (3)..........................................                711,100                     5.2%
   277 Park Avenue, 26th Floor
   New York, NY 10172
Salvatore F. D'Amato (4).........................................                 60,333                     *
Kenneth H. Traub (5).............................................                137,500                     *
Alan Goldstein (6)...............................................                 33,333                     *
Stephen A. Benton (7)............................................                  5,000                     *
Fred J. Levin....................................................                     --                     *
Morris Weissman (8)..............................................                 20,000                     *
   c/o American Banknote Corporation
   410 Park Avenue
   New York, NY 10022
All executives officers and directors as a group
  (6 persons)  (9)...............................................                239,666                     1.7%
</TABLE>


----------------
* Less than 1%.

(1)  Beneficial ownership is determined in accordance with the rules of the SEC,
     and includes general voting power and/or investment power with respect to
     securities. Shares of common stock subject to options currently exercisable
     or exercisable within 60 days of March 15, 2000 are deemed outstanding for
     computing the percentage beneficially owned by the person holding such
     options.

(2)  The information provided is based solely on a Schedule 13G filed with the
     SEC on February 4, 1999. Putnam Investments, Inc., which is a wholly-owned
     subsidiary of Marsh & McLennan Companies, Inc., wholly owns two registered
     investment advisers: Putnam Investment Management, Inc., which is the
     investment adviser to the Putnam family of mutual funds and which
     beneficially owns 877,200 shares of our common stock, and The Putnam
     Advisory Company, Inc., which is the investment adviser to Putnam's
     institutional clients and which beneficially owns 1,042,902 shares of our
     common stock. Both subsidiaries have dispository power over the shares as
     investment managers, but each of the mutual fund's trustees have voting
     power over the shares held by each fund, and The Putnam Advisory Company,
     Inc. has shared voting


                                      -40-
<PAGE>   43
     power over the shares held by the institutional clients. Putnam
     Investments, Inc. and Marsh & McLennan Companies, Inc. have declared that
     the filing of a Schedule 13G with the SEC shall not be deemed an admission
     by either or both of them that they are, for the purposes of Section 13(d)
     or 13(g) under the Securities Exchange Act of 1934, as amended, the
     beneficial owner of any shares of our common stock, and have further stated
     that neither of them have any power to vote or dispose of, or direct the
     voting or disposition of, any shares of our common stock.

(3)  The information provided is based solely on a Schedule 13G filed with the
     SEC on October 8, 1999. Libra Advisors, LLC is the general partner of Libra
     Fund, L.P., which owns 676,100 shares of common stock, and the investment
     advisor of an offshore fund that owns 35,000 shares of common stock. Libra
     Advisors, LLC has the power to vote and to direct the voting of and the
     power to dispose and direct the disposition of these 711,100 shares. Ranjon
     Tandon is the sole voting member and manager of Libra Advisors, LLC and may
     be deemed to have the power to vote and to direct the voting of and the
     power to dispose and direct the disposition of the 711,100 shares of common
     stock beneficially owned by Libra Advisors, LLC.

(4)  Includes 58,333 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2000.

(5)  Includes 137,500 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2000.

(6)  Consists of 33,333 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2000.

(7)  Consists of 5,000 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2000.

(8)  Mr. Weissman served as Chairman of the Board and Chief Executive Officer
     from 1990 to April 1999. The information regarding Mr. Weissman's
     beneficial ownership of our common stock is based solely on a review of
     filings made with the SEC.

(9)  Includes 234,166 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2000.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Prior to our IPO in July 1998, we were a wholly-owned subsidiary of ABN. ABN
does not own any of our common stock following the IPO. In connection with the
IPO, we entered into a number of agreements with ABN relating to the transition
period and to defining our ongoing relationships following the IPO, as follows:

Separation Agreement.  This agreement provides that:

         -        we will generally indemnify ABN, including its officers,
                  directors, employees and affiliates, against all costs,
                  liabilities and expenses relating to the IPO and the conduct
                  by us of our business, including as a result of guarantees by
                  ABN of any of our obligations,


                                      -41-
<PAGE>   44
         -        ABN will indemnify us against all costs, liabilities and
                  expenses relating to the conduct by ABN of its business,
                  including as a result of guarantees by us of any obligations
                  of ABN,

         -        immediately prior to the closing of the IPO, we will have a
                  nominal amount of unrestricted cash and ABN shall be entitled
                  to all unrestricted cash on hand,

         -        ABN will indemnify and hold us harmless for all federal,
                  foreign, state and local franchise, income, sales, use,
                  transfer and other tax liabilities or obligations, including
                  interest and penalties, attributable to ABN's consolidated
                  group activities (other than our activities) for all periods,

         -        we will indemnify and hold harmless ABN for all federal,
                  foreign, state and local franchise, income, sales, use,
                  transfer and other tax liabilities or obligations, including
                  interest and penalties, attributable to our activities for all
                  periods, and

         -        we and ABN will cross-indemnify each other for certain other
                  matters.

License Agreement. This agreement provides us with the right to use the
"American Bank Note" name for a one-year term, automatically renewable for
consecutive one-year periods, for an annual fee of $1. Additionally, we and ABN
granted each other perpetual, paid-up royalty-free licenses for any patents,
trademarks or other proprietary technology used by the other in its respective
business. We agreed not to use the name "American Bank Note" or any variation
thereof in connection with any business, enterprise or venture outside of the
holography industry and not to sublicense the name to third parties.

Transitional Services Agreement. ABN agreed to provide or cause to be provided
to us certain specified corporate and administrative services for a one-year
transitional period after our IPO. The agreement provides that the services will
be provided for fees, which will be no greater than ABN's costs. No services
were provided under the agreement.

Employee Benefits Allocation Agreement. This agreement governs the allocation of
responsibilities and costs regarding employee benefit plans and related matters.
The agreement provides that we shall establish new benefit and insurance plans
for our employees, and will cooperate with ABN with respect to certain shared
responsibilities during the transitional period. ABN will be solely responsible
for any contributions that may be required following the IPO with respect to
service prior thereto for our employees who were covered under the ABN defined
benefit retirement plan.

On December 8, 1999, ABN filed a petition and plan of reorganization in federal
bankruptcy court pursuant to Chapter 11 of the U.S. Bankruptcy Code. The
proposed plan seeks approval for a financial restructuring resulting in the
cancellation of certain of ABN's outstanding indebtedness in exchange for equity
in ABN as well as the amendment of the repayment terms of certain other
outstanding indebtedness of ABN. The proposed plan does not seek to affect ABN's
trade obligations or payables in the ordinary course. We have filed an objection
to the disclosure statement describing ABN's proposed plan of reorganization. We
have also submitted a substantial claim in the proceeding for certain amounts
that we claim ABN owes us. Because of ABN's financial difficulties, it may be
difficult for us to collect on these claims or any future liabilities of ABN to
us.


                                      -42-
<PAGE>   45
                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)  (1) Financial Statements

         The financial statements required by this item are submitted in a
         separate section beginning on page F-1 of this report.

     (2) Financial Statement Schedules

         The financial statement schedule required by this item is submitted in
         a separate section on page S-1 of this report.

         Schedules other than that included at page S-1 of this report have been
         omitted because of the absence of conditions under which they are
         required or because the required information is included in our
         financial statements or notes thereto.

     (3) Exhibits

         See (c) below.

(b)      Reports on Form 8-K

         None.

(c)              Exhibits

<TABLE>
<S>              <C>
         3.1     Amended and Restated Certificate of Incorporation.*
         3.2     Amended and Restated By-Laws.*
         4.1     Form of Common Stock Certificate.*
         10.1    Form of Separation Agreement.*
         10.2    Form of License Agreement.*
         10.3    Form of Transitional Services Agreement.*
         10.4    Form of Employee Benefits Allocation Agreement.*
         10.5    Form of 1998 Stock Incentive Plan.*
         10.6    Form of Defined Contribution Plan.*
         10.7    Production Agreement between MasterCard International Incorporated and American
                 Bank Note Holographics, Inc., dated as of February 1, 1996.*
         10.8    Letter Agreement, dated June 29, 1998, between MasterCard
                 International Incorporated and American Bank Note Holographics,
                 Inc., amending the Production Agreement dated as of February 1,
                 1996.**+
         10.9    Letter Agreement, dated March 3, 1999, between MasterCard
                 International Incorporated and American Bank Note Holographics,
                 Inc., further amending the Production Agreement dated as of
                 February 1, 1996.**
         10.10   Loan and Security Agreement, dated as of September 29, 1999,
                 between Foothill Capital Corporation and American Bank Note
                 Holographics, Inc., together with Amendment No. 1 dated
                 December 31, 1999 and letter dated January 4, 2000.
</TABLE>


                                      -43-
<PAGE>   46
<TABLE>
<S>              <C>
         10.11   Employment Agreement, dated April 20, 1999, between Salvatore F. D'Amato and
                 American Bank Note Holographics, Inc.**
         10.12   Employment Agreement, dated February 3, 1999, between Kenneth H. Traub and
                 American Bank Note Holographics, Inc.**
         10.13   Employment Agreement, dated April 30, 1999, between Alan Goldstein and American
                 Bank Note Holographics, Inc.**
         10.14   Employment Agreement, dated September 15, 1999, between Russell
                 LaCoste and American Bank Note Holographics, Inc.**
</TABLE>

----------------

*    Incorporated by reference from the Registration Statement on Form S-1
     (Registration No. 333-51845).

