UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|ý                                           | ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2003
|OR                                         
|o                                           | 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)

|DELAWARE(State or other jurisdiction of
incorporation or organization) |  | 13-3317668(IRS Employer Identification No.)
|---------------------------------------------------------------------- |  | -------------------------------------------
|399 EXECUTIVE BOULEVARD
ELMSFORD, NY                                   |  | 10523                                      
|(Address of Principal Executive Offices)                               |  | (Zip Code)                                 

(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 ý    No o

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. Yes o    No ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o    No ý

The aggregate market value of the common stock, $0.01 par value, held by non-affiliates of the registrant, based upon the closing sale price of the
common stock on June 30, 2003, was approximately $15,818,400. Shares of common stock held by each officer and director and by each person who controls 10% or more of the outstanding voting
power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The
aggregate number of shares of common stock, $.01 par value, outstanding on March 12, 2004 was 18,483,720.

DOCUMENTS
INCORPORATED BY REFERENCE

NONE



---

AMERICAN BANK NOTE HOLOGRAPHICS, INC.    2003 Form 10-K    Table of Contents

|Part I                        |  |                                                                                                              |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|Item 1.                       |  | Business                                                                                                     |  | 3 
|Item 2.                       |  | Properties                                                                                                   |  | 17
|Item 3.                       |  | Legal Proceedings                                                                                            |  | 17
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17
|Part II                       |  |                                                                                                              |  |   
|Item 5.                       |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 18
|Item 6.                       |  | Selected Financial Data                                                                                      |  | 19
|Item 7.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 21
|Item 7A.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 28
|Item 8.                       |  | Financial Statements and Supplementary Data                                                                  |  | 28
|Item 9.                       |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 28
|Item 9A.                      |  | Control Procedures                                                                                           |  | 28
|Part III                      |  |                                                                                                              |  |   
|Item 10.                      |  | Directors and Executive Officers of Registrant                                                               |  | 29
|Item 11.                      |  | Executive Compensation                                                                                       |  | 31
|Item 12.                      |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 38
|Item 13.                      |  | Certain Relationships and Related Transactions                                                               |  | 40
|Item 14.                      |  | Principal Accountant Fees and Services                                                                       |  | 41
|Part IV                       |  |                                                                                                              |  |   
|Item 15.                      |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                             |  | 42
|Index to Financial Statements |  | F-1                                                                                                         

---



Part I.

Item 1. BUSINESS.

American Bank Note Holographics, Inc. ("ABNH" or the "Company") originates, produces and markets holograms. Our holograms are used primarily for security
applications such as counterfeiting protection and authentication of transaction cards, identification cards, documents of value and consumer products. Our ability to create distinctive, secure
optically variable devices, to reproduce them with high quality and to distribute them securely has enabled us to become a market leader in security holography. Our products are used by over 150
companies worldwide, including MasterCard, VISA, American Express, Discover, Diners Club, Quaker State and Eli Lilly, as well as agencies of the United States government and certain foreign
governments. We also produce non-secure holograms for design 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:



The Holography Industry

A hologram is a unique type of image that is created through the diffraction of light at pre-determined angles to create various visual effects.
Holograms are created with special laser configurations and do not use ink, so that a holographic image is readily distinguishable from a traditionally printed or copied image. When a hologram is
viewed from different angles, the viewer is able to see features such as depth and movement, which is not typically possible in normal two-dimensional photographs. Holograms can also
include information that is detectable only with the aid of special devices.

The
holography industry is divided into two main sectors: security and non-security.

Security

The security sector of the holographic industry includes products that protect and authenticate transaction cards, documents of value, consumer and industrial
products and identification cards. Using holography, each customer can develop its own unique hologram with which to identify and protect its product. Holograms provide the following major benefits as
security devices:



3

---



The
security sector of the holographic industry addresses concerns about counterfeiting, diversion, tampering and fraud. The cost of the hologram is generally relatively small compared
to the value of the item being protected and the risk of loss. Consequently, customers typically select suppliers primarily based on the effectiveness of their security solutions, quality, reliability
and price.

4

---

Our
primary emphasis for our research, product development, marketing and sales activities is focused on the security sector of the holographic industry. We offer a diverse set of
security, authentication and design features. Based on customer specific needs and applications, we can combine these techniques creating a unique set of effects in a well-constructed and
effective holographic security product.

Non-Security

The non-security sector of the holographic industry includes design, packaging and other decorative applications.

The
unique visual appeal of holograms makes them attractive for use on consumer products. Holograms are used to enhance the design of a wide variety of products including greeting cards,
decorative clothing, point-of-purchase displays, and for other promotional uses. Holograms are also used for packaging of food and other products. These holograms are generally
used on consumer product packaging for their eye-catching appeal, including packaging for candy, beer, toothpaste, soft drinks and other consumer products. Non-secure holograms
are generally not as complex, secure or proprietary as security holograms. Since there are more companies capable of producing non-secure holograms than there are qualified to produce
security holograms, the competition is more intense in the non-security sector, and the margins are typically lower than in the security market. Customers in the non-security
sector of the holographic industry typically distinguish between suppliers primarily based upon price, quality and production capacity.

Markets and Products

We have five target markets, and we market various products to meet the needs of these markets:

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. Our products include:

Holographic Hot-Stamp Foil.Our largest source of revenue since our inception has been security holograms
embossed into hot-stamp foil, for credit card authentication. Holographic hot-stamp foil can also enhance the design and branding of a card. Our customers in this market
include the issuers or printers of MasterCard, Visa, American Express, Discover and Diners Club cards.

HoloCard.HoloCard incorporates a hologram on a card's entire face, creating a customized marketing tool and a
counterfeit deterrent. A full-faced hologram can support brand recognition, product enhancement campaigns, customer retention and overall product differentiation efforts.

HoloMag.ABNH's patented technology for combining a hologram with the magnetic stripe on a card. HoloMag not
only enables efficient utilization of real estate on the card with attractive imagery on the magnetic stripe, but it significantly enhances card security. Multiple levels of security plus distinct
visual recognition make this device a very effective tool against card skimming and counterfeiting.

Documents of Value.Concerns over counterfeiting and copying have led to an increased use of
holograms on documents of value, including currency, checks, gift certificates, stamps, tickets and other financial instruments. Holographic products for paper documents of value include:

5

---

Holographic Thread.A holographic thread is a security device made up of a narrow-strip hologram, approximately
2-5 millimeters wide, and is typically incorporated into the paper substrate at the security paper mill. The hologram is often partially embedded into the paper creating a window or
serpentine-thread. This holographic product offers both visual and covert security features and helps raise the recognition and perceived value of the document it is embedded into. We produce
holographic material for security threads with our proprietary process, which we believe provides significant advantages for brighter and more durable holographic threads compared to other methods of
holographic replication.

Holographic Ribbons.A holographic ribbon is an anti-counterfeiting device that can be used on documents of value
such as checks and currency. The system is comprised of a narrow strip hologram made of hot-stamp foil and slit into ribbons that are applied on security paper by either the paper maker or
the printer.

Holographic Patch.A holographic patch is created by embossing a hologram into hot-stamp foil, and is used for authenticating
currency and other secure documents. It is machine applied for registered placement and quality. Depending on the design of the document, patches can be created to meet specific size, shape, creative
and security requirements. A holographic patch is applied with heat and pressure forming a distinctly recognizable, security component of the document.

Product Authentication and Security Packaging.The use of holograms for product authentication and
security packaging 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 are used as authentication devices in, among others, pharmaceuticals, licensed consumer products and high value consumer and industrial products. 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. Our products for this
market segment include:

Holographic Labels.Our pressure-sensitive label is available with a broad array of authenticating features such as
demetallizing, latent imagery, machine readability and other overt and covert features. By combining multiple security techniques, we achieve higher levels of security and make the entire product or
package easier to authenticate and difficult to simulate.

HoloSeal.HoloSeal integrates several key security features into one innovative device. A high security
hologram, customized tamper-apparent break pattern, black light verification system and machine-readable embedded code are all features of this security label. In addition, HoloSeal can be
manufactured to be transparent or semi-transparent so that printed regulatory or marketing copy can be seen through the hologram.

HoloGard.HoloGard is ABNH's innovative approach to sealing bottles or containers with a higher level of
security. Utilizing an induction seal process, this application provides for authentication, tamper-resistance and branding. A holographic layer becomes part of the seal itself. HoloGard can be
combined with other security features to create an effective approach for the security needs of a wide range of sealed products.

HoloSleeve.HoloSleeve is a heat-shrink seal with an integrated holographic stripe that can be
applied to the lids of bottles to deter product fraud and tampering. By including overt and covert security features within the hologram, a customized tamper-apparent break pattern and an embedded
black light verification system, HoloSleeve provides manufacturers of bottled goods with a tool to combat criminals that, at the same time, can be easily integrated into a customer's existing
manufacturing operations.

Transparent Laminates for Identification Documents.We provide secure holographic laminates for
applications such as ID cards, passports, military ID's and drivers' licenses. We have patents on demetallized holograms which are transparent and used to see printed information under the holograms.

6

---

We
believe there are significant security advantages for demetallized holograms used on ID cards and passports. We currently supply transparent laminates for certain U.S. government ID
cards as well as national IDs for certain foreign countries. We believe there is a need to improve the security of certain ID cards and passports and we are proposing security holograms as a component
of the security enhancements that are being considered by major issuers of identification documents.

Commercial.We also produce holographic imagery for decorative and promotional purposes. Our products
for this market include pressure sensitive labels with a rich array of designs and wide web holographic patterns for flexible packaging applications.

Strategy

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, Diners Club, Discover, American Express and many of the major security card manufacturers. We
intend to maintain our leadership position in the card industry and grow through excellent customer service and the distribution of new products that address the security needs and design objectives
of this market.

Focus Sales and Marketing.We have narrowed the focus of our sales and marketing efforts to those specific applications
within our target markets in which we can establish and sustain competitive advantages through a combination of product differentiation, intellectual property and market position.

Protect and Leverage Our Intellectual Property Position.We intend to continue to protect our intellectual property and
leverage our intellectual property rights.

Broaden and Enhance Our Security Offerings.We are developing better security solutions for our target markets which
incorporate innovative applications of holography and other complimentary technologies.

Control Costs.We intend to prudently manage our expenses to strengthen our competitive position and enhance margins.

Strengthen Operational Capabilities.We intend to invest in enhancing our production and operational capabilities to improve
the products and services we provide to our customers and gain operational efficiencies.

Grow through Strategic Partnerships.We have a strategic partnership with Crane & Co. and we intend to continue
pursuing strategic partnerships or acquisitions that could provide operating synergies or access to new customers or technologies.

Production Process

We are one of the most experienced security production companies in the holographic industry. We have ISO certified security production facilities containing a
total of nine origination laboratories and twenty 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 or customer orders to third parties. The production process consists of the following steps:

7

---



The first step of the production process is the design of the hologram. In our 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.



After the design has been completed, various laser-ready components (magnetic disc, three-dimensional sculpture, flat art, etc., referred to as "information") are
delivered to one of our 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 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 effects. 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 believe that our largest competitors in the security sector may use similar processes among others.



Once the origination process is completed, a plate is created in order to permit mass production. The "one-up" 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 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.



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

8

---

We employ three 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. Soft or compliant embossing permits embossing into pre-metallized films,
as well as, certain metallized films and also allows for embossing on wider-web materials.