**   Incorporated by reference from the Annual Report on Form 10-K for 1998.

+    Portions have been omitted pursuant to a request for confidential
     treatment.

(d)      Financial Statement Schedules

         See (a)(2) above.


                                      -44-
<PAGE>   47
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                                TABLE OF CONTENTS




<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>                                                                              <C>
INDEPENDENT AUDITORS' REPORT ..............................................      F-2
FINANCIAL STATEMENTS:
  Balance Sheets, December 31, 1999 and 1998 ..............................      F-3
  Statements of Operations for the Years Ended December 31,
     1999, 1998 and 1997 ..................................................      F-4
  Statements of Stockholders' Equity for the Years Ended
     December 31, 1999, 1998 and 1997 .....................................      F-5
  Statements of Cash Flows for the Years Ended December 31,
     1999, 1998 and 1997 ..................................................      F-6
  Notes to Financial Statements ...........................................      F-7
  Schedule II- Valuation and Qualifying Accounts ..........................      S-1
</TABLE>




                                      F-1
<PAGE>   48
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
    American Bank Note Holographics, Inc.
    Elmsford, New York

We have audited the accompanying balance sheets of American Bank Note
Holographics, Inc. as of December 31, 1999 and 1998, and the related statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the accompanying Table of Contents. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of American Bank Note Holographics, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 10 to the financial statements, the Company is involved in
certain litigation.


Deloitte & Touche LLP
New York, New York
March 29, 2000




                                      F-2
<PAGE>   49
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                                 BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                         1999         1998
<S>                                                                   <C>          <C>
                                     ASSETS
CURRENT ASSETS:
     Cash and cash equivalents .................................      $   266      $ 4,319
     Accounts receivable, net of allowance for doubtful
        accounts of $390 and $131 ..............................        3,224        4,023
     Inventories, net of allowances of $2,806 and $2,756 .......        2,915        5,827
     Deferred income taxes .....................................        2,143        1,777
     Prepaid expenses and other ................................          282          427
                                                                      -------      -------
          Total current assets .................................        8,830       16,373
MACHINERY, EQUIPMENT AND LEASEHOLD
   IMPROVEMENTS -- Net .........................................        5,195        5,325
OTHER ASSETS ...................................................          303          680
EXCESS OF COST OVER NET ASSETS ACQUIRED -
  Net of accumulated amortization of $2,264 and $1,919 .........        8,097        8,442
                                                                      -------      -------
TOTAL ASSETS ...................................................      $22,425      $30,820
                                                                      =======      =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Revolving credit ..........................................      $    74      $ 5,591
     Current portion of notes payable ..........................          138          304
     Current portion of long-term debt .........................          200           --
     Accounts payable ..........................................        2,494        4,376
     Accrued expenses ..........................................        3,266        2,619
     Customer advances .........................................          607        1,460
                                                                      -------      -------
          Total current liabilities ............................        6,779       14,350
LONG-TERM DEBT .................................................          800           --
OTHER LONG-TERM LIABILITIES, INCLUDING
   NOTES PAYABLE ...............................................           56          477
DEFERRED INCOME TAXES ..........................................        1,335        1,463
                                                                      -------      -------
          Total liabilities ....................................        8,970       16,290
                                                                      -------      -------
COMMITMENTS AND CONTINGENCIES -- Note 10
STOCKHOLDERS' EQUITY:
     Preferred Stock, authorized 5,000,000 shares; no shares
       issued or outstanding
     Common Stock, par value $.01 per share, authorized,
       30,000,000 shares; issued and outstanding, 13,636,000
       shares ..................................................          136          136
     Additional paid-in capital ................................       11,627       11,627
     Retained earnings .........................................        1,692        2,767
                                                                      -------      -------
          Total stockholders' equity ...........................       13,455       14,530
                                                                      -------      -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .....................      $22,425      $30,820
                                                                      =======      =======
</TABLE>

                       See notes to financial statements.




                                      F-3
<PAGE>   50
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                            STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                            1999           1998           1997
                                                          --------       --------       --------
<S>                                                       <C>            <C>            <C>
REVENUE:
      Sales ........................................      $ 20,695       $ 28,669       $ 23,085
      Royalty income ...............................           535            554            785
                                                          --------       --------       --------
           Total revenue ...........................        21,230         29,223         23,870
                                                          --------       --------       --------

COSTS AND EXPENSES:
     Cost of goods sold ............................        11,508         19,064         12,153
     Selling and administrative (Notes 9 and 11) ...         9,304          6,291          5,813
     Depreciation and amortization .................         1,026          1,080          1,136
                                                          --------       --------       --------
           Total costs and expenses ................        21,838         26,435         19,102
                                                          --------       --------       --------

     Operating (loss) income .......................          (608)         2,788          4,768
                                                          --------       --------       --------

OTHER -- Net:
     Interest income ...............................            31            183            305
     Other income ..................................            24             --             36
     Interest expense ..............................        (1,016)          (583)          (159)
                                                          --------       --------       --------
           Total other - net .......................          (961)          (400)           182
                                                          --------       --------       --------

(LOSS) INCOME BEFORE TAXES ON
    INCOME .........................................        (1,569)         2,388          4,950
TAXES ON INCOME (BENEFIT) ..........................          (494)         1,269          2,130
                                                          --------       --------       --------

NET (LOSS) INCOME ..................................      $ (1,075)      $  1,119       $  2,820
                                                          ========       ========       ========

NET (LOSS) INCOME PER SHARE:
     Basic and diluted .............................      $  (0.08)      $   0.08       $   0.21
                                                          ========       ========       ========
</TABLE>

                       See notes to financial statements.




                                      F-4
<PAGE>   51
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                        DUE FROM
                                                    COMMON STOCK           ADDITIONAL                   FORMER
                                               ----------------------      PAID-IN       RETAINED       PARENT AND
                                                SHARES        AMOUNT       CAPITAL       EARNINGS       AFFILIATES       TOTAL
                                                ------        ------       -------       --------       ----------       -----
<S>                                            <C>           <C>           <C>           <C>            <C>            <C>
BALANCE, JANUARY 1, 1997 ................        13,636      $    136      $ 11,627      $ 32,716       $(22,045)      $ 22,434
     Change during year .................            --            --            --            --         (4,089)        (4,089)
     Net income .........................            --            --            --         2,820           _ --          2,820
                                               --------      --------      --------      --------       --------       --------
BALANCE, DECEMBER 31 1997 ...............        13,636           136        11,627        35,536        (26,134)        21,165
     Change during year .................            --            --            --            --         (7,754)        (7,754)
     Deemed dividend to Former Parent
       and affiliates (see Note 1) ......            --            --            --       (33,888)        33,888             --
     Net income .........................            --            --            --         1,119             --          1,119
                                               --------      --------      --------      --------       --------       --------
BALANCE, DECEMBER 31, 1998 ..............        13,636           136        11,627         2,767             --         14,530
     Net (loss) .........................            --            --            --        (1,075)            --         (1,075)
                                               --------      --------      --------      --------       --------       --------
BALANCE, DECEMBER 31, 1999 ..............        13,636      $    136      $ 11,627      $  1,692       $     --       $ 13,455
                                               ========      ========      ========      ========       ========       ========
</TABLE>

                       See notes to financial statements.