The
other method of production is casting. We developed a proprietary casting method, which we refer to as In-Situ Polymeric Replication. 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 each of these methods may include some combination of metallization, demetallization, application of adhesive, slitting, die-cutting, lamination and custom
numbering. The completed holographic material may then be applied to the customer's product.

We
perform the above processes through a combination of our internal production resources and outside subcontractors.

Quality

Through the ISO 9001:2000 certification program, we continually make improvements to our processes through the use of an effective and efficient business
management system.

Our
manufacturing facilities located in Elmsford, New York and Huntingdon Valley, Pennsylvania are ISO certified.

Our
manufacturing facility located in Elmsford, New York includes our art department, origination labs, plate making and replication and maintains the ISO 9001:2000 standard covering
quality assurance for design, development and production.

Our
manufacturing facility located in Huntingdon Valley, Pennsylvania maintains ISO 9001:2000 certification covering quality assurance for production.

Information Technology

We implemented an integrated enterprise resource planning system starting in 2000 that provides more comprehensive information for management decision making. We
made improvements to this system in 2003 and we intend to make further improvements in 2004.

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 research and development has enabled us to create new technologies and proprietary production processes and to deliver innovative products to the marketplace. We intend to continue to make
on-going investments in research and development in order to:



9

---



Manufacturing Facilities

See "Item 2. Properties."

Sales and Marketing

In 2003, we provided holographic products to over 150 customers worldwide. We are the exclusive supplier of holograms to MasterCard and we are one of 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, Eli Lilly, Quaker State,
agencies of the United States government, foreign governments and numerous other companies.

In
the sales department we currently employ a Vice President of Sales, a Vice President of Corporate Development, four full-time, incentive-compensated salespeople and two
customer sales service personnel. We also utilize incentive-based international sales agents around the world.

Our
sales process generally involves identifying a customer problem, designing a solution for the customer problem, creating samples for customer evaluation and testing. Most of our
target customers are credit card issuers, government agencies and large corporations that are experiencing counterfeiting or other security problems. The sales process is generally at least three
months, and in some cases, the sales process can last several years.

Pricing
decisions are generally made centrally by our operating executives. We focus some of our marketing efforts on trade shows such as the International Card Manufacturers Association
trade show, the Card Tech/SecureTech trade show, Intergraph, Cartes and Interphex.

Competition

The holographic industry is highly competitive and highly fragmented. A number of our competitors are larger, and have greater financial resources, than us. The
industry has become increasingly competitive over the past several years as low cost foreign producers have entered our target markets, and low cost holographic producers that previously focused on
non-security applications are increasingly competing in security applications. The holographic industry has also experienced consolidation, which has increased the breadth and scale of
some of our competitors. In the
holographic industry, competition is generally based on technology, price, product quality and customer service. We also compete with other non-holographic methods or devices.

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 30 U.S.
patents and numerous foreign patents, as well as patents pending and service marks that are used in our business.

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 U.S. 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.

10

---

Employees

As of March 12, 2004, we employed approximately 100 persons of which 55 are covered by collective bargaining agreements. We consider our relations with our
employees to be good. We are party to collective bargaining agreements with Paper, Allied-Industrial, Chemical & Energy Workers International Union Local 1-0318 ("Local
1-0318") and PACE International Union Local 286 ("Local 286"). The agreement with Local 1-0318 has a three-year term, will expire on December 31, 2006 and
covers 22 employees. The agreement with Local 286 has a five-year term, will expire on January 28, 2005, and covers 33 employees.

Available Information

Our investor relations website is accessable through www.abnh.com. We make available on this website under the caption "Investor Relations (SEC Filings)" free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or submit such materials to the Securities and Exchange Commission.

Risk Factors



In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating
our business and us because these 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 10-K.

Our quarterly and annual operating results may fluctuate and the price of our common stock may change in response to those fluctuations.

Our
quarterly and annual operating results have varied in the past and may vary significantly in the future depending on factors such as:



11

---



Because
our revenues and operating results may fluctuate, it is possible that in some future quarter, our revenues or operating results will be below the expectations of public market
analysts and investors, which could cause our stock price to decrease.

We depend on sales to credit card manufacturers for a substantial portion of our business, the loss of which would significantly reduce our
revenues.

Sales
to credit card companies accounted for approximately 77% of our total sales in 2003 and 82% of our total sales in 2002. Sales to MasterCard and approved manufacturers of VISA brand
credit cards together accounted for approximately 63% of our total sales in 2003 and 67% of our total sales in 2002. We entered into an agreement with MasterCard dated February 28, 2003, which
replaced the agreement dated February 1, 1996, as amended. We entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained us to produce a new hologram
for the Debit MasterCard and extended the agreement to February 2011, subject to automatic renewal if not terminated by either party.    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 if we were
to lose a substantial portion of our business with either of these entities our business, operating results and financial condition would be materially and adversely affected. In addition, if we fail
to obtain anticipated orders from these customers or if we experience delays or cancellations of orders from these customers, our business and financial performance will be materially and adversely
affected.

We are in a competitive, highly-fragmented industry with many companies competing to deliver a highly-specialized product, which may lead to declining sales or
reduced prices for our products.

The
holography industry is highly competitive. A number of our competitors are larger than us or are divisions of larger companies, and have greater financial resources, than us. 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. The industry has
become increasingly competitive over the past several years as low cost foreign producers have entered our target markets, and low cost holographic producers that previously focused on
non-security applications are increasingly competing in security applications. Increasing competition in the market for our security holograms has resulted in declining sales prices for
these products over the past several years and sales prices are continuing to decline. Competitive pressures may force us to reduce prices, which can adversely affect our results of operations.

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



In
addition, an increased use of non-holographic methods or devices in place of our products could reduce demand for our products. We cannot assure you that we will have
sufficient resources to make the technological advances necessary to maintain any competitive advantages. We also cannot assure you that the bases of competition in the industries in which we compete
will not shift.

12

---

If we are not able to successfully protect our intellectual property our business could be materially and adversely affected.

Our
business is dependent upon our proprietary technology. 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. Certain of our patents have expired and
others have been declared invalid in the past. Other patents will expire over the next several years. The expiration of patents has resulted in our royalty income decreasing materially in 2003. We can
not assure you 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. 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.

If our products infringe on the intellectual property rights of third-parties, our business may suffer if we are sued for infringement or cannot obtain licenses
to these rights on commercially acceptable terms.

We
are subject to the risk of adverse claims and litigation alleging infringement by us of the intellectual property rights of others. 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 cause 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 material adverse effect on our business and financial condition.

We depend on third-party suppliers and subcontractors for some key product components and processes, and we may not be able to find alternative sources in a
timely manner if those suppliers or subcontractors fail to supply us.

We
purchase certain key materials used in the manufacture of our holograms and outsource certain key processes from third-party suppliers, some of which are sole source relationships,
with whom we do not have supply contracts. We may not be able to find alternative sources in a timely manner if our suppliers or subcontractors become unwilling or unable to supply us, or if they
increase their prices. Our inability to obtain key product components or to have certain processes performed on our behalf could cause delays or reduce product shipments, which could cause our
relationship with customers to suffer and materially and adversely affect our financial condition, results of operations and cash flows.

Our common stock trades on the OTC Bulletin Board, which may adversely affect the price of our common stock.

Our
common stock trades on the over-the-counter bulletin board (OTCBB), an electronic quotation service. Our current stock price does not meet the minimum stock
price requirement of any major stock exchange or NASDAQ. The OTCBB does not impose listing standards or requirements, does not provide automatic trade executions and does not maintain relationships
with quoted issuers. Stocks traded on the OTCBB may experience:

13

---



In
addition, many investors have policies against purchasing or holding OTCBB securities. Both trading volume and the market value of our stock have been, and will continue to be,
affected by trading on the OTCBB, which may adversely affect the price of our stock and make it difficult for our stockholders to resell their shares.

If we were unable to continue to attract and retain qualified employees, our business, operating results and financial condition could be materially and adversely
affected.

Our
future success depends on our ability to attract and retain qualified:



Competition
for these individuals is intense, and we cannot assure you that we will be able to retain our existing personnel or attract and retain additional personnel.

Our former parent company, American Banknote Corporation ("ABN" or the "Former Parent"), has experienced financial difficulty and we may have risks associated
with ABN's inability to perform under the terms of its agreement with us.

During
2000, we reached an agreement with ABN which provided, among other things, for ABN to be responsible for and pay all asserted and unasserted income, franchise or similar tax
liabilities of ours for the period January 1, 1990 through July 20, 1998 and indemnify us with respect to any such liabilities. ABN has experienced financial difficulty in the past and
if ABN continues to experience financial difficulty, it may result in its inability to perform under the terms of the agreement with us which could have a material adverse effect on our financial
position, results of operations and cash flows.

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.

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.

Sales
derived from customers outside the United States were 28% of our total sales in 2003 and 27% of our total sales in 2002. Our international sales are subject to risks, including:

14

---



These
factors may have a material adverse effect on our future international sales and, consequently our business, financial condition or 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. 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.

The issuance of shares of our common stock upon exercise of outstanding options, together with the potential sales of such shares in the public market, could
result in substantial dilution of your investment, a detrimental effect on our liquidity and ability to raise additional capital, and a significant decline in the market value of our common
stock.

As
of March 12, 2004, we had approximately 18,483,720 shares of our common stock issued and outstanding and 2,838,500 additional shares of common stock reserved for issuance upon
exercise of outstanding stock options. If the holders of shares of common stock acquired upon the exercise of outstanding options were to sell a significant amount of their shares into the open
market, the market price of our common stock could be adversely affected. The sales might also make it more difficult for us to sell equity or equity-related securities in the future at a price we
deem appropriate.

Crane & Co. Inc. has certain rights which could adversely affect the market price of our common stock.

On
June 30, 2000, we entered into a stock purchase agreement with Crane & Co., Inc. ("Crane") under which Crane purchased 3,387,720 shares of our common stock. In
connection with the transaction, Crane received the right to cause us to register its shares for public resale and to include its shares in any future registration of our securities, subject to
certain exceptions. Any sales of such shares by Crane could have a negative effect on the market price of our common stock.

Our principal stockholders, executive officers and directors have substantial influence over all matters requiring stockholder approval, including a change of
control that you might otherwise approve.

Our
executive officers and directors and entities related to them, in the aggregate, beneficially own approximately 24.0% of our common stock as of March 12, 2004, which includes
18.4% owned by Crane & Co., Inc., an investor related to Douglas A. Crane, one of our directors. These stockholders acting together have the ability to exert substantial influence over
all matters requiring approval by our stockholders. These matters include the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Such a
concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination.

15

---





Our certificate of incorporation permits our board of directors to issue up to 5,000,000 shares of preferred stock and 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:



We
are also subject to Section 203 of the Delaware General Corporation Law which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder.

16

---

Item 2. PROPERTIES.

We maintain secure hologram manufacturing facilities in Elmsford, New York, Huntingdon Valley, Pennsylvania and Dalton, Massachusetts. 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 leased 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 production of numerous holographic products. Our origination facilities include nine laser laboratories. This lease expires in December 2007.

Our
30,000 square foot leased facility at Huntingdon Valley, Pennsylvania is dedicated to the production of security holograms. This lease expires in July 2007.

Our
2,400 square foot leased facility at Dalton, Massachusetts was opened in 2000 and is also dedicated to the production of security holograms. The lease, which is for successive one
year periods ending on October 31, automatically renews unless 120 days advance notice is given by either party not to renew.

Each
facility is constantly monitored for security, and has uniformed security personnel on site, 24 hours a day, seven days a week. Our Director of Security is responsible for
the physical security of each facility, 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.

Item 3. LEGAL PROCEEDINGS.

During 1991, we entered into a Patent License Agreement (the "License Agreement"), which required us to pay royalties in connection with certain products that we
produce. During 2002, the licensor under the License Agreement filed a lawsuit against us in the United States District Court for the Eastern District of Washington, alleging breach of the License
Agreement. In December 2002, we entered into a settlement agreement whereby we paid $431,250 on December 31, 2002. The payment satisfied all obligations to pay royalties that may have
been owed both for the past and the future under the License Agreement. In 2002, we recorded $231,250 as royalty expense in the accompanying statements of operations to cover all allegedly past due
royalties and $200,000 will be amortized over the remaining life of the patents which expire in 2005 and 2007.

We
currently, and from time to time, are involved in litigation (as both plaintiff and defendant) incidental to the conduct of our business; however, 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.

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

None.

17

---

Part II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock has been quoted on the NASD's Over-the-Counter Bulletin Board quotation service under the symbol "ABHH," since
March 31, 2000. Our securities are not listed or quoted on any exchange or other quotation system.

The
following table sets forth the high and low closing prices of our common stock for each quarter of 2002, 2003 and the first two months of 2004.

High

Low2002First Quarter

$
1.92

$
1.39Second Quarter


2.08


1.14Third Quarter


1.39


0.85Fourth Quarter


0.93


0.632003First Quarter

$
0.98

$
0.71Second Quarter


1.22


0.79Third Quarter


1.29


1.05Fourth Quarter


1.53


1.082004First Quarter (through February 27, 2004)

$
2.40

$
1.50


Warrants
to purchase our common stock were quoted on the NASD's Over-the-Counter Bulletin Board quotation service from August 27, 2002 to June 18,
2003, the date the warrants expired. During 2002, the warrants had high and low closing prices of $0.05 and $0.01, respectively, during the third quarter and a high and low closing price of $0.01
during the fourth quarter. During 2003, the warrants had high and low closing prices of $0.03 and $0.01, respectively, during the first quarter and high and low closing prices of $0.01 and $0.001,
respectively, during the period ended June 18, 2003.

As
of March 12, 2004, there were approximately 499 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
have not paid cash dividends during the past two fiscal years. We have no plans or intentions of paying dividends in the foreseeable future.

18

---

Item 6. SELECTED FINANCIAL DATA.

|                          |                                                                    | Year Ended December 31,                    
|------------------------- | ------------------------------------------------------------------ | -------------------------------------------
|
|STATEMENT OF INCOME DATA: |                                                                    |                                            
|                          | Revenue:                                                           |                                            
|                          |                                                                    | Sales (a)                                  
|                          |                                                                    | Royalty income                             
|                          |                                                                    |                                            
|                          |                                                                    |                                            
|                          | Costs and expenses:                                                |                                            
|                          |                                                                    | Cost of goods sold                         
|                          |                                                                    | Selling and administrative (a) (b)         
|                          |                                                                    | Research and development                   
|                          |                                                                    | Depreciation and amortization              
|                          |                                                                    | Impairment of goodwill and fixed assets (d)
|                          |                                                                    |                                            
|                          |                                                                    |                                            
|                          |                                                                    |                                            
|                          | Operating income (loss)                                            |                                            
|                          | Other income (expense):                                            |                                            
|                          |                                                                    | Other income                               
|                          |                                                                    | Interest, net                              
|                          |                                                                    | Settlement with Former Parent              
|                          |                                                                    | Settlement of shareholder litigation       
|                          |                                                                    | Patent settlement and other                
|                          |                                                                    |                                            
|                          |                                                                    |                                            
|                          |                                                                    |                                            
|                          | Income (loss) before provision for (benefit from)
    income taxes |                                            
|                          | Provision for (benefit from) income taxes                          |                                            
|                          |                                                                    |                                            
|                          | Net income (loss)                                                  |                                            
|                          |                                                                    |                                            
|                          | Net income (loss) per share:                                       |                                            
|                          |                                                                    | Basic and diluted                          
|                          | Weighted average shares outstanding:                               |                                            
|                          |                                                                    | Basic                                      
|                          |                                                                    | Diluted                                    

|                    |                            | December 31,
|------------------- | -------------------------- | ------------
|
|BALANCE SHEET DATA: |                            |             
|                    | Working capital            |             
|                    | Total assets               |             
|                    | Total debt                 |             
|                    | Total stockholders' equity |             

---

19

---



20

---

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, are appearing elsewhere in this report.

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 an
initial public offering (the "Offering"), representing ABN's entire investment in ABNH. We did not receive any proceeds from the Offering.

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. We also produce
non-secure holograms for packaging and promotional applications. Our sales of holograms for security applications generally carry higher gross margins than sales for
non-security 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 prompted the use of
holograms on documents of value, including currency, passports, gift certificates, vouchers, stamps, tickets and other financial instruments.

A
significant portion of our business is derived from orders placed by 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, 2003, 2002 and 2001 were approximately 33%, 41%, and 37%,
respectively. We entered into an agreement with MasterCard dated February 28, 2003, which replaced the agreement dated February 1, 1996, as amended. We entered into an amendment to this
agreement on September 29, 2003, in which MasterCard retained us to produce a new hologram for the Debit MasterCard and extended the agreement to February 2011, subject to automatic
renewal if not terminated by either party. The new agreement provides that MasterCard will receive three sequential price reductions of approximately 3% each, effective at the beginning of 2003, 2004
and 2006. We are currently the exclusive supplier to MasterCard. Sales to VISA card manufacturers were approximately 30%, 26%, and 23%, respectively, of sales for the years ended December 31,
2003, 2002 and 2001. 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 where 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

21

---

been
billed for the order. At December 31, 2003 and 2002, accounts receivable from this customer totaled $1.0 million and $1.6 million, respectively.

We
purchase certain key materials used in the manufacture of our holograms and outsource certain key processes from third party suppliers, some of which are sole source relationships,
with whom we do not have supply contracts. Any problems that occur with respect to the delivery, quality or cost of any such materials or processes could have a material adverse effect on our
financial position, results of operations and cash flows.

During
2003, 2002 and 2001, export sales accounted for approximately 28%, 27% and 28%, 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.

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, marketing and promotion
expenses, legal and accounting expenses and expenses associated with being a public company.

In
accordance with a tax allocation agreement in effect through the date of the Offering, we were included in the consolidated 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. During
2000, we reached an agreement with ABN which provided, among other things, for ABN to be responsible for and pay all of our asserted and unasserted income, franchise and similar tax liabilities for
the period January 1, 1990 through July 20, 1998 and indemnify us with respect to any such liabilities. For periods subsequent to the date of the Offering, we have been filing our own
federal and state income tax returns.



We make use of estimates and assumptions that impact the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories and intangible assets. These estimates
and assumptions are based on historical results and trends as well as our forecasts as to how these might change in the future.

We
believe the following critical accounting policies, among others, impact the significant judgments and estimates we use in the preparation of our financial statements:

22

---



We recognize revenue in accordance with the provisions of the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition." Specifically, 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 where 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.



We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make the required payments. We recognize
allowance for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of our customers
were to deteriorate or if economic conditions were to worsen, additional allowances may be required in the future.



Inventories are stated at the lower of cost or market with cost being determined on the first-in, first-out (FIFO) method. At each balance
sheet date, we evaluate our ending inventory for excess quantities and obsolescence. We provide reserves for estimated obsolescence equal to the difference between the cost of the inventory and its
estimated market value. We fully reserve for inventories deemed obsolete. If future demand or market conditions are less favorable than our projections, additional inventory write-downs may be
required.



We account for goodwill and long-lived assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142")
and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 142, which provides that goodwill should not be amortized
but instead tested for impairment on an annual basis, was adopted by us on January 1, 2002. The impairment testing is performed in two steps: (i) the determination of impairment, based
on our fair value compared with our carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of
goodwill with the carrying amount of that goodwill. In accordance with SFAS No. 142, we completed the transitional impairment test during the quarter ended March 31, 2002, which testing
indicated that no adjustment was required upon the adoption of the pronouncement. We performed the annual test for impairment required by SFAS No. 142 during the quarter ended
December 31, 2002. At that time, our fair value (based on quoted market prices) was found to be less than our carrying amount, and accordingly, we recorded a $7.4 million impairment
charge for the year ended December 31, 2002. This charge represents the full impairment of the goodwill on our balance sheet. SFAS No. 144 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

23

---

Assets
to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the quarter ended December 31, 2002, we recorded a charge for the impairment
of long-lived assets of $1.9 million to write off fixed assets consisting of master plates which will no longer be used. This charge represents the full impairment of this
long-lived asset on our balance sheet. The goodwill and the long-lived assets arose through purchase accounting by our Former Parent, as it related to us, in connection with
our Former Parent's 1990 merger.

Results of Operations



Sales.Sales decreased by $0.4 million, or 2.0%, from $18.7 million in 2002 to $18.3 million in 2003.
The decrease was due to a decrease in sales to MasterCard of the original MasterCard hologram of $2.4 and a discontinuation of the Europay hologram of $0.4 million which was partially offset by
sales of $0.8 million of the new Debit MasterCard hologram, an increase in sales of identification products of $0.8 million and a net increase in sales of other products of
$0.8 million.

Royalty Income.Royalty income for the year ended December 31, 2003 decreased $0.5 million from the year ended
December 31, 2002 due to the expiration of a patent license agreement.

Cost of Goods Sold.Cost of goods sold decreased by $0.6 million, or 7.3%, from $8.9 million in 2002 to
$8.3 million in 2003. As a percentage of sales, cost of goods sold decreased from 47.8% in 2002 to 45.3% in 2003. The decrease in cost of goods sold as a percentage of sales of 3% was primarily
due to decreases in provisions for warranty, obsolescence and royalties of 3% and lower production costs of 2% offset by a 2002 vendor reimbursement of 2% which did not recur in 2003.

Selling and Administrative Expenses.Selling and administrative expenses decreased by $0.6 million, from
$7.1 million in 2002 to $6.5 million in 2003. As a percentage of sales, selling and administrative expenses decreased from 38.2% in 2002 to 35.6% in 2003. The decrease in selling and
administrative expenses is primarily due to a decrease in other selling and administrative expenses of $0.5 million primarily due to decreases in expenses for insurance, telephone, travel,
show, sales samples and bad debt expenses and a decrease in salaries and benefits of $0.1 million primarily due to lower headcount and commissions.

Research and Development.Research and development expenses remained relatively unchanged.

Impairment of Goodwill and Fixed Assets.The 2002 impairment charges of $7.4 million, to write off goodwill recorded
under the requirements of SFAS No. 142, and $1.9 million, to write off fixed assets recorded under the requirements of SFAS No. 144, did not recur in 2003.

Other Income.Other income decreased $0.7 million from $0.8 million in 2002 to $0.1 million in 2003. The
decrease was primarily due to income from settlement agreements in 2002 that did not recur in 2003.

Income Taxes.Income tax expense decreased $0.1 million from $0.9 million in 2002 to $0.8 million in
2003. The decrease was primarily due to a decrease in taxable income in 2003 after giving effect to impairments of goodwill and fixed assets which are permanent differences for tax purposes.