                                      F-5
<PAGE>   52
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                            STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       1999          1998          1997
                                                                     -------       -------       -------
<S>                                                                  <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net (loss) income ........................................      $(1,075)      $ 1,119       $ 2,820
     Adjustments to reconcile net (loss) income to net cash
        provided by operating activities:
        Depreciation and amortization .........................        1,026         1,080         1,136
        Deferred income taxes .................................         (494)       (1,196)         (279)
        Deferred financing costs ..............................          626            --            --
        Gain on sale of equipment .............................          (12)           --            --
     Changes in operating assets and liabilities:
        Accounts receivable ...................................          799         1,874           696
        Inventories ...........................................        2,912           204        (1,081)
        Prepaid expenses and other ............................          248          (459)          127
        Accounts payable, accrued expenses and other ..........       (1,639)        3,313           574
        Customer advances .....................................         (853)        1,460            --
                                                                     -------       -------       -------
          Net cash provided by operating activities ...........        1,538         7,395         3,993
                                                                     -------       -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures .....................................         (577)         (359)         (461)
     Proceeds from sale of equipment ..........................           38            --            --
                                                                     -------       -------       -------
          Net cash used in investing activities ...............         (539)         (359)         (461)
                                                                     -------       -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Deferred financing costs .................................         (352)         (510)           --
     Notes payable, net .......................................         (183)          377            --
     Long-term debt borrowings ................................        1,000            --            --
     Revolving credit borrowings, net .........................       (5,517)        4,917           674
     Advances to Former Parent and affiliates, net ............           --        (7,754)       (4,089)
                                                                     -------       -------       -------
          Net cash used in financing activities ...............       (5,052)       (2,970)       (3,415)
                                                                     -------       -------       -------

(DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS .................................................       (4,053)        4,066           117
CASH AND CASH EQUIVALENTS, BEGINNING OF
  YEAR ........................................................        4,319           253           136
                                                                     -------       -------       -------
CASH AND CASH EQUIVALENTS, END OF YEAR ........................      $   266       $ 4,319       $   253
                                                                     =======       =======       =======

SUPPLEMENTAL CASH PAYMENTS:
     Taxes (including amounts paid to Former Parent) ..........      $     1       $ 2,799       $ 5,485
                                                                     =======       =======       =======
     Interest .................................................      $ 1,031       $    --       $   159
                                                                     =======       =======       =======
</TABLE>

                       See notes to financial statements.



                                      F-6
<PAGE>   53
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American Bank Note Holographics, Inc. (the "Company") was, until July 20, 1998
(the "Offering Date"), a wholly-owned subsidiary of American Banknote
Corporation (the "Former Parent"). On the Offering Date, the Former Parent
completed the sale of 13,636,000 shares of the Company's common stock in a
public offering (the "Offering"), representing its entire investment in the
Company. The Company did not receive any proceeds from the Offering.
Additionally, in connection with the Offering, the amounts due from the Former
Parent and affiliates of approximately $33.9 million were canceled and deemed to
be a dividend (see Note 7). Immediately following the Offering, the Company had
approximately $5.2 million of secured bank debt and nominal cash. For financial
reporting purposes, the amounts due from the Former Parent and affiliates prior
to the Offering Date have been classified within stockholders' equity.

On June 11, 1998, the Company declared a 1,363.6 to one stock split, effective
July 2, 1998, in the form of a stock dividend, of its Common Stock and increased
its authorized Common Stock to 30,000,000 shares and its authorized Preferred
Stock to 5,000,000 shares. The accompanying financial statements give
retroactive effect to the consummation of the stock split.

As a wholly-owned subsidiary, the Company was provided certain corporate and
administrative services by its Former Parent, including financial reporting,
treasury functions, tax planning and compliance, risk management, human
resources and legal services. Additionally, because the Former Parent managed
cash and financing requirements centrally, interest expense and financing
requirements prior to the Offering Date were based on the existing capital
structure. The financial position and operations of the Company prior to the
Offering may differ from the results that may have been achieved had the Company
operated as an independent entity.

The Company originates, mass-produces, and markets secure holograms. Holograms
are used for security, packaging and promotional applications. The Company
operates in one reportable industry segment.

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 reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of sales and expenses during the reporting
period. Actual results may differ materially from those estimates.

CASH AND CASH EQUIVALENTS -- All highly liquid investments with a maturity of
three months or less, when purchased, are considered to be cash equivalents.




                                      F-7
<PAGE>   54
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

CONCENTRATIONS OF CREDIT RISK -- A significant portion of the Company's accounts
receivable are due from credit card issuers and related credit card
manufacturers located throughout the United States and Europe. The Company
establishes its credit policies based on an ongoing evaluation of its customers'
creditworthiness and competitive market conditions and does not require
collateral. The Company establishes its allowance for doubtful accounts based on
an assessment of exposures to credit losses at each balance sheet date and
believes its allowance for doubtful accounts is sufficient, based on the credit
exposures outstanding at December 31, 1999.

INVENTORIES AND SALES RECOGNITION -- Inventories are stated at the lower of cost
or market with cost being determined on the first-in, first-out (FIFO) method.
Hologram originations (which represent costs of a unique master hologram, that
is made to customer specifications and is an integral part of the production
process) are capitalized and charged to cost of goods sold over the estimated
production period.

Sales and the related cost of goods sold are generally recognized at the latter
of the time of shipment or when title passes to customers. In some situations,
the Company has shipped product with the right of return where the Company is
unable to reasonably estimate the level of returns and/or the sale is contingent
upon the customers' use of the product. In these situations, the Company does
not recognize sales upon product shipment, but rather when the buyer of the
product informs the Company that the product has been used. Additionally,
pursuant to terms with a certain customer, completed items are stored on behalf
of the customer at the Company's on-site secured facility and, in that instance,
sales are recognized when all of the following have occurred: the customer has
ordered the goods, the manufacturing process is complete, the goods have been
transferred to the on-site secured facility and are ready for shipment, the risk
of ownership has passed to the customer and the customer has been billed for the
order. At December 31, 1999, accounts receivable from this customer totaled $0.5
million. There were no amounts receivable from this customer at December 31,
1998. In the first quarter of 1998, the Company recorded sales of approximately
$6.5 million under this arrangement.

At December 31, 1999 and 1998, customer advances approximating $0.6 million and
$1.5 million, respectively, represent payments received from customers for
products which have not yet been shipped ($0.5 million and $1.2 million,
respectively) and for products shipped with the right of return ($0.1 million
and $0.3 million, respectively) where the Company is unable to reasonably
estimate the level of returns. These customer advances are classified as current
liabilities on the accompanying balance sheets.

ROYALTY INCOME -- The Company enters into licensing agreements with certain
manufacturers under which the Company receives royalty payments. Royalty
payments due under licensing agreements are recognized as income either based
upon shipment reports from licensees, where available, or estimated shipments by
such licensees.




                                      F-8
<PAGE>   55
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

DEPRECIATION AND AMORTIZATION -- Machinery and equipment is recorded at cost and
depreciated by the straight-line method over the estimated useful lives of 5 to
22 years.

Amortization of leasehold improvements is computed by the straight-line method
based upon the remaining term of the applicable lease, or the estimated useful
life of the asset, whichever is shorter.

LONG-LIVED ASSETS -- The Company reviews its long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Such changes in circumstances may include, among other
factors, a significant change in technology that may render an asset or an asset
group obsolete or noncompetitive, a significant change in the extent or manner
in which an asset is used, evidence of a physical defect in an asset or asset
group or an operating loss. If changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, the Company estimates the
future cash flows (undiscounted and without interest charges) expected to result
from the use of the asset and its eventual disposition, and records an
impairment loss (equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset) if such estimated cash flows are less than
the carrying amount of the asset.

Assets to be disposed of and assets not expected to provide any future service
potential to the Company are recorded at the lower of carrying amount or fair
value less costs to sell.

INTANGIBLE ASSETS -- The excess of cost over net assets acquired is being
amortized over 30 years by the straight-line method. The Company reviews
enterprise level goodwill for impairment when changes in circumstances, similar
to those described above for long-lived assets, indicate that the carrying value
may not be recoverable. Under these circumstances, the Company estimates future
cash flows using the recoverability method (undiscounted and including related
interest charges), as a basis for recording any impairment loss. An impairment
loss is then recorded to adjust the carrying value of goodwill to the
recoverable amount. The impairment loss taken is no greater than the amount by
which the carrying value of the net assets of the business exceeds its fair
value.

DEFERRED FINANCING COSTS -- Costs incurred in connection with obtaining
financing are deferred and amortized as a charge to interest expense over the
term of the related borrowing using the interest method.

WARRANTY COSTS -- The Company provides for warranty costs in amounts it
estimates will be needed to cover future warranty obligations for products sold
during the year. Estimates of warranty costs are periodically reviewed and
adjusted, when necessary, to consider actual experience.




                                      F-9
<PAGE>   56
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred (1999 -- $0.3 million, 1998 -- $0.3 million and 1997 -- $0.5 million).

INCOME TAXES -- The Company accounts for income taxes under the liability method
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. The provision for income taxes includes deferred
income taxes resulting from items reported in different periods for income tax
and financial statement purposes. Deferred tax assets and liabilities represent
the expected future tax consequences of the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis.

STOCK-BASED COMPENSATION PLANS -- SFAS No. 123, Accounting for Stock-Based
Compensation, allows either adoption of a fair value method for accounting for
stock-based compensation plans or continuation of accounting for stock-based
compensation plans under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations with
supplemental disclosures.