Sales.Sales decreased by $1.3 million, or 6.7%, from $20.0 million in 2001 to $18.7 million in 2002.
The decrease in sales was due primarily to a decrease in sales of non-credit card security holograms due to the conclusion of certain lower margin programs in 2001.

24

---

Royalty Income.Royalty income increased $0.1 million or 19.1%, from $0.5 million in 2001 to
$0.6 million in 2002. The increase was due to higher reported licensee revenue in 2002.

Cost of Goods Sold.Cost of goods sold decreased by $1.1 million, or 10.4%, from $10.0 million in 2001 to
$8.9 million in 2002. As a percentage of sales, cost of goods sold decreased from 49.8% in 2001 to 47.8% in 2002. The decrease was comprised of a decrease in production costs of 3% primarily
resulting from the effect of cost reductions put in place during 2002 and the elimination of some lower margin sales, and a decrease of 2% resulting from the settlement of a vendor dispute offset by
an increase in the provision for inventory obsolescence of 1%, an increase in warranty expense of 1% and an increase in royalty expense of 1% related to a settlement of a patent license matter.

Selling and Administrative Expenses.Selling and administrative expenses decreased by $0.2 million, from
$7.3 million in 2001 to $7.1 million in 2002. As a percentage of sales, selling and administrative expenses increased from 36.5% in 2001 to 38.2% in 2002. The decrease in expenses is
primarily due to a decrease in selling salaries and benefits of $0.2 million primarily resulting from a decrease in personnel and a decrease in other selling expenses of $0.2 million
primarily related to reductions in travel and show expenses offset by increases in other administration expenses of $0.1 million related to increases in general insurance and relocation
expenses and an increase in bad debt expense of $0.1 million due to an increase in the allowance for doubtful accounts due to an increase in the aging of accounts receivable.

Research and Development.Research and development expenses decreased $0.1 million from $1.2 million in 2001 to
$1.1 million in 2002. As a percentage of sales, research and development expenses decreased from 6.2% in 2001 to 6.1% in 2002. The decrease is primarily due to a decrease in research and
development testing expense in 2002.

Impairment of Goodwill and Fixed Assets.We performed our annual impairment test of goodwill under SFAS No. 142,
during the quarter ended December 31, 2002. Upon completion of the test we determined that goodwill had been impaired as a result of a decrease in our market capitalization. Accordingly, we
recorded an impairment charge of $7.4 million during the quarter ended December 31, 2002, reflecting the write-down of the carrying value of goodwill. In addition, during the
quarter ended December 31, 2002, we recorded an asset impairment charge of $1.9 million to write off fixed assets consisting of master plates which will no longer be used. This
impairment was recorded under the requirements of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

Other Income (Expense).Other income (expense) increased by $0.5 million from $0.3 million in 2001 to
$0.8 million in 2002. This increase was due to a patent settlement agreement entered into in the third quarter of 2002 for $0.6 million and the settlement of a dispute with a former
agent of ours in the fourth quarter of 2002 for $0.1 million offset by a decrease in interest income of $0.2 million resulting from lower interest rates in effect during 2002.

Income Taxes.Income tax expense increased $0.3 million or 58% from $0.6 million in 2001 to $0.9 million
in 2002. The increase was primarily due to an increase in taxable income in 2002 after giving effect to the impairment of goodwill and fixed assets which are permanent differences for tax purposes.

Seasonality

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

25

---

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 research and
development expenses, availability and cost of materials from our suppliers, competitive pricing pressures and financing costs.

Liquidity and Capital Resources

At December 31, 2003, we had $11.3 million of cash and cash equivalents and working capital of $16.1 million.

On
June 30, 2000, we entered into a Stock Purchase Agreement (the "Agreement") with Crane & Co., Inc. ("Crane"). Under the Agreement, we sold 3,387,720 shares of our
common stock to Crane for an aggregate purchase price of $9,316,230. The Agreement also provides that our Board of Directors and the audit committee of our board of directors each be expanded by one
position, which was filled by Douglas A. Crane, a representative of Crane. The Agreement also provides that, for as long as Crane owns at least 51% of the shares of common stock purchased under the
Agreement, Crane shall be entitled to designate one director on the management slate of nominees to our board of directors, and that, should our board of directors be expanded to a number greater than
six, then our board of directors shall be expanded by another seat, and Crane shall be entitled to nominate an additional director.

The
Agreement also contains a standstill provision, whereby Crane agreed, that, among other things, neither it nor its affiliates, except as otherwise provided for in the Agreement, will
acquire more than its current proportionate share of our outstanding securities. The standstill provision also provides that Crane will not offer, sell or transfer any of its voting securities of ABNH
during a tender or exchange offer if such offer is opposed by our board of directors. In connection with the transaction, Crane also received the right to cause us to register Crane's shares for
public resale and the right to include such shares in any future registration of our securities, subject to certain exceptions.

Net
cash provided by operating activities was $3.1 million for the year ended December 31, 2003, as compared to $1.6 million of cash provided by operating activities
for the prior year. For the year ended December 31, 2003, our net income adjusted for non-cash charges provided cash of $2.5 million compared to $3.0 million of cash
provided by our net loss adjusted for non-cash charges in the prior year. For the year ended December 31, 2003, cash provided by changes in operating assets and liabilities was
$0.6 million compared to cash used for changes in operating assets and liabilities of $1.4 million in the prior year.

Investing
activities for the years ended December 31, 2003 and 2002 used cash flows of approximately $0.5 million and $0.4 million, respectively. These activities
primarily reflected capital expenditures for the respective years. We anticipate that capital expenditures in 2004 and 2005 will be approximately $3.5 million for each year. These amounts
relating to capital expenditures are intended to improve production capabilities, expand our product line and reduce future operating costs.

There
were no financing activities for the years ended December 31, 2003 and 2002.

We
believe that cash flows from operations and our cash balances will be sufficient to meet working capital needs, and fund capital expenditures for the next twelve months.

On
March 17, 2003, our board of directors authorized the repurchase of up to $2.0 million of our outstanding common stock. Under the terms of the repurchase plan, we were
authorized to make

26

---

purchases
from time-to-time, either on the open market or through privately negotiated transactions as conditions warrant, over a period of twelve months. The stock repurchase
plan was terminated on December 15, 2003 without any shares being repurchased under the plan.

The
following table quantifies our future obligations, which consist primarily of lease obligations (in thousands):

|                  |  | Total |       | Less than
1 year |   | 2-3
years |  | 4-5
years |       | More than
5 years
|----------------- |  | ----- | ----- | ---------------- | - | --------- |  | --------- | ----- | -----------------
|Lease obligations |  | $     | 3,666 |                  | $ | 1,006     |  | $         | 1,824 |                  

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, 2003 and 2002.

|                                       |  | Year Ended December 31, 2003
|-------------------------------------- |  | ----------------------------
|
|
|Sales                                  |  | $                           
|Cost of goods sold                     |  |                             
|Net income                             |  |                             
|Net income per sharebasic and diluted |  | $                           

|                                              |  | Year Ended December 31, 2003 |      
|--------------------------------------------- |  | ---------------------------- | -----
|
|
|Sales                                         |  | $                            | 4,620
|Cost of goods sold                            |  |                              | 2,314
|Net income (loss)                             |  |                              | 67   
|Net income (loss) per sharebasic and diluted |  | $                            | 0.00 

27

---



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.

The Audit Committee of our Board of Directors annually considers and recommends to our Board the selection of our independent auditors. As recommended by our
Audit Committee, our Board of Directors on June 6, 2002 decided to dismiss Arthur Andersen LLP as our independent public accountants and engaged Ernst & Young LLP to serve as our
independent auditors for 2002.

During
the fiscal years ended December 31, 2000 and 2001, and through June 6, 2002, there were no disagreements between us and Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Arthur Andersen's satisfaction, would have caused Arthur Andersen to
make reference to the subject matter of the disagreement in connection with its reports. None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K
occurred within the fiscal years ended December 31, 2000 and 2001 or through June 6, 2002. The audit reports of Arthur Andersen on our financial statements as of and for the fiscal years
ended December 31, 2000 and 2001 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

We
requested that Arthur Andersen furnish a letter addressed to the SEC stating that it agreed with the above statements relating to Arthur Andersen with respect to our fiscal years
ended December 31, 2000 and 2001 and the subsequent interim period. A copy of this letter was filed as Exhibit 16.1, as part of our Form 8-K, dated June 10,
2002.

During
the fiscal years ended December 31, 2000 and 2001, and through June 6, 2002, neither we, nor anyone acting on our behalf, consulted with Ernst & Young with
respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any
other matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

Item 9A. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer,
of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15.
Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information
relating to ABNH required to be included in our periodic Securities and Exchange Commission filings. There were no changes in our internal control over financial reporting that occurred during our
most recent fiscal quarter that would have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28

---

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.

The following table sets forth certain information concerning our directors, executive officers and other key employees. All directors hold office until the next
annual meeting of stockholders or until their successors have been elected and qualified. Dr. Stephen A. Benton, who had served as a director since
July 1998, passed away during 2003. Officers are appointed by the board of directors and serve at the discretion of the board.

|Name                           |  | Age |  | Position(s)                                          
|------------------------------ |  | --- |  | -----------------------------------------------------
|Directors, Executive Officers: |  |     |  |                                                      
|Kenneth H. Traub               |  | 42  |  | President, Chief Executive Officer and Director      
|Salvatore F. D'Amato           |  | 75  |  | Chairman of the Board                                
|Fred J. Levin*                 |  | 41  |  | Director                                             
|Douglas A. Crane**             |  | 43  |  | Director                                             
|Mark J. Bonney*                |  | 50  |  | Director                                             
|Alan Goldstein                 |  | 57  |  | Vice President, Chief Financial Officer and Secretary

---

Kenneth H. Traubhas 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 a M.B.A. from the Harvard Graduate School of Business Administration and a B.A.
from Emory University.

Salvatore F. D'Amatohas 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.

Fred J. Levinhas served as a director since February 2000. Mr. Levin has been the President and Chief Executive Officer of the LGI
Network LLC, a market research and information service company, since February 2002. Previously, Mr. Levin was the President of the Concord Watch Division of Movado Group, Inc., a
manufacturer and marketer of watches, from March 1998 to January 2002. 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 a M.B.A. from the Harvard Graduate School of Business Administration.

29

---

Douglas A. Cranehas served as a director since June 2000. Mr. Crane has been the Manager of Currency Paper Manufacturing and U.S.
Currency Contract for Crane & Co., Inc. a manufacturer of paper products, since 2001. Mr. Crane also served with Crane & Co., Inc. as Manager of Corporate Strategic
Planning from 1998 to 2001, as Manager of Manufacturing Technology from 1995 to 1998, and as production manager, project engineer from 1990 to 1995. Mr. Crane holds a B.S. in Biomedical
Engineering/Materials Science from Brown University, a M.S. in Paper Chemistry from the Institute of Paper Science and Technology and a M.B.A. from the Massachusetts Institute of Technology.

Mark J. Bonneyhas served as a director since February 2003. Mr. Bonney has been the Chief Executive Officer of MJB Consulting, a
strategic management-consulting firm, since March 2002. Previously, Mr. Bonney was the President and Chief Operating Officer of Axsys Technologies, a leading supplier of optical
components and subsystems from August 1999 through March 2002. Prior thereto, Mr. Bonney held various positions, including Vice President of Operations, Vice President of Finance
and Chief Financial Officer of Zygo Corporation, a manufacturer of measurement systems and optical products, from March 1993 through July 1999. Mr. Bonney holds a B.S. in Business
Administration and Economics from Central Connecticut State University and a M.B.A. in Finance from the University of Hartford.