The Company has chosen to account for its stock options using the intrinsic
value based method prescribed in APB Opinion No. 25 and, accordingly, does not
recognize compensation expense for stock option grants made at an exercise price
equal to or in excess of the fair market value of the stock at the date of
grant. Pro forma net income and net income per share amounts as if the fair
value method had been adopted are presented in Note 8. SFAS No. 123 does not
impact the Company's results of operations, financial position or cash flows.

BASIC AND DILUTED NET INCOME PER SHARE -- Basic net income per share is computed
based on the weighted average number of outstanding shares of common stock,
after giving retroactive effect to the stock split. The basic weighted average
number of shares outstanding were 13,636,000 for each of the years ended
December 31, 1999, 1998 and 1997. Diluted net income per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding and dilutive potential shares of common stock (all related to
outstanding stock options in 1998). For the year ended December 31, 1999,
options to purchase 1,420,000 shares of the Company's common stock were
excluded from the calculation of diluted net income per share because the
effect of inclusion of such options would have been antidilutive. For the year
ended December 31, 1998, the dilutive effect of approximately 65,000 equivalent
shares related to stock options was used in determining the diluted weighted
average shares outstanding. For the years ended December 31, 1999, 1998 and
1997, the diluted weighted average number of shares outstanding were
13,636,000, 13,701,000 and 13,636,000, respectively.




                                      F-10
<PAGE>   57
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

BUSINESS INFORMATION -- Sales to MasterCard were approximately 27%, 30% and 35%
of sales for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately 75% of the 1998 MasterCard sales were recorded in the first
quarter of 1998. At December 31, 1999, accounts receivable from MasterCard
approximated $0.5 million. No amounts were due from MasterCard at December 31,
1998. The Company is the exclusive supplier of holograms to MasterCard pursuant
to an agreement, as amended, that extends until February 2003. The agreement
provides for automatic two-year renewal periods if not terminated by either
party. During 1999, the Company was informed by MasterCard that it believes that
the Company breached certain terms of the agreement in 1998 and 1997. The
Company has been working closely with MasterCard to address issues raised by
MasterCard, and believes its relationship with MasterCard is good. Beginning in
January 2000, the Company agreed to lower its selling price to MasterCard by
approximately 12%. The loss of all or a substantial portion of the sales to
MasterCard, however, would have a material adverse effect on the financial
position, results of operations and cash flows of the Company.

Sales to manufacturers of VISA credit cards (approximately 50 customers) were
approximately 18%, 26% and 27% of sales for the years ended December 31, 1999,
1998 and 1997, respectively. The loss of a substantial portion of the sales to
these customers would have a material adverse effect on the financial position,
results of operations and cash flows of the Company. At December 31, 1999 and
1998, accounts receivable from these customers approximated $0.5 million and
$1.0 million, respectively.

The Company has historically purchased certain key materials used in the
manufacture of its holograms from single suppliers, with which it does not have
supply contracts. Any problems that occur with respect to the delivery, quality
or cost of any such materials could have a material adverse effect on the
financial position, results of operations and cash flows of the Company.

EXPORT SALES -- U.S. export sales were approximately 32%, 28% and 25% of sales
for the years ended December 31, 1999, 1998 and 1997, respectively. All export
sales are denominated in United States dollars. At December 31, 1999 and 1998,
accounts receivable from these customers approximated $0.5 million and $1.2
million, respectively.

RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year's presentation.




                                      F-11
<PAGE>   58
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

NEW ACCOUNTING STANDARDS -- In March 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use ("SOP
98-1"). SOP 98-1 requires computer software costs associated with internal use
software to be expensed as incurred until certain capitalization criteria are
met. The Company adopted SOP 98-1 on January 1, 1999. Adoption of this statement
did not have a material impact on the Company's financial position, results of
operations, or cash flows.

In April 1998, the AICPA issued Statement of Position 98-5, Reporting on the
Cost of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires all costs associated
with pre-opening, pre-operating and organization activities to be expensed as
incurred. The Company adopted SOP 98-5 on January 1, 1999. Adoption of this
statement did not have a material impact on the Company's financial position,
results of operations, or cash flows.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which, as amended,
is effective for fiscal years beginning after June 15, 2000. SFAS No. 133
requires the recognition of all derivatives in the balance sheets as either
assets or liabilities measured at fair value. The Company will adopt SFAS No.
133 for the 2001 fiscal year. The Company is currently evaluating the impact
SFAS No. 133 will have on its financial position, results of operations and cash
flows.

2. INVENTORIES

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                                   ------------
                                                                1999          1998
                                                              -------       -------
<S>                                                           <C>           <C>
                                                                  (IN THOUSANDS)
    Finished goods .....................................      $ 3,498       $ 3,430
    Finished goods on consignment with customers .......          228           487
    Work in process ....................................        1,096         3,273
    Origination and cylinder costs .....................          114           427
    Raw materials ......................................          785           966
                                                              -------       -------
                                                                5,721         8,583
    Less: Reserve for obsolescence .....................       (2,806)       (2,756)
                                                              -------       -------
                                                              $ 2,915       $ 5,827
                                                              =======       =======
</TABLE>




                                      F-12
<PAGE>   59
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                                ------------
                                                             1999         1998
                                                             ----         ----
                                                               (IN THOUSANDS)
<S>                                                         <C>          <C>
    Machinery and equipment ..........................      $11,420      $11,041
    Leasehold improvements ...........................          890          888
                                                            -------      -------
                                                             12,310       11,929
    Accumulated depreciation and amortization ........        7,115        6,604
                                                            -------      -------
                                                            $ 5,195      $ 5,325
                                                            =======      =======
</TABLE>


4. ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                                ------------
                                                             1999         1998
                                                             ----         ----
                                                               (IN THOUSANDS)
<S>                                                         <C>          <C>
    Accrued contract liability .......................      $   472      $   472
    Accrued interest expense .........................           36           94
    Warranty reserve .................................          935          445
    Federal, state and local income taxes ............          143          144
    Salaries and wages ...............................          619          387
    Other ............................................        1,061        1,077
                                                            -------      -------
                                                            $ 3,266      $ 2,619
                                                            =======      =======
</TABLE>



5. TAXES ON INCOME

In accordance with a tax allocation agreement in effect through the Offering
Date, the Company was included in the consolidated U.S. Federal income tax
return and, in certain instances, consolidated or combined state and local
income tax returns of its Former Parent and made payments to the Former Parent
based on the amounts which would be payable as Federal, state and local income
taxes as if consolidated or combined returns were not filed. The Company
computed its Federal, state and local income tax provision as if it was filing
separate income tax returns, without regard to the tax




                                      F-13
<PAGE>   60
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

5. TAXES ON INCOME (CONTINUED)

allocation agreement. In October 1999, an affiliate of the Former Parent
received an assessment for approximately $0.9 million of taxes and interest from
the City of New York relating to the years ended December 31, 1990, 1991, and
1992. The Company was included in the combined City of New York income tax
returns of the Former Parent for the periods covered by the assessment and had
previously made payments to the Former Parent based on amounts which would have
been payable if the combined income tax returns were not filed. The Company is
contingently liable, jointly and severally, for U.S. Federal, state and local
income taxes for periods in which it is included in the consolidated or combined
income tax returns of its Former Parent (see Note 10). Amounts paid to the
Former Parent in excess of amounts which would have been payable had the Company
filed separate income tax returns have been charged to Due from Former Parent
and affiliates. For periods subsequent to the Offering Date, the Company will
file its own U.S. Federal and state income tax returns. The Company has not
filed income tax returns for New York State for the year ended December 31,
1998.

Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.

Taxes on income (benefit) are as follows:

<TABLE>
<CAPTION>
                                                 FOR THE YEARS ENDED
                                                     DECEMBER 31,
                                                     ------------
                                        1999             1998             1997
                                      -------          -------          -------
                                                    (IN THOUSANDS)
<S>                                   <C>              <C>              <C>
Current:
     Federal ................         $    --          $ 2,025          $ 1,912
     State and local ........              --              440              497
                                      -------          -------          -------
                                           --            2,465            2,409
                                      -------          -------          -------
Deferred:
     Federal ................            (383)          (1,020)            (240)
     State and local ........            (111)            (176)             (39)
                                      -------          -------          -------
                                         (494)          (1,196)            (279)
                                      -------          -------          -------
                                      $  (494)         $ 1,269          $ 2,130
                                      =======          =======          =======
</TABLE>




                                      F-14
<PAGE>   61
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

5. TAXES ON INCOME (CONTINUED)

A reconciliation of the taxes on income and the amount computed by applying the
Federal income tax statutory rate of 35% follows:

<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED
                                                                   DECEMBER 31,
                                                                   ------------
                                                         1999          1998         1997
                                                       -------       -------      -------
                                                                  (IN THOUSANDS)
<S>                                                    <C>           <C>          <C>
Statutory tax ...................................      $  (549)      $   836      $ 1,733
Amortization of nondeductible goodwill ..........          122           122          122
State and local taxes, net of Federal benefit ...          (72)          172          298
Nondeductible fee ...............................           --            84           --
Other ...........................................            5            55          (23)
                                                       -------       -------      -------
                                                       $  (494)      $ 1,269      $ 2,130
                                                       =======       =======      =======
</TABLE>


The tax effects of the items comprising the Company's deferred income tax assets
and liabilities are as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                               ------------
                                                            1999          1998
                                                          -------       -------
                                                              (IN THOUSANDS)
<S>                                                       <C>           <C>
Current deferred tax assets:
     Uniform capitalization of inventory ...........      $   212       $   168
     Bad debt reserve ..............................          160            54
     Warranty reserve ..............................          383           182
     Inventory obsolescence ........................        1,150         1,131
     Accrued vacation ..............................           38            42
     Other liabilities .............................          200           200
                                                          -------       -------
     Total current deferred tax assets .............      $ 2,143       $ 1,777
                                                          =======       =======
Non-current deferred tax assets:
     Net operating loss carryforward ...............      $  (490)      $    --
     Postretirement medical accrual ................           --          (174)
                                                          -------       -------
                                                             (490)         (174)
Non-current deferred tax liabilities:
     Excess tax over book depreciation .............        1,825         1,637
                                                          -------       -------
     Net non-current deferred tax liabilities ......      $ 1,335       $ 1,463
                                                          =======       =======
</TABLE>


At December 31, 1999, the Company has net operating loss carryforwards
available to offset future Federal income taxes of $1.1 million, which expire
in 2017, and net operating loss carryforwards available to offset future state
income taxes of $1.1 million, which expire in 2017.




                                      F-15
<PAGE>   62
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

6. REVOLVING CREDIT AGREEMENT

On July 20, 1998, contemporaneously with the Offering, the Company entered into
a $30.0 million credit facility agreement (the "Credit Agreement"), consisting
of a $20.0 million acquisition facility and a $10.0 million working capital
facility, maturing on July 20, 2004, which replaced a facility the Company had
entered into with an affiliate of its Former Parent. Substantially all of the
Company's assets were secured under the terms of the Credit Agreement. At
December 31, 1998, the $5.6 million outstanding under the Credit Agreement
exceeded the maximum permitted borrowings, as defined, pursuant to the borrowing
base formula, as defined, under the Credit Agreement. In February 1999, the
lenders notified the Company that the Company was in default under the Credit
Agreement. On March 31, 1999, the Credit Agreement was amended (the "Amended
Credit Agreement"), whereby the maximum permitted borrowings were reduced to the
lesser of $4.5 million or the maximum permitted borrowings under a borrowing
base formula, as defined. Borrowings under the Amended Credit Agreement bore
interest at the lender's alternate base rate, as defined, plus 0.5%. On July 20,
1999, the Amended Credit Agreement was amended (the "Second Amended Credit
Agreement"), whereby (i) all existing events of default were waived, (ii) the
latest maturity date of all loans outstanding was changed to January 20, 2000,
and (iii) the maximum permitted borrowings was reduced to $4.0 million, which
was to decline monthly until December 31, 1999 when the maximum permitted
borrowings was to be $2.6 million. The Second Amended Credit Agreement provided
for borrowings under a revolving credit line bearing interest at the lender's
alternate base rate, as defined, plus 2% (8.0% at December 31, 1998), subject to
a borrowing base formula, as defined. As consideration for the Second Amended
Credit Agreement, the Company paid a fee of $40,000 and issued warrants to
purchase up to 781,645 shares of its Common Stock, subject to antidilution
rights, at $4.50 per share. Such warrants were terminated on September 29, 1999
pursuant to the Second Amended Credit Agreement when amounts outstanding under
the Second Amended Credit Agreement were repaid, as described below.

On September 29, 1999, amounts then outstanding under the Second Amended Credit
Agreement were repaid when the Company entered into a Loan and Security
Agreement with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank
(as amended, the "Loan and Security Agreement"), maturing on September 29, 2004.
The Loan and Security Agreement, which is secured by substantially all of the
Company's assets, provides for borrowings in an aggregate amount up to $10.0
million (which may be increased to $15.0 million with the consent of the
parties), subject to a borrowing base formula, under a revolving credit
facility, term loan and capital expenditure loan. Borrowings under the Loan and
Security Agreement bear interest at the lender's reference rate, as defined,
plus 1.5%, (10% at December 31, 1999) which may decrease to 1.25%, 1.00%, or
0.5% under certain circumstances. Under the terms of the Loan and Security
Agreement, the maximum amounts of the term and capital expenditure loans are
approximately $1.0 million and $2.0 million, respectively, and are repayable in
sixty equal monthly installments. At December 31, 1999, the Company had $74,000
outstanding on the revolving credit facility and $1.0 million outstanding on the
term loan which is payable in monthly installments of $16,667 beginning January,
2000. At December 31, 1999, no loans were outstanding on the capital expenditure
line. In addition, the Company had $0.3 million of availability under the
revolving credit facility at December 31, 1999.




                                      F-16
<PAGE>   63
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

6.  REVOLVING CREDIT AGREEMENT (CONTINUED)

The Loan and Security Agreement contains covenants customary for credit
facilities of a similar nature, including limitations on the ability of the
Company to, among other things, (i) declare dividends or repurchase or redeem
stock, (ii) prepay, redeem or repurchase debt, incur liens and engage in
sale-leaseback transactions, (iii) make loans and investments, (iv) incur
additional debt, (v) amend or otherwise alter material agreements or enter into
restrictive agreements, (vi) make capital expenditures in any fiscal year in
excess of $2.5 million, (vii) engage in mergers, acquisitions and asset sales,
(viii) engage in certain transactions with affiliates and (ix) materially alter
the nature of its business. Additionally, under the terms of the Loan and
Security Agreement, the Company is required to comply with specified financial
covenants and ratios. The Loan and Security Agreement also provides for events
of default customary for transactions of this type, including nonpayment,
misrepresentation, breach of covenant, cross-defaults, bankruptcy, adverse
judgments in excess of $0.2 million, and change of ownership and control.

During 1999, the Company wrote-off unamortized deferred financing costs of
approximately $0.6 million relating to the amendments to and repayment of the
Credit Agreement.

During both 1999 and 1998, the weighted average interest rate of outstanding
borrowings was approximately 8.4%. The average aggregate borrowings during 1999
and 1998 was approximately $3.3 million and $5.2 million, respectively.

At December 31, 1999, the Company has notes payable totaling approximately
$194,000, of which $139,000 is due in 2000, $19,000 in 2001, $21,000 in 2002,
and $15,000 in 2003. The notes bear interest at rates ranging from 5.85% to
8.36%.




                                      F-17
<PAGE>   64
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

7. RELATED PARTY TRANSACTIONS

The financial statements reflect both allocated and, where readily determinable,
actual expenses for services provided by the Company's Former Parent and
affiliates. Where allocations have been utilized, the Company, its Former Parent
and affiliates recorded transactions based upon systematic and reasonable
methods, including but not limited to sales, asset values and headcount, all as
a percent of total.

The amounts by major category of historical transactions with the Former Parent
and affiliates follow:

<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED
                                                              DECEMBER 31,
                                                        -----------------------
                                                          1998           1997
                                                        --------       --------
                                                             (IN THOUSANDS)
<S>                                                     <C>            <C>
Due from (to) Former Parent and affiliates:
  Balance at beginning of year ...................      $ 26,134       $ 22,045
     Income tax liability payable to Former
       Parent ....................................        (2,272)        (2,307)
     Taxes paid to Former Parent .................         2,422          5,306
     Cash advances to Former Parent ..............         7,685          2,851
     Allocation of employee benefits(1) ..........          (402)        (1,052)
     Sales to affiliates .........................            --            123
     Allocation of security services .............          (100)          (198)
     Sales and administration expenses(2) ........          (244)          (592)
     Allocation of general liability insurance ...            --           (293)
     Intercompany interest(3) ....................           156            305
     Reversal of SERP liability ..................           (56)            --
     Executive benefits(4) .......................           (13)           (54)
     Other .......................................           578             --
     Deemed dividend to Former Parent (see
       Note 1) ...................................       (33,888)            --
                                                        --------       --------
  Balance at end of year .........................      $     --       $ 26,134
                                                        ========       ========
</TABLE>

----------

(1) Primarily medical, life and disability insurance premiums.

(2) Includes legal fees and allocated portion of audit fees.

(3) Included in the above balances is a $5.3 million note receivable from the
    Former Parent that bore interest at 5.75% per annum.

(4) Includes value of restricted stock of the Former Parent.

The amount of the deemed dividend to the Former Parent is subject to adjustment
based on the Company's taxable income through the Offering Date (see Note 5).