Alan Goldsteinhas 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.

Audit Committee

Our Board of Directors has established an Audit Committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The members of the Audit Committee are currently Mark J. Bonney (Chairman) and Fred J. Levin. Our Board of Directors has determined that Mark J. Bonney is an audit committee financial
expert as defined by Item 401(h) of Regulation S-K of the Exchange Act. All of the members of our Audit Committee are independent within the meaning of Item 7(d)(3)(iv) of
Schedule 14A applying the definition of independence set forth in Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards. The Audit Committee's amended and
restated charter provides that the Audit Committee shall be comprised of no more than five and no less than three members. Dr. Stephen Benton who served as a member of our Audit Committee
passed away during 2003 resulting in our Audit Committee being comprised of only two members. We are currently searching for a qualified candidate to replace Dr. Benton and serve on our Audit
committee.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who beneficially own more than
10% of our common stock, to file with the Securities and Exchange Commission reports of their ownership and changes in their ownership of common stock. Based upon a review of the copies of the filings
with the Securities and Exchange Commission and written representations from our executive officers, directors and persons who beneficially own more than

30

---

10%
of our common stock, we believe that the Section 16(a) filing requirements applicable to our executive officers, directors and persons who beneficially own more than 10% of our common
stock in fiscal 2003 were complied with on a timely basis, except each of Kenneth Traub, Salvatore D'Amato, Alan Goldstein and Fred Levin failed to file a Form 4 on a timely basis, which
transactions were subsequently reported on a Form 5.

Code of Ethics

We have adopted a Code of Ethics for Senior Financial Officers applicable to our Chief Executive Officer, Chief Financial Officer, treasurer, controller,
principal accounting officer and other employees performing similar functions. The Code of Ethics for Senior Financial Officers is available on our website. We will satisfy the disclosure requirement
under Item 10 of Form 8-K relating to amendments or waivers from any provision of the Code of Ethics for Senior Financial Officers by either filing a Form 8-K or
posting this information on our website within five days business days following the date of amendment or waiver. Our website address is www.abnh.com.

Item 11. EXECUTIVE COMPENSATION.

The following table provides information concerning compensation paid to or earned during 2001, 2002 and 2003 by each individual who served as our chief executive
officer or in a similar capacity during 2003 and our other two executive officers during 2003 (the "Named Executive Officers").

Summary Compensation Table

|                                                                     |  |                |  | Annual Compensation     |  | Long-Term
Compensation
Shares of
Common Stock
Underlying
Options
(#) |  |                     
|-------------------------------------------------------------------- |  | -------------- |  | ----------------------- |  | -------------------------------------------------------------------- |  | --------------------
|
|Kenneth H. Traub
President and Chief
Executive Officer               |  | 2001
2002
2003 |  | 300,000
309,000
318,270 |  | 150,000
145,000
140,000                                              |  | 10,208
9,312
9,609  
|Salvatore F. D'Amato
Chairman of the Board                           |  | 2001
2002
2003 |  | 180,000
185,400
190,962 |  | 70,000
70,000
70,000                                                 |  | 13,380
42,502
13,788
|Alan Goldstein
Vice President, Chief
Financial Officer and
Secretary |  | 2001
2002
2003 |  | 170,000
175,100
180,350 |  | 50,000
40,000
45,000                                                 |  | 5,868
6,835
5,820   

---

31

---

Option Grants for 2003

The following table sets forth information with respect to option grants in 2003 to each of the Named Executive Officers.

OPTION GRANTS IN LAST FISCAL YEAR

|                     |  |                |  |            |    |    |           |  |                  | Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation For
Option Term(2)
|-------------------- |  | -------------- |  | ---------- | -- | -- | --------- |  | ---------------- | -------------------------------------------------------------------------------------------------
|
|
|
|Kenneth H. Traub     |  | 150,000
50,000 |  | 25.60
8.53 | %% | $$ | 0.85
1.13 |  | 5/28/13
12/18/13 |                                                                                                  
|Salvatore F. D'Amato |  | 25,000
15,000  |  | 4.27
2.56  | %% | $$ | 0.85
1.13 |  | 5/28/13
12/18/13 |                                                                                                  
|Alan Goldstein       |  | 25,000
15,000  |  | 4.27
2.56  | %% | $$ | 0.85
1.13 |  | 5/28/13
12/18/13 |                                                                                                  

---

2003 Year-End Option Values

The following table provides information concerning the number and value of unexercised options held by each of the Named Executive Officers on
December 31, 2003. No options were exercised in 2003 by the Named Executive Officers.

|                     |  | Shares of Common Stock Underlying Unexercised Options
(#) |  | Value of Unexercised In-the-Money Options at December 31, 2003
($)(1)
|-------------------- |  | --------------------------------------------------------- |  | ---------------------------------------------------------------------
|
|
|Kenneth H. Traub     |  | 775,000                                                   |  | 200,000                                                              
|Salvatore F. D'Amato |  | 325,000                                                   |  | 40,000                                                               
|Alan Goldstein       |  | 173,000                                                   |  | 40,000                                                               

---

32

---

Stock Incentive Plans

On August 4, 2000, we adopted the American Bank Note Holographics, Inc. 2000 Stock Incentive Plan (as amended, the "2000 Plan"), which was
subsequently approved by our stockholders at our annual meeting on September 12, 2000. In August 2001, our stockholders approved an amendment to the 2000 Plan increasing the shares
available for issuance thereunder by 600,000 to 1,350,000 shares. On July 20, 1998, we adopted the 1998 Stock Incentive Plan (as amended, the "1998 Plan", and collectively with the 2000 Plan,
the "Plans"). The Plans were adopted for the purpose of granting various stock incentives to officers, directors, employees and consultants of ABNH. The board of directors (or a committee appointed by
the board of directors) has discretionary authority, subject to certain restrictions, to administer the Plans. The total number of shares reserved for issuance under the Plans are 3,213,000 shares of
common stock. Options to purchase 2,823,000 shares of common stock were outstanding under the Plans at December 31, 2003. Options to purchase an additional 15,000 shares of common stock were
outstanding outside the Plans at December 31, 2003. The exercise price of options granted under the Plans 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 Plans generally become vested and exercisable for up to either 25% or 331/3% of the total optioned shares upon each succeeding anniversary
of the date of grant. 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.

Retirement Plans

On October 1, 1999, we implemented defined contribution plans for our employees. Aggregate contributions to such plans, which have been charged to our
operations, were approximately $56,000, $51,000 and $48,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

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. In addition, directors may, from time to time, receive additional grants of options to purchase shares of our common
stock as determined by our board of directors.

Employment Agreements

We entered into an employment agreement with Kenneth H. Traub in February 1999 for an initial term of one year, which renews automatically for successive
one year terms, unless we give at least 60 days written notice prior to the end of the current term. As amended in March 2000, the agreement provides for an annual base salary of
$300,000, to be increased by not less than 3% per year upon renewal and further provides that, if we do not renew his employment agreement, Mr. Traub will receive severance equal to two times
his annual salary and bonus. Pursuant to the agreement, Mr. Traub shall receive quarterly bonuses of $25,000 unless the board of directors or a committee designated thereby shall, in its sole

33

---

discretion,
determine the payment of such quarterly bonus should not be paid based on the performance of Mr. Traub and/or the business, results of operations or financial condition of ABNH.
Additionally, the board of directors or compensation committee may, in its sole discretion, award Mr. Traub additional quarterly and year-end bonuses. 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 the event of Mr. Traub's termination by us for
any reason other than for cause, as defined in the agreement, or his resignation for good reason, as defined in the agreement, we are generally required to (1) 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) continue to provide employee
benefits to Mr. Traub, and (3) accelerate vesting on any unvested options granted to him under the 1998 Plan and permit the exercise of vested options under such plan for a period of two
years thereafter. Upon the termination of Mr. Traub's employment by us following a change of control, as defined in the agreement, or Mr. Traub's resignation for good reason following a
change in control, we are required to (1) pay him a severance amount equal to two times his annual salary and bonus then in effect (or, if such termination or resignation for good reason is
more than one year after such change of control, an amount equal to three times his salary and annual bonus then in effect), (2) accelerate vesting on any unvested options granted under the
1998 Plan and any shares of restricted stock purchased by Mr. Traub, and (3) to the extent such amounts are subject to excise taxes under Section 4999 of the Internal Revenue
Code, provide a tax gross up to him for any additional amounts due. In connection with his employment agreement, Mr. Traub has agreed not to compete with, or solicit from, us during his term of
employment and for one year thereafter and has agreed not to disclose or use our confidential information.

We
entered into an employment agreement with Salvatore F. D'Amato in April 1999 for an initial term of two years, which renews upon mutual agreement for successive one year terms.
As amended, the agreement provides for a base salary of $180,000 per year. Pursuant to the Agreement Mr. D'Amato is eligible to receive bonuses at the discretion of our board of directors, with
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. 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 Alan Goldstein in April 1999 for an initial term of one year which renews automatically for successive one year terms, unless we give
at least 60 days written notice prior to the end of the current term. As amended, the agreement provides for an annual base salary of $170,000, to be increased by not less than 3% per year upon
renewal and further provides that, if we do not renew his employment agreement, Mr. Goldstein will receive severance equal to one-half of his annual salary and bonus. Pursuant to
the agreement Mr. Goldstein is
eligible to receive bonuses at the discretion of our board of directors, with 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 by us for any reason other than for cause, as defined in
the agreement, or his resignation for good reason, as defined in the agreement, we are required to (1) 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) continue to provide employee benefits to
Mr. Goldstein and (3) accelerate vesting on any unvested options granted to him under the 1998 Plan and

34

---

permit
the exercise of vested options under such plan for a period of two years thereafter. Upon termination of Mr. Goldstein's employment following a change of control, or
Mr. 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
and bonus 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.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee currently consists of Messrs. Levin, Crane and Bonney. Mr. Crane is an employee and representative of Crane &
Co., Inc. See "Item 13. Certain Relationships and Related Transactions." None of the members of our Compensation Committee is or has been an officer or employee of ABNH. No interlocking
relationships exist between the board of directors or Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship
existed in the past. None of our executive officers or directors serves on the board of directors or compensation committee of any entity which has one or more executive officers serving as a member
of our board of directors or Compensation Committee. Mr. Benton, a former member of our Compensation Committee passed away during 2003.

Compensation Committee Report on Executive Compensation

The Compensation Committee of the board of directors advises our board of directors on compensation matters, determines the compensation of the Chief Executive
Officer, reviews and takes action on the recommendation of the Chief Executive Officer as to the appropriate compensation of other officers and key personnel and approves the grants of bonuses to
officers and key personnel. The Compensation Committee is also responsible for the administration of our Stock Incentive Plans. This report of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.

Chief Executive Officer Compensation

The Compensation Committee reviews the compensation arrangements for our Chief Executive Officer at least annually, typically in the fourth and/or first quarter
of the fiscal year. Mr. Traub's employment agreement, which renewed as of February 2004 for an additional one-year term, includes provisions described above under the heading
"Employment Agreements" for the payment of a base
salary and the payment of quarterly and other bonuses. In determining whether to renew Mr. Traub's employment agreement and his total compensation for fiscal 2004, the Compensation Committee
considered the terms of his employment agreement, his leadership of the Company, our financial and operational performance during the preceding year, competitive pay practices, and Mr. Traub's
individual performance and contributions to us. The Compensation Committee believes that Mr. Traub provides strong leadership to us and has been instrumental in improving our financial,
operating and strategic position.

In
making its compensation decisions with respect to Mr. Traub, the Compensation Committee exercised its discretion and judgment based on the above factors, relying more heavily
on qualitative factors compared to quantitative criteria and results. No specific formula was applied to determine the weight of each factor. As part of its review of executive compensation, the
Compensation Committee met with and was advised by independent compensation consultants. In fiscal 2003, Mr. Traub's contractual base compensation was $318,270. Mr. Traub was also paid
the $25,000 quarterly bonus contemplated under his employment agreement and an additional year-end discretionary bonus of $40,000.

35

---

ABNH'S General Compensation Policy for Executive Officers

The fundamental policy of the Compensation Committee is to provide our executive officers with competitive compensation packages that are designed to retain key
personnel, motivate executives to advance our objectives and reward contributions to our operational and financial performance. It is the Compensation Committee's objective to have a portion of each
executive officer's compensation contingent upon our performance as well as upon each executive officer's own level of performance. Therefore, the compensation package for each executive officer is
comprised of three different elements: (1) base salary which is designed primarily to be competitive with salary levels in the industry; (2) cash bonuses which reflect the achievement of
qualitative and quantitative objectives and goals; and (3) long-term stock-based incentive awards which strengthen the mutuality of interest between the executive officers and our
stockholders.

Factors.The principal factors (together with the factors specified above with respect to
Mr. Traub) that the Compensation Committee considered with respect to each executive officer's compensation for fiscal 2003 are summarized below. The Compensation Committee may, however, in its
discretion, apply entirely different factors for executive compensation in future years.

Base Salary.The base salary for each executive officer is specified in his respective employment
agreement and was determined on the basis of the following factors: experience, expected personal performance, the salary levels in effect for comparable positions within and outside the industry and
internal and external base salary comparability considerations. The weight given to each of these factors differed from individual to individual, as the Compensation Committee and the board of
directors believed appropriate.

Bonus.Bonus represents the variable component of the executive compensation program that is tied to
our performance and individual achievement. In determining bonuses, the Compensation Committee considers factors such as relative performance of ABNH during the year and the individual's contribution
to our performance, the need to attract, retain and motivate high quality executives as well as the degree to which the executive officer met or exceeded certain objectives established for him.

Long-Term Incentive Compensation.Long-term incentives are provided through
grants of stock options. The grants are designed to align the interests of each executive officer with those of the stockholders and provide each individual with a significant incentive to manage ABNH
from the perspective of an owner with an equity stake. Each option grant allows the individual to acquire shares of our common stock at a fixed price per share over a specified period of time up to
ten years. Each option generally becomes exercisable in installments over a three or four-year period. Therefore, the option grant will provide a return to the executive officer only if
the executive officer remains employed by ABNH during the vesting period, and then only if the market price of the underlying shares appreciates. The number of shares subject to each option grant is
set at a level intended to create meaningful opportunity for appreciation based on the executive officer's current position with ABNH, the size of comparable awards made to individuals in similar
positions and the individual's personal performance in recent periods. The Compensation Committee also considers the number of unvested options held by the executive officer in order to maintain an
appropriate level of equity incentive for that individual. However, the Compensation Committee does not adhere to any specific guidelines as to the relative option holdings of our executive officers.

Internal Revenue Code Limits on the Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally denies publicly-held corporations a federal income tax deduction for
compensation exceeding $1,000,000 paid to the Chief

36

---

Executive
Officer or any of the four other highest paid executive officers, excluding performance-based compensation. Through December 31, 2003, this provision has not limited our ability to
deduct executive compensation, but the Compensation Committee will continue to monitor the potential impact of Section 162(m) on our ability to deduct executive compensation. We believe that
our compensation philosophy of paying our executive officers with competitive salaries, cash bonuses and long-term incentives, as described in this report, serves the best interest of ABNH
and its stockholders.

THE
COMPENSATION COMMITTEE

Fred
J. Levin
Douglas A. Crane
Mark J. Bonney

37

---

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The
following table sets forth as of March 12, 2004 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.

|Name and Address                                                                                                                    |  | Number (1) |  | Percentage (1) |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | -------------- | -
|Crane & Co., Inc
    30 South Street
    Dalton, MA 01226                                                                           |  | 3,387,720  |  | 18.3           | %
|Libra Advisors, LLC (2)
Libra Associates, LLC
Libra Fund, L.P.
Ranjan Tandon
    277 Park Avenue, 26th Floor
    New York, NY 10172 |  | 2,156,000  |  | 11.7           | %
|Levy, Harkins & Co., Inc. (3)
The Gracy Fund, L.P.
Edwin A. Levy
Michael J. Harkins
    570 Lexington Avenue
    New York, NY 10022 |  | 1,701,600  |  | 9.2            | %
|Kenneth H. Traub (4)                                                                                                                |  | 775,000    |  | 4.0            | %
|Salvatore F. D'Amato (5)                                                                                                            |  | 327,000    |  | 1.7            | %
|Alan Goldstein (6)                                                                                                                  |  | 173,000    |  | *              |  
|Fred J. Levin (7)                                                                                                                   |  | 71,200     |  | *              |  
|Douglas A. Crane (8)                                                                                                                |  | 3,403,520  |  | 18.4           | %
|Mark J. Bonney (9)                                                                                                                  |  | 5,000      |  | *              |  
|All executives officers and directors as a group (6 persons) (10)                                                                   |  | 4,754,720  |  | 24.0           | %

---

38

---

39

---

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2003 with respect to shares of our common stock which may be issued under our equity
compensation plans.

|Plan Category                                                  |        | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |           | Weighted-average
exercise price
of outstanding options,
warrants and rights |      | Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))
|-------------------------------------------------------------- | ------ | ------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by security holders (1)     |        | 1,726,000                                                                                   |           | $                                                                           | 1.40 |                                                                                                                                            
|Equity compensation plans not approved by security holders (2) |        | 1,097,000                                                                                   |           | $                                                                           | 2.64 |                                                                                                                                            
|                                                               |        |                                                                                             |           |                                                                             |      |                                                                                                                                            
|                                                               | Total: |                                                                                             | 2,823,000 |                                                                             |      |                                                                                                                                            
|                                                               |        |                                                                                             |           |                                                                             |      |                                                                                                                                            
|                                                               |        |                                                                                             |           |                                                                             |      |                                                                                                                                            

---

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On June 30, 2000, we entered into a Stock Purchase Agreement (the "Agreement") with Crane & Co., Inc. ("Crane"). Under the Agreement, we sold
3,387,720 shares of our common stock to Crane for an aggregate purchase price of $9,316,230. The Agreement also provides that our Board of Directors and our audit committee of our Board of Directors
each be expanded by one position, which was filled by Douglas A. Crane, a representative of Crane. The Agreement also provides that, for as long as Crane owns at least 51% of the shares of common
stock purchased under the Agreement, Crane shall
be entitled to designate one director on the management slate of nominees to our Board, and that, should our Board be expanded to a number greater than six, then our Board shall be expanded by another
seat, and Crane shall be entitled to nominate an additional director.

The
Agreement also contains a standstill provision, whereby Crane agreed, that, among other things, neither it nor its affiliates, except as otherwise provided for in the Agreement, will
acquire more than its current proportionate share of the outstanding securities of ABNH. The standstill provision also provides that Crane will not offer, sell or transfer any of its voting securities
of ABNH during a tender or exchange offer if such offer is opposed by our Board of Directors. In connection with the transaction, Crane also received the right to cause us to register Crane's shares
for public resale and the right to include such shares in any future registration of our securities, subject to certain exceptions.

During
2000, we entered into agreements with Crane under which we rent factory space and lease employees for our facility in Dalton, MA. For the years ended December 31, 2003,
2002 and 2001, we

40

---

paid
Crane under these agreements $72,000 each year, for the rental of the factory space and $162,000, $151,000 and $116,000, respectively, for the leased employees. In addition, we paid Crane $5,700
for leasehold improvements on the rental space for the year ended December 31, 2001. On February 28, 2003, we entered into a new agreement with MasterCard which entitles MasterCard to
appoint Crane as its second supplier to produce up to 20% of MasterCard's annual hologram requirements in coordination with us. In addition, the agreement allows MasterCard to appoint Crane as its
contingent supplier under certain circumstances.

During
2001, we purchased a technology and patent pending from Mr. D'Amato, which he had developed prior to becoming a director, for a purchase price of $30,000.

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES.

On June 6, 2002, upon the recommendation of our Audit Committee our board of directors dismissed Arthur Andersen LLP who had served as our previous
independent auditors and engaged Ernst & Young LLP. All fees paid to Arthur Andersen during 2002 for audit and other services rendered are set forth below. In addition, Ernst & Young
LLP, our independent auditors for 2002 and 2003, were paid for audit and other services rendered as set forth below in 2002 and 2003.

Audit Fees

|2003 Fiscal Year                                |  | Ernst & Young LLP
|----------------------------------------------- |  | -----------------
|Audit Fees                                      |  | $                
|Audit-Related Fees                              |  |                  
|Tax Fees                                        |  |                  
|All Other Fees                                  |  |                  
|                                                |  |                  
|Total Fees for the Year Ended December 31, 2003 |  | $                
|                                                |  |                  

|2002 Fiscal Year                                |  | Arthur Andersen LLP |        | Ernst & Young LLP
|----------------------------------------------- |  | ------------------- | ------ | -----------------
|Audit Fees                                      |  | $                   | 20,500 |                  
|Audit-Related Fees                              |  |                     |       |                  
|Tax Fees                                        |  |                     |       |                  
|All Other Fees                                  |  |                     |       |                  
|                                                |  |                     |        |                  
|Total Fees for the Year Ended December 31, 2002 |  | $                   | 20,500 |                  
|                                                |  |                     |        |                  

The
Audit Committee concluded that provision of these services is compatible with maintaining the principal accountants' independence.

Pre-Approval Policies

The Audit Committee pre-approves all audit and non-audit services provided by our independent auditors prior to the engagement of the
independent auditors with respect to such services. With respect to audit services and permissible non-audit services not previously approved, the Audit Committee has authorized the
Chairman of the Audit Committee to approve such audit services and permissible non-audit services, provided the Chairman informs the Audit Committee of such approval at its next regularly
scheduled meeting. All "Audit Fees" and "Tax Fees" set forth above were pre-approved by the Audit Committee in accordance with its pre-approval policy. ABNH did not incur any
"Audit-Related Fees" or "Other Fees" in 2002 or 2003.

41

---



Part IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

Current
report on Form 8-K, dated November 14, 2003, reporting the Company's results of operations for the quarter ended September 30, 2003.

The
following exhibits are filed as part of this report or are incorporated herein by reference. Exhibit Nos. 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, and 10.10 are management contracts,
compensatory plans or arrangements.