                                      F-18
<PAGE>   65
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

7.  RELATED PARTY TRANSACTIONS (CONTINUED)

For financial reporting purposes, the amounts due from the Former Parent and
affiliates for periods prior to the Offering Date have been classified within
stockholders' equity.

In addition to the above, the Company sold $1.0 million, $0.6 million and $0.4
million of products and services in 1999, 1998 and 1997, respectively, to its
Former Parent and affiliates in the normal course of business. Purchases by the
Company from the Former Parent and affiliates in the normal course of business
were $0.1 million in 1997. There were no such purchases in 1999 and 1998. At
December 31, 1999 and 1998, trade accounts receivable from the Former Parent and
affiliates were $0.2 million and $0.2 million, respectively. Included in the
above are transactions in which the Company acted as a subcontractor to an
affiliate of the Former Parent under a government contract. Sales under this
subcontract, which are billed to the affiliate of the Former Parent,
approximated $0.2 million, $0.3 million and $0.1 million in 1999, 1998 and 1997,
respectively. At December 31, 1999 and 1998, trade accounts receivable from the
affiliate of the Former Parent under this subcontract approximated $0.2 million
and $0.1 million, respectively. At both December 31, 1999 and 1998, accounts
payable and accrued expenses include approximately $0.3 million and $0.2
million, respectively, due the Former Parent and its affiliates.

In 1997 employees of the Company received stock options under the Former
Parent's stock-based compensation plans. No such options were granted in 1999
and 1998. Had compensation cost for the stock option plans been determined based
on the fair value at the grant award dates, in 1997, consistent with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, net income
would have been reduced by approximately $13,000 in 1997.

In connection with the Offering, the Company and its Former Parent entered into
a number of agreements relating to the transition period and to defining their
ongoing relationships following the Offering, as follows (see Note 10):

    Separation Agreement -- Provides that: (i) the Company will generally
    indemnify the Former Parent, including its officers, directors, employees
    and affiliates, against all costs, liabilities and expenses relating to the
    Offering and the conduct by the Company of its business, including as a
    result of guarantees by the Former Parent of any obligations of the Company;
    (ii) the Former Parent will indemnify the Company against all costs,
    liabilities and expenses relating to the conduct by the Former Parent of its
    business, including as a result of guarantees by the Company of any
    obligations of the Former Parent; (iii) immediately prior to the closing of
    the Offering, the Company will have a nominal amount of unrestricted cash
    and the Former Parent shall be entitled to all unrestricted cash on hand;
    (iv) the Former Parent will indemnify and hold harmless the Company for all
    federal, foreign, state and local franchise, income, sales, use, transfer
    and other tax liabilities or obligations,




                                      F-19
<PAGE>   66
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

7. RELATED PARTY TRANSACTIONS (CONTINUED)

    including interest and penalties, attributable to the Former Parent's
    consolidated group activities (other than activities of the Company) for all
    periods; (v) the Company will indemnify and hold harmless the Former Parent
    for all federal, foreign, state and local franchise, income, sales, use,
    transfer and other tax liabilities or obligations, including interest and
    penalties, attributable to activities of the Company for all periods; and
    (vi) the Company and the Former Parent will cross-indemnify each other for
    certain other matters.

    License Agreement -- Provides the Company with the right to use the American
    Bank Note name for a one-year term, automatically renewable for consecutive
    one-year periods, for an annual fee of $1. Additionally, the Company and
    Former Parent granted each other perpetual, paid-up royalty-free licenses
    for any patents, trademarks or other proprietary technology used by the
    other in its respective business. The Company agreed not to use the name
    American Bank Note or any variation thereof in connection with any business,
    enterprise or venture outside of the holography industry and not to
    sublicense the name to third parties.

    Transitional Services Agreement -- The Former Parent agreed to provide or
    cause to be provided to the Company certain specified corporate and
    administrative services for a one-year transitional period after the
    Offering. The agreement provides that the services will be provided for
    fees, which will be no greater than the Former Parent's costs. No services
    were provided under the agreement.

    Employee Benefits Allocation Agreement -- Governs the allocation of
    responsibilities and costs regarding employee benefit plans and related
    matters. The agreement provides that the Company shall establish new benefit
    and insurance plans for its employees, and will cooperate with the Former
    Parent with respect to certain shared responsibilities during the
    transitional period. The Former Parent will be solely responsible for any
    contributions that may be required following the Offering with respect to
    service prior thereto for employees of the Company who were covered under
    the Former Parent defined benefit retirement plan.

INDEMNIFICATIONS FROM FORMER PARENT -- As described above and in Notes 5 and 10,
in connection with the Offering, the Company and its Former Parent entered into
a number of agreements, which, among other matters, provide for the
indemnification, under certain circumstances, of the Company by the Former
Parent. As described below, during 1999, the Former Parent has experienced
significant financial difficulty, which may result in its inability to perform
under the terms of the indemnifications provided, which could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.

On December 8, 1999, the Former Parent filed a petition and plan of
reorganization in federal bankruptcy court pursuant to Chapter 11 of the U.S.
Bankruptcy Code. The proposed plan seeks approval for a financial restructuring
resulting in the cancellation of certain of the Former Parent's outstanding
indebtedness in exchange for equity in the Former Parent as well as the
amendment of the repayment terms of certain other outstanding indebtedness of
the Former Parent. The proposed plan does not seek to affect the Former Parent's
trade obligations or payables in the ordinary course. The Company has objected
to the disclosure statement describing ABN's proposed bankruptcy plan of
reorganization. The Company has also submitted a substantial claim in the
proceeding for certain



                                      F-20
<PAGE>   67
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

7. RELATED PARTY TRANSACTIONS (CONTINUED)

amounts, which the Company claims the Former Parent owes the Company. Because of
the Former Parent's financial difficulties, it may be difficult for the Company
to collect on these claims or any future liabilities of the Former Parent to the
Company. The Company has not recorded any amounts in its financial statements
related to the above claim.

8. 1998 STOCK INCENTIVE PLAN

Subsequent to the Offering Date, the Company adopted the 1998 Stock Incentive
Plan (as amended, the "1998 Plan") for the purpose of granting various stock
incentives to key employees. The Board of Directors (or a committee appointed by
the Board of Directors) has discretionary authority, subject to certain
restrictions, to administer the 1998 Plan. The total number of shares reserved
for issuance under the 1998 Plan is 1,863,000 shares of common stock. Options to
purchase 1,240,000 shares of common stock were outstanding under the Plan at
December 31, 1999. Options to purchase an additional 180,000 shares of common
stock were outstanding outside the Plan at December 31, 1999. The exercise price
of options granted under the 1998 Plan may not be less than 100% of the fair
market value of the common stock on the date such option was granted. Options
granted under the 1998 Plan generally would become vested and exercisable for up
to 33 1/3% of the total optioned shares upon each succeeding anniversary of the
date of grant. The terms of options granted outside the Plan are the same as the
terms of the options granted under the Plan. Generally, the unexercised portion
of any option automatically terminates upon the termination of the optionee's
employment with the Company, unless otherwise determined by the Board of
Directors; provided, however, that any extension shall not extend beyond the
expiration of the option, generally ten years. Upon a change in control,
outstanding options will generally become fully vested and may be exercised
immediately.

A summary of the status of the Company's outstanding stock options as of
December 31, 1999 and 1998 and changes during the years then ended follows:

<TABLE>
<CAPTION>
                                                                  1999                        1998
                                                                  ----                        ----

                                                                        WEIGHTED                   WEIGHTED
                                                                        AVERAGE                    AVERAGE
                                                                        EXERCISE                   EXERCISE
                                                          SHARES         PRICE        SHARES        PRICE
                                                          ------         -----        ------        -----
<S>                                                     <C>             <C>         <C>             <C>
Outstanding, beginning of year ...................         984,250       $8.50              --      $  --
     Granted .....................................       1,244,000        2.35         984,250       8.50
     Forfeited ...................................        (808,250)       8.31              --
                                                        ----------                  ----------
Outstanding, end of year .........................       1,420,000        3.22         984,250       8.50
                                                        ==========                  ==========
Options exercisable, year-end ....................          67,333        8.50              --       8.50
                                                        ==========                  ==========
Weighted average fair value of options granted
     during the year .............................      $     1.97                  $     6.19
                                                        ==========                  ==========
</TABLE>




                                      F-21
<PAGE>   68
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

8. 1998 STOCK INCENTIVE PLAN (CONTINUED)

During 1999, the Company issued options to its newly appointed Chairman (175,000
shares at $2.50 per share), President (250,000 shares at $1.75 per share and
100,000 shares at $2.50 per share), Executive Vice President (150,000 shares at
$2.75 per share) and Chief Financial Officer (100,000 shares at $2.50 per share)
at exercise prices equal to the fair market value of the Company's common stock
on the dates of the respective grants. Included in the outstanding options at
December 31, 1998 were options to the Company's former Chairman and Chief
Executive Officer (400,000), former President (200,000), former Vice
President-Finance (40,000) and former Vice President of operations (40,000), all
of which were canceled upon their resignations in 1999. Additionally, during
1998, the Company issued 45,000 options to members of its Board of Directors
(which are reflected in the above table) at an exercise price of $8.50 per
share, representing the fair market value of the Company's common stock on the
grant date.