3.1

Amended and Restated Certificate of Incorporation. (1)3.2

Amended and Restated By-Laws. (1)3.3

Amendment to the Amended and Restated Certificate of Incorporation. (2)4.1

Form of Common Stock Certificate. (1)4.2

Stock Purchase Agreement by and between Crane & Co., Inc. and American Bank Note Holographics, Inc. dated as of June 29, 2000. (3)4.3

Form of Option Agreement for American Bank Note Holographics, Inc. 1998 Stock Incentive Plan as amended. (5)4.4

Form of Option Agreement for American Bank Note Holographics, Inc. 2000 Stock Incentive Plan. (5)4.5

Option Agreement between Dr. Stephen Benton and American Bank Note Holographics, Inc., dated July 20, 1998. (5)


42

---

10.1

Form of Separation Agreement, by and between American Bank Note Corporation and American Bank Note Holographics, Inc. dated July 20, 1998. (1)10.2

Form of License Agreement. (1)10.3

Form of Transitional Services Agreement. (1)10.4

Form of Employee Benefits Allocation Agreement. (1)10.5

Form of 1998 Stock Incentive Plan. (1)10.6

Form of 2000 Stock Incentive Plan. (6)10.7

Form of Defined Contribution Plan. (1)10.8

Employment Agreement, dated April 20, 1999, between Salvatore F. D'Amato and American Bank Note Holographics, Inc. (7)10.9

Employment Agreement, dated February 3, 1999, between Kenneth H. Traub and American Bank Note Holographics, Inc., as amended on March 20, 2000. (9)10.10

Employment Agreement, dated April 30, 1999, between Alan Goldstein and American Bank Note Holographics, Inc. (7)10.11

Standard Form of Loft Lease, dated as of July 23, 1992, by and between Robert Martin Company and American Bank Holographics, Inc. (9)10.12

Lease Agreement, dated as of January 19, 2001 by and between Crane & Co., Inc. and American Bank Note Holographics, Inc. (9)10.13

Lease Agreement, dated August 11, 2002, by and between Mark Hankin and HanMar Associates MLP, tenants-in-common and American Bank Note Holographics, Inc. with Addenda thereto. (11)10.14

Settlement Agreement, dated July 1, 2002, by and between American Bank Note Holgraphics, Inc. and Leonhard Kurz GmbH & Co. KG (10)10.15

Patent License Agreement, dated July 1, 2002, by and between American Bank Note Holographics, Inc. and Leonhard Kurz GmbH & Co. KG (10)(+)10.16

Substitute Cross License Agreement, dated July 1, 2002, by and between American Bank Note Holographics, Inc. and Leonhard Kurz & Co. KG (10)10.17

Hologram Agreement, dated February 28, 2003, by and between MasterCard International Incorporated and American Bank Note Holograhics, Inc. (11)(+)10.18

Form of Idemnification Agreement between the Company and its directors and officers. (12)10.19

Amendment No. 1 to the Hologram Agreement, dated February 28, 2003, by and between MasterCard International Incorporated and American Bank Note Holographics, Inc., made as of September 29, 2003. (13)(+)23.1

Consent of Ernst & Young LLP


43

---

23.2

Consent of Arthur Andersen LLP31.1

Certification of Kenneth H. Traub pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Alan Goldstein pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Kenneth H. Traub pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.32.2

Certification of Alan Goldstein pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.


---

61602).

44

---



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:                                  

March
23, 2004

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.

|Signature                                   |  | Title                                                                         |  | Date          
|------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|                                            |  |                                                                               |  |               
|/s/KENNETH H. TRAUBKenneth H. Traub         |  | President, Chief Executive Officer and Director (Principal Executive Officer) |  | March 23, 2004
|/s/ALAN GOLDSTEINAlan Goldstein             |  | Chief Financial Officer (Principal Financial and Accounting Officer)          |  | March 23, 2004
|/s/SALVATORE F. D'AMATOSalvatore F. D'Amato |  | Chairman of the Board                                                         |  | March 23, 2004
|/s/FRED J. LEVINFred J. Levin               |  | Director                                                                      |  | March 23, 2004
|/s/DOUGLAS A. CRANEDouglas A. Crane         |  | Director                                                                      |  | March 23, 2004
|/s/MARK J. BONNEYMark J. Bonney             |  | Director                                                                      |  | March 23, 2004

45

---

AMERICAN BANK NOTE HOLOGRAPHICS, INC.    INDEX TO FINANCIAL STATEMENTS    ITEM 15(a)

|                                         |                                                                                         | Page
|---------------------------------------- | --------------------------------------------------------------------------------------- | ----
|REPORT OF INDEPENDENT AUDITORS           |                                                                                         | F-2 
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS |                                                                                         | F-3 
|FINANCIAL STATEMENTS:                    |                                                                                         |     
|                                         | Balance Sheets, December 31, 2003 and 2002                                              |     
|                                         | Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001           |     
|                                         | Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001 |     
|                                         | Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001           |     
|                                         | Notes to Financial Statements                                                           |     
|                                         | Schedule IIValuation and Qualifying Accounts                                           |     

---



Report of Independent Auditors

To
the Board of Directors
American Bank Note Holographics, Inc.

We
have audited the accompanying balance sheets of American Bank Note Holographics, Inc. (the "Company") as of December 31, 2003 and 2002 and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of the
Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations and whose report dated March 1, 2002, expressed an unqualified
opinion on those statements.

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

In
our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2003 and
2002 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule for the years ended December 31, 2003 and 2002, 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 above, the financial statements of the Company as of December 31, 2001 and for the year then ended, were audited by other auditors who have ceased operations. As
described in Note 1, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards ("Statement") No. 142,
"Goodwill and Other Intangible Assets," which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001
included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense recognized in
that period related to goodwill that are no longer being amortized as a result of initially applying Statement No. 142 to the Company's underlying records obtained from management, and
(b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related net income per share amounts. In our opinion, the disclosures for 2001
in Note 1 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.



New
York, New York
March 5, 2004

F-2

---

The
following is a copy of the previously issued report of Arthur Andersen LLP dated March 1, 2002, related to their audit of the financial statements of American Bank Note
Holographics, Inc., as of and for the two-year period ended December 31, 2001. During 2002, Arthur Andersen LLP ceased operations and, as such, has not reissued this report.
Additionally, Arthur Andersen LLP has not consented to the use of this audit report. Since American Bank Note Holographics, Inc. is unable to obtain a current manually signed audit report, a
copy of Arthur Andersen's most recent signed and dated report has been included to satisfy filing requirements, as permitted under Rule 2-02(e) of Regulation S-X.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
the Board of Directors and Stockholders of
    American Bank Note Holographics, Inc.:

We
have audited the accompanying balance sheets of American Bank Note Holographics, Inc. (a Delaware corporation) as of December 31, 2001 and 2000 and the related
statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements and schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Bank Note Holographics, Inc. as of
December 31, 2001 and 2000 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

Our
audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule on page S-1 is presented for purposes
of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial
statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.



New
York, New York
March 1, 2002

F-3

---



AMERICAN BANK NOTE HOLOGRAPHICS, INC.        BALANCE SHEETS        DECEMBER 31, 2003 AND 2002        (In Thousands, Except Share Data)

|                                                                                                                          |                                                                                                                       | 2003                       |        | 2002   |       
|------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------ | ------
|ASSETS                                                                                                                    |                                                                                                                       |                            |        |        |       
|CURRENT ASSETS:                                                                                                           |                                                                                                                       |                            |        |        |       
|                                                                                                                          | Cash and cash equivalents                                                                                             |                            | $      | 11,341 |       
|                                                                                                                          | Accounts receivable, net of allowance for doubtful accounts of $180 and $210                                          |                            |        | 3,174  |       
|                                                                                                                          | Inventories                                                                                                           |                            |        | 2,386  |       
|                                                                                                                          | Deferred income taxes                                                                                                 |                            |        | 981    |       
|                                                                                                                          | Prepaid expenses                                                                                                      |                            |        | 385    |       
|                                                                                                                          | Other                                                                                                                 |                            |        | 150    |       
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|                                                                                                                          |                                                                                                                       | Total current assets       |        |        | 18,417
|MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTSNet of
    accumulated depreciation and amortization of $9,238 and $8,505 |                                                                                                                       |                            | 2,490  |        |       
|OTHER ASSETS                                                                                                              |                                                                                                                       |                            | 113    |        |       
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|TOTAL ASSETS                                                                                                              |                                                                                                                       | $                          | 21,020 |        | $     
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                      |                                                                                                                       |                            |        |        |       
|CURRENT LIABILITIES:                                                                                                      |                                                                                                                       |                            |        |        |       
|                                                                                                                          | Accounts payable                                                                                                      |                            | $      | 687    |       
|                                                                                                                          | Accrued expenses                                                                                                      |                            |        | 1,627  |       
|                                                                                                                          | Customer advances                                                                                                     |                            |        | 49     |       
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|                                                                                                                          |                                                                                                                       | Total current liabilities  |        |        | 2,363 
|DEFERRED INCOME TAXES                                                                                                     |                                                                                                                       |                            | 1,208  |        |       
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|                                                                                                                          | Total liabilities                                                                                                     |                            |        | 3,571  |       
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|COMMITMENTS AND CONTINGENCIES                                                                                             |                                                                                                                       |                            |        |        |       
|STOCKHOLDERS' EQUITY:                                                                                                     |                                                                                                                       |                            |        |        |       
|                                                                                                                          | Preferred Stock, authorized, 5,000,000 shares; no shares issued or outstanding                                        |                            |        |       |       
|                                                                                                                          | Common Stock, par value $0.01 per share, authorized, 40,000,000 shares; issued and
    outstanding, 18,483,720 shares |                            |        | 185    |       
|                                                                                                                          | Additional paid-in capital                                                                                            |                            |        | 23,994 |       
|                                                                                                                          | Accumulated deficit                                                                                                   |                            |        | (6,730 | )     
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|                                                                                                                          |                                                                                                                       | Total stockholders' equity |        |        | 17,449
|                                                                                                                          |                                                                                                                       |                            |        |        |       
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                |                                                                                                                       | $                          | 21,020 |        | $     
|                                                                                                                          |                                                                                                                       |                            |        |        |       

The
accompanying notes are an integral part of these financial statements.

F-4

---



AMERICAN BANK NOTE HOLOGRAPHICS, INC.        STATEMENTS OF OPERATIONS        YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001        (In Thousands, Except Per Share Data)

|                                                |                                         | 2003                     |       | 2002   |        | 2001  
|----------------------------------------------- | --------------------------------------- | ------------------------ | ----- | ------ | ------ | ------
|REVENUE:                                        |                                         |                          |       |        |        |       
|                                                | Sales                                   |                          | $     | 18,284 |        | $     
|                                                | Royalty income                          |                          |       | 48     |        |       
|                                                |                                         |                          |       |        |        |       
|                                                |                                         | Total revenue            |       |        | 18,332 |       
|                                                |                                         |                          |       |        |        |       
|COSTS AND EXPENSES:                             |                                         |                          |       |        |        |       
|                                                | Cost of goods sold                      |                          |       | 8,279  |        |       
|                                                | Selling and administrative              |                          |       | 6,518  |        |       
|                                                | Research and development                |                          |       | 1,142  |        |       
|                                                | Depreciation and amortization           |                          |       | 739    |        |       
|                                                | Impairment of goodwill and fixed assets |                          |       |       |        |       
|                                                |                                         |                          |       |        |        |       
|                                                |                                         | Total costs and expenses |       |        | 16,678 |       
|                                                |                                         |                          |       |        |        |       
|                                                | Operating income (loss)                 |                          |       | 1,654  |        |       
|                                                |                                         |                          |       |        |        |       
|OTHER INCOME:                                   |                                         |                          |       |        |        |       
|                                                | Interest                                |                          |       | 97     |        |       
|                                                | Patent and other settlements            |                          |       |       |        |       
|                                                |                                         |                          |       |        |        |       
|                                                |                                         | Total other income       |       |        | 97     |       
|                                                |                                         |                          |       |        |        |       
|INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |                                         |                          | 1,751 |        |        | (7,279
|PROVISION FOR INCOME TAXES                      |                                         |                          | 744   |        |        | 858   
|                                                |                                         |                          |       |        |        |       
|NET INCOME (LOSS)                               |                                         | $                        | 1,007 |        | $      | (8,137
|                                                |                                         |                          |       |        |        |       
|NET INCOME (LOSS) PER SHARE:                    |                                         |                          |       |        |        |       
|                                                | Basic and diluted                       |                          | $     | 0.05   |        | $     
|                                                |                                         |                          |       |        |        |       

The
accompanying notes are an integral part of these financial statements.