The following table summarizes information about stock options outstanding at
December 31, 1999:

<TABLE>
<CAPTION>
                                                                     WEIGHTED-
                                                                      AVERAGE                 WEIGHTED-
                                                                     REMAINING                 AVERAGE
          RANGE OF                      NUMBER                      CONTRACTUAL                EXERCISE
       EXERCISE PRICES                OUTSTANDING                  LIFE (YEARS)                 PRICE
       ---------------                -----------                  ------------                 -----
<S>                                   <C>                          <C>                        <C>
       $1.75 to $8.50                  1,420,000                       9.23                    $ 3.22
</TABLE>


The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
outstanding stock options. Had compensation cost for the Company's outstanding
stock options been determined based on the fair value at the grant dates for
those options consistent with SFAS No. 123, the Company's 1999 and 1998 net
(loss) income and basic and diluted net (loss) income per share would have
differed as reflected by the pro forma amounts indicated below (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                           1999            1998
                                                         -------       ---------
<S>                                                      <C>           <C>
Net (loss) income:
     As reported ..................................      $(1,075)      $   1,119
                                                         =======       =========
     Pro forma ....................................      $(2,295)      $     132
                                                         =======       =========
Basic and diluted net (loss) income per share:
     As reported ..................................      $ (0.08)      $    0.08
                                                         =======       =========
     Pro forma ....................................      $ (0.17)      $    0.01
                                                         =======       =========
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
                                                  1999                1998
                                             --------------      --------------
<S>                                          <C>                 <C>
Expected volatility ...................          71.25%              71.25%
Risk-free interest rate ...............      4.84% to 5.92%           5.48%
Dividend yield ........................            --                  --
Expected life .........................        7.5 years           7.5 years
</TABLE>




                                      F-22
<PAGE>   69
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

9. EMPLOYEE BENEFITS PLANS

Certain employees of the Company have rights to benefits under the Former
Parent's defined benefit retirement plan, but are not eligible for any
additional benefits. No contributions are currently required in order to provide
those benefits. Pursuant to the Employee Benefits Allocation Agreement (see Note
7), if contributions should be required in the future, including any
contributions to fully fund plan benefits on termination of the plan, the amount
of such contributions are required to be paid by the Former Parent (see Note
10).

POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS -- Prior to the Offering
Date, the Company participated in benefit plans of affiliates of its Former
Parent, which provided certain postretirement health care and life insurance
benefits for certain eligible employees. Under the terms of these plans, the
Company's employees could become eligible for these benefits if they reached
normal retirement age, with certain service requirements during the period in
which the Company participated in those plans. The Company accrued the estimated
cost of retiree benefit payments (other than pensions) during the years an
employee provided services. The Former Parent's plans are not funded. Under the
terms of the Employee Benefits Allocation Agreement (see Note 7), the Company is
not responsible for the benefits to be provided to employees who retired from
the Company prior to the Offering Date or who had qualified for such benefits as
of the Offering Date. During the years ended December 31, 1998 and 1997, costs
relating to these plans approximated $21,000 and $58,000, respectively. During
1999, the Company determined that it would not continue this plan for current
employees. Included in selling and administrative expenses is approximately $0.4
million relating to the reversal of the unfunded obligation.

RETIREMENT PLANS -- Retirement benefits were provided by the Former Parent to
eligible employees through the defined contribution retirement plan of the
Former Parent; the aggregate contributions to such plan which have been charged
to the Company's operations was approximately $0.2 million in each of the years
ended 1998 and 1997, respectively. The Company continued to be a participating
employer in this plan through September 30, 1999, at which time it implemented
its own defined contribution plan. Contributions for the year ended December 31,
1999 aggregated $0.1 million.

Certain employees of the Company participate in an affiliate of the Former
Parent's defined benefit pension plan. Benefits under the plan were frozen in
1992 and were based on years of service and average final compensation. The
liability for benefits under this plan, which is substantially funded, is the
responsibility of an affiliate of the Former Parent. The total pension expense
relating to the Company's employees in the aggregate for 1998 and 1997 was less
than $10,000.




                                      F-23
<PAGE>   70
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

9. EMPLOYEE BENEFITS PLANS (CONTINUED)

In 1997, the Company participated in the Former Parent's noncontributory
supplemental executive retirement plan ("SERP") for certain senior management
employees of the Former Parent and its affiliates. Benefits under the
noncontributory plan are based on years of service and average final
compensation. The plan is unfunded. Following the Offering, the Company's
participants ceased to be eligible for SERP benefits, accordingly, the Company's
obligation under this plan ($56,000) was credited to Due from Former Parent and
affiliates. The aggregate contribution to such plan which has been charged to
operations was approximately $28,000 in 1997.

10. COMMITMENTS AND CONTINGENCIES

SEC AND U.S. ATTORNEY INVESTIGATIONS -- On February 9, 1999, the Division of
Enforcement of the SEC issued a Formal Order Directing Private Investigation,
designating officers to take testimony and requiring the production of certain
documents, in connection with matters giving rise to the need to restate the
Company's previously issued financial statements. The Company has provided
numerous documents to and continues to cooperate fully with the SEC staff.
Management of the Company cannot predict the duration of such investigation or
its potential outcome.

The U.S. Attorney's Office for the Southern District of New York has commenced
an investigation in connection with matters giving rise to the need to restate
the Company's previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act. The Company has not been
advised that it is a target of such investigation. The Company has provided
numerous documents to and continues to cooperate fully with the U.S. Attorney's
office. Management of the Company cannot predict the duration of such
investigation or its potential outcome.

On January 20, 2000, the Former Parent announced in an SEC filing that it was
advised by the U.S. Attorney's Office for the Southern District of New York that
it is a target of an investigation relating to the revenue recognition issues
involving the Company. In addition, the Former Parent announced that, in
connection with the same issues, the staff of the SEC is prepared to recommend
to the SEC that enforcement proceedings be commenced against the Former Parent
in U.S. District Court seeking injunctive relief and monetary disgorgement. The
Former Parent also announced that it was advised by counsel to Morris Weissman,
its Chairman of the Board and Chief Executive Officer and the Company's former
Chairman of the Board and Chief Executive Officer, that such counsel had
received similar notification from the U.S. Attorney's Office for the Southern
District of New York and the staff of the SEC with respect to Mr. Weissman.

LITIGATION -- A consolidated class action complaint against the Company, certain
of its former officers and directors, its Former Parent, the four co-lead
underwriters of the Offering and its auditors, has been filed in the United
States District Court for the Southern District of New York. The complaint
alleges violations of the federal securities laws and seeks to recover damages
on behalf of all purchasers of the Company's Common Stock during the class
period (July 15, 1998 through February 1, 1999). The complaint seeks rescission
of the purchase of shares of the Company's Common Stock or alternatively,
unspecified compensatory damages, along with costs and expenses including
attorney's fees. The




                                      F-24
<PAGE>   71
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Company and certain other defendants have separately moved to dismiss the
complaint. The Plaintiffs' discovery requests as well as their motion for class
certification have been stayed pending resolution of the respective motions to
dismiss. The Company has commenced settlement discussions with Plantiffs'
counsel. Management of the Company does not believe it is feasible to predict or
determine the outcome or resolution of these proceedings, or to estimate the
amounts of, or potential range of loss with respect thereto. In addition, the
timing of the resolution of these proceedings is uncertain. The range of
possible resolutions could include judgments against the Company or settlements
that could require substantial payments by the Company, including costs of
defending such suits, which could have a material adverse effect on the
Company's financial position, results of operations and cash flows.

On February 14, 1997, James Rigby, Trustee in Bankruptcy for Holosonics, Inc.,
Holotron Corp., Meadow Games, Inc. and Fire Diamond, Inc. commenced an adversary
proceeding in the United States Bankruptcy Court for the Western District of
Washington at Seattle against International Banknote Company, Inc., the Former
Parent and the Company. The complaint alleged that the defendants were indebted
to the bankruptcy estate for royalty payments under a 1981 license and that the
Company was liable for unpaid royalties for the period from January 1, 1990
through July 1992 in the amount of approximately $1.6 million, plus attorney's
fees and interest on unpaid amounts. The defendants and Trustee entered into a
settlement agreement which was approved by an order of the Bankruptcy Court on
September 10, 1999, whereby the defendants agreed to pay the Trustee $150,000,
all of which has been paid. The full amount of this settlement has been accrued
at December 31, 1998.

In 1994, plaintiffs, K.A.H. Company, Inc. and Kenneth A. Haines, filed suit
against the Company, the Former Parent and ABNH Research Co., Inc. in the
Supreme Court of the State of New York, County of New York. A judgment was
entered on March 19, 1999 for $175,639, with attorney's fees still to be
assessed. Such judgment was entered only against the Former Parent, which
contended that the Company should contribute to the payment of the judgment. On
February 2, 2000, the plaintiffs and defendants settled all claims, including
attorney's fees, for $300,000, of which $110,000 has been paid through March 15,
2000, with the remaining $190,000 to be paid by March 31, 2000. The full amount
of this settlement has been accrued at December 31, 1998.

On August 17, 1999, the Company commenced an action in the Supreme Court of the
State of New York, County of Westchester, seeking recovery of approximately
$350,000 on a claim arising from amounts owed to the Company for holographic
materials sold and delivered in July 1999. The defendant removed the action to
the United States District Court for the Southern District of New York. On
December 1, 1999, the Company received the defendant's answers to its complaint
and counterclaims alleging millions of dollars in damages arising from the
Company's alleged breach of a 1993 agreement pursuant to which the Company sold
holographic material to the defendant and alleged failure to fulfill a May 1998
purchase order. On January 7, 2000, the court granted the Company's motion for
summary judgment with respect to the claim. On March 15, 2000, the Company
entered into a settlement agreement with the defendant under which the defendant
paid $346,000 and the parties exchanged general releases of all claims. The
Company also agreed that it will resume shipments under the May 1998 purchase
order.




                                      F-25
<PAGE>   72
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

In 1998, the Company fulfilled an order for holograms for approximately
$600,000. In 1999, the customer alleged that the Company breached its contract
with such customer based on problems that the ultimate user was experiencing
with the holograms, and claimed potential damages in excess of $6 million.
Management of the Company does not believe that the agreement was breached, and
is in discussions with this customer in an attempt to resolve this dispute
amicably. There can be no assurance, however, that this matter will be resolved
amicably, or that this dispute will not lead to litigation with the customer.
The Company has begun settlement negotiations with the customer and based on
those settlement negotiations the Company reserved $775,000 during 1999 for a
breach of contract claim relating to warranties.

The Company currently and from time to time is involved in litigation (as both
plaintiff and defendant) incidental to the conduct of its business; however,
other than the shareholder litigation described above, the Company is not a
party to any lawsuit or proceeding which, in the opinion of management of the
Company, is likely to have a material impact on the Company's financial
position, results of operations or cash flows.

Amounts accrued for litigation matters represent the anticipated costs (damages
and/or settlement amounts) in connection with pending litigation and claims. The
costs are accrued when it is both probable that an asset has been impaired or a
liability has been incurred and the amount can be reasonably estimated. The
accruals are based upon the Company's assessment, after consultation with
counsel, of probable loss based on the facts and circumstances of each case, the
legal issues involved, the nature of the claim made, the nature of the damages
sought and any relevant information about the plaintiffs, and other significant
factors which vary by case. When it is not possible to estimate a specific
expected cost to be incurred, the Company evaluates the range of probable loss
and records the minimum end of the range. As of December 31, 1999 and 1998,
accruals for litigation matters approximated $315,000 and $500,000,
respectively. It is anticipated that the $315,000 accrual will be paid in 2000.
The Company believes, based on information known at December 31, 1999, that
anticipated probable costs of litigation matters as of December 31, 1999 have
been adequately provided to the extent determinable.




                                      F-26
<PAGE>   73
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

PRODUCT LIABILITY MATTERS -- The Company provides holograms in connection with a
wide range of its customers' products, in which case it is possible that the
Company is subject to product liabilities in association with those products or
in connection with the holograms used with those products. Although the Company
maintains product liability insurance, there can be no assurance that such
insurance would be available to cover any such claim or available in amounts
sufficient to cover all potential liabilities. As a result, product liability
claims could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.

LEASES -- The Company has long-term operating leases for offices, manufacturing
facilities and equipment, which expire through 2007. The Company has renewal
options on some locations, which provide for renewal rents based upon increases
tied to the consumer price index.

Net rental expense was approximately $1.3 million for the year ended December
31, 1999 and $1.2 million for each of the years ended December 31, 1998 and
1997.

At December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows: $1.1 million in 2000; $0.9 million in 2001;
$0.9 million in 2002; $0.8 million in 2003; $0.8 million in 2004; and $1.9
million thereafter.

EMPLOYMENT AGREEMENTS -- In 1999, the Company entered into employment agreements
with certain officers which provide for among other matters minimum compensation
of approximately $658,000 in 2000 and $115,000 in 2001. The agreements also
provide for discretionary bonuses. In connection with these agreements, the
Company granted options to acquire 775,000 shares of its Common Stock at prices
ranging from $1.75 to $2.75 per share, representing the fair market value of the
Company's Common Stock on the dates of grant.

NEW YORK STOCK EXCHANGE DELISTING -- On August 3, 1999, the New York Stock
Exchange suspended trading in the Company's Common Stock for failure by the
Company to deliver its Annual Report on Form 10-K for the year ended December
31, 1998 and its Quarterly Report on Form 10-Q for the three months ended March
31, 1999 on a timely basis. Following the suspension, the New York Stock
Exchange delisted the Company's Common Stock. The Company does not expect to
resume trading on the New York Stock Exchange, but the Company intends to seek
to have its security traded on another stock exchange or the National
Association of Securities Dealers Automated Quotation System.




                                      F-27
<PAGE>   74
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

11. OTHER

During 1999, the Audit Committee of the Company's Board of Directors commenced a
special investigation into the events that resulted in the need to restate the
Company's financial statements for the years ended December 31, 1997 and 1996
and the first three quarters of 1998. The costs of the special investigation and
related restatement effort and legal defense approximated $3.5 million, net of
insurance reimbursements of $0.6 million, and are included within selling and
administrative expenses in the accompanying statements of operations.




                                      F-28
<PAGE>   75
                                                                     SCHEDULE II

                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                    ADDITIONS
                                                           ------------------------
                                               BALANCE,    CHARGED TO    CHARGED TO                   BALANCE,
                                               BEGINNING   COSTS AND        OTHER                       END
                DESCRIPTION                     OF YEAR     EXPENSES      ACCOUNTS       DEDUCTIONS   OF YEAR
                -----------                     -------     --------      --------       ----------   -------
                                                                       (IN THOUSANDS)
<S>                                            <C>         <C>           <C>             <C>          <C>
  Year ended December 31, 1999:
       Allowance for doubtful accounts
         (deducted from accounts
         receivable) .....................      $  131      $  342                        $   83(1)   $  390
                                                ======      ======                        ======      ======
       Allowance for obsolescence
         (deducted from inventory) .......      $2,756      $1,295                        $1,245      $2,806
                                                ======      ======                        ======      ======

  Year ended December 31, 1998:
       Allowance for doubtful accounts
         (deducted from accounts
         receivable) .....................      $  168      $  379                        $  416(1)   $  131
                                                ======      ======                        ======      ======
       Allowance for obsolescence
         (deducted from inventory) .......      $  467      $2,289                        $   --      $2,756
                                                ======      ======                        ======      ======

  Year ended December 31, 1997:
       Allowance for doubtful accounts
         (deducted from accounts
         receivable) .....................      $  245      $  732                        $  809(1)   $  168
                                                ======      ======                        ======      ======
       Allowance for obsolescence
         (deducted from inventory) .......      $  265      $  202                        $   --      $  467
                                                ======      ======                        ======      ======
</TABLE>

----------

(1) Accounts deemed to be uncollectible, net of recoveries.



                                       S-1
<PAGE>   76
                                   SIGNATURES

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

                                AMERICAN BANK NOTE HOLOGRAPHICS, INC.



                                By: /s/ Kenneth H. Traub
                                    --------------------------------------------
                                        Kenneth H. Traub
                                        President and Chief Executive Officer

March 30, 2000

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                        TITLE                                  DATE
---------                                        -----                                  ----
<S>                             <C>                                                <C>
/s/ Kenneth H. Traub            President, Chief Executive Officer and             March 30, 2000
------------------------        Director (Principal Executive Officer)
    KENNETH H. TRAUB


/s/ Alan Goldstein              Chief Financial Officer                            March 30, 2000
------------------------        (Principal Financial and
    ALAN GOLDSTEIN              Accounting Officer)


/s/ Salvatore F. D'Amato        Chairman of the Board                              March 30, 2000
------------------------
    SALVATORE F. D'AMATO


/s/ Stephen A. Benton           Director                                           March 30, 2000
------------------------
    STEPHEN A. BENTON


/s/ Fred J. Levin               Director                                           March 30, 2000
------------------------
    FRED J. LEVIN
</TABLE>