F-5

---



AMERICAN BANK NOTE HOLOGRAPHICS, INC.        STATEMENTS OF STOCKHOLDERS' EQUITY        YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001        (In Thousands)

|                           |            | Common Stock |   |   |     |   |   |        |  
|-------------------------- | ---------- | ------------ | - | - | --- | - | - | ------ | -
|
|
|BALANCE, JANUARY 1, 2001   |            | 18,484       |   | $ | 185 |   | $ | 23,994 |  
|                           | Net income |              |  |   |     |  |   |        | 
|                           |            |              |   |   |     |   |   |        |  
|BALANCE, DECEMBER 31, 2001 |            | 18,484       |   |   | 185 |   |   | 23,994 |  
|                           | Net loss   |              |  |   |     |  |   |        | 
|                           |            |              |   |   |     |   |   |        |  
|BALANCE, DECEMBER 31, 2002 |            | 18,484       |   |   | 185 |   |   | 23,994 |  
|                           | Net income |              |  |   |     |  |   |        | 
|                           |            |              |   |   |     |   |   |        |  
|BALANCE, DECEMBER 31, 2003 |            | 18,484       |   | $ | 185 |   | $ | 23,994 |  
|                           |            |              |   |   |     |   |   |        |  

The
accompanying notes are an integral part of these financial statements.

F-6

---



AMERICAN BANK NOTE HOLOGRAPHICS, INC.        STATEMENTS OF CASH FLOWS        YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001        (In Thousands)

|                                                 |                                                                                          | 2003                                       |                                           | 2002  |      | 2001  |       
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ----- | ---- | ----- | ------
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                                                                          |                                            |                                           |       |      |       |       
|                                                 | Net income (loss)                                                                        |                                            | $                                         | 1,007 |      | $     | (8,137
|                                                 | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                            |                                           |       |      |       |       
|                                                 |                                                                                          | Depreciation and amortization              |                                           |       | 739  |       |       
|                                                 |                                                                                          | Deferred income taxes                      |                                           |       | 744  |       |       
|                                                 |                                                                                          | (Recovery) provision for doubtful accounts |                                           |       | (30  | )     |       
|                                                 |                                                                                          | Impairment of goodwill and fixed assets    |                                           |       |     |       |       
|                                                 | Changes in operating assets and liabilities:                                             |                                            |                                           |       |      |       |       
|                                                 |                                                                                          | Accounts receivable                        |                                           |       | 517  |       |       
|                                                 |                                                                                          | Inventories                                |                                           |       | 155  |       |       
|                                                 |                                                                                          | Prepaid expenses and other                 |                                           |       | 486  |       |       
|                                                 |                                                                                          | Accounts payable and accrued expenses      |                                           |       | (455 | )     |       
|                                                 |                                                                                          | Customer advances                          |                                           |       | (40  | )     |       
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|                                                 |                                                                                          |                                            | Net cash provided by operating activities |       |      | 3,123 |       
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                                                                          |                                            |                                           |       |      |       |       
|                                                 | Capital expenditures                                                                     |                                            |                                           | (441  | )    |       | (354  
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|                                                 |                                                                                          |                                            | Net cash used in investing activities     |       |      | (441  | )     
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                          |                                            | 2,682                                     |       |      | 1,291 |       
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR     |                                                                                          |                                            | 8,659                                     |       |      | 7,368 |       
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|CASH AND CASH EQUIVALENTS, END OF YEAR           |                                                                                          | $                                          | 11,341                                    |       | $    | 8,659 |       
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|SUPPLEMENTAL CASH PAYMENTS:                      |                                                                                          |                                            |                                           |       |      |       |       
|                                                 | Taxes                                                                                    |                                            | $                                         | 5     |      | $     | 2     
|                                                 |                                                                                          |                                            |                                           |       |      |       |       
|                                                 | Interest                                                                                 |                                            | $                                         |      |      | $     |      
|                                                 |                                                                                          |                                            |                                           |       |      |       |       

The
accompanying notes are an integral part of these financial statements.

F-7

---



AMERICAN BANK NOTE HOLOGRAPHICS, INC.    NOTES TO FINANCIAL STATEMENTS  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American
Bank Note Holographics, Inc. (the "Company" or "ABNH") was incorporated in the state of Delaware in August 1985. The Company was, until July 20, 1998 (the
"Offering Date"), a wholly-owned subsidiary of American Banknote Corporation (the "Former Parent" or "ABN").

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 accounting principles generally accepted in the United States, 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 (primarily government bonds) with a maturity of three months or less, when purchased, are considered to be cash
equivalents and are stated at cost, which approximates market.

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. At December 31, 2003 and for the year then ended one customer accounted for 30% of the Company's accounts receivable and 33% of its sales and a second
customer
accounted for 30% of the Company's accounts receivable and 9% of its sales. At December 31, 2002 and for the year then ended one customer accounted for 40% of the Company's accounts receivable
and 41% of its sales and a second customer accounted for 24% of the Company's accounts receivable and 11% of its sales. The Company establishes its credit policies based on an ongoing evaluation of
its customers' creditworthiness and competitive market conditions and does not require collateral.

InventoriesInventories
are stated at the lower of cost or market with cost being determined on the first-in, first-out (FIFO) method. The cost of
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 charged to cost of goods sold in
the period incurred.

Revenue
RecognitionThe Company recognizes revenue in accordance with the provisions of the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition." Specifically, 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 where 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, 2003 and 2002, accounts receivable from this customer approximated $1.0 million and $1.6 million, respectively.

F-8

---

At
both December 31, 2003 and 2002, customer advances approximating $0.1 million represent payments received from customers for products which have not yet been shipped.
These customer advances are classified as current liabilities on the accompanying balance sheets.

Effective
October 1, 2000, the Company adopted the Emerging Issues Task Force, ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs." Under the
provisions of EITF 00-10, shipping and handling amounts billed to customers are included in revenues and shipping and handling costs are included in selling and administrative expenses and
amounted to $358,000, $373,000, and $370,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

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.

Depreciation
and AmortizationMachinery and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives
ranging from 5 to 15 years.

Amortization
of leasehold improvements is computed using 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In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires obligations associated with the retirement of long-lived assets to be recorded as increases in costs of the related asset. Also, on October 3, 2001, the
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment or
Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 develops one accounting model for determining impairment based on the model in
SFAS No. 121, and for long-lived assets that are to be disposed of by sale, requires them to be recorded at the lower of book value or fair value less cost to sell. In addition,
SFAS No. 144 expands the scope of "discontinued operations." The new rules were applied prospectively beginning January 1, 2002.

During
the quarter ended December 31, 2002, the Company recorded a charge for the impairment of long-lived assets of $1.9 million to write off fixed assets
consisting of master plates which will no longer be used. The impairment charge, which was recorded under the requirements of SFAS No. 144, represents the full impairment of this
long-lived asset on our balance sheet. This asset arose through purchase accounting by the Company's Former Parent, as it related to the Company, in connection with the Former Parent's
merger in 1990. There was no impairment of long-lived assets in 2003.

GoodwillIn
July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which provides that goodwill should not be amortized but instead
tested for impairment on an annual basis, was adopted by the Company on January 1, 2002. The impairment testing is performed in two steps: (i) the determination of impairment, based on
the fair value of the Company compared with its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair
value of goodwill with the carrying amount of that goodwill. In accordance with SFAS No. 142 the Company completed the transitional impairment test during the quarter ended March 31,
2002, which testing indicated that no adjustment was required upon the adoption of the pronouncement. The Company performed the annual test for impairment required by SFAS No. 142 during the
quarter ended December 31, 2002. At that time the fair value (based on quoted market prices) of the Company was found to be less than its carrying amount and as

F-9

---

a
result, the Company recorded a $7.4 million impairment charge for the year ended December 31, 2002. This charge represents the full impairment of the goodwill on the Company's balance
sheet. This asset arose through purchase accounting by the Company's Former Parent, as it related to the Company, in connection with the Former Parent's merger in 1990.

As
a result of the adoption of SFAS No. 142, the amortization of goodwill ceased as of January 1, 2002. Had goodwill amortization been recorded in 2002, goodwill
amortization expense of $345,000 would have been included in the accompanying statement of operations for the year ended December 31, 2002.

The
2001 historical financial statements do not reflect the provisions of SFAS No. 142. Had the Company adopted SFAS No. 142 on January 1, 2001, net income and basic
and diluted net income per share for the year ended December 31, 2001, would have been as follows (in thousands, except per share data):

|                                                 |  | 2001
|------------------------------------------------ |  | ----
|Net income as reported                           |  | $   
|Add: Goodwill amortization                       |  |     
|                                                 |  |     
|Adjusted net income                              |  | $   
|                                                 |  |     
|Pro forma basic and diluted net income per share |  | $   
|                                                 |  |     

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 based on historical experience and are periodically reviewed and adjusted, when necessary. The Company's product warranty provision is included in accrued expenses in
the accompanying balance sheets. Changes in the Company's warranty provision during the years ended December 31, 2003, 2002 and 2001 are as follows (in thousands):

2003

2002

2001Balance at beginning of year

$
605

$
1,011

$
935Warranties provided


160


410


260Settlements made


(255
)

(816
)

(184
)Balance at end of year

$
510

$
605

$
1,011


Research
and DevelopmentResearch and development costs are expensed as incurred.

Income
TaxesThe Company accounts for income taxes under the liability method in accordance with 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In December 2002, FASB issued SFAS No. 148, "Accounting for Stock Based CompensationTransition and
Disclosurean amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,

F-10

---

"Accounting
for Stock Issued to Employees." In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company adopted
the disclosure requirements of SFAS No. 148 effective December 31, 2002. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method
of accounting 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.

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 2003, 2002 and 2001 net income (loss) and basic and diluted net income (loss) per share would have differed as reflected by the pro forma amounts indicated below (in thousands, except per
share data):

|                                                                                                                            |  | 2003 |       | 2002 |   | 2001  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------
|
|Net income (loss), as reported                                                                                              |  | $    | 1,007 |      | $ | (8,137
|Add: Non-cash employee compensation, as reported                                                                            |  |      |      |      |   |      
|Deduct: Stock-based employee compensation expense determined under fair value
    based method for all awards, net of taxes |  |      | 47    |      |   | 199   
|                                                                                                                            |  |      |       |      |   |       
|Pro forma, net income (loss)                                                                                                |  | $    | 960   |      | $ | (8,336
|                                                                                                                            |  |      |       |      |   |       
|Basic and diluted net income (loss) per share, as reported                                                                  |  | $    | 0.05  |      | $ | (0.44 
|                                                                                                                            |  |      |       |      |   |       
|Basic and diluted net income (loss) per share, pro forma                                                                    |  | $    | 0.05  |      | $ | (0.45 
|                                                                                                                            |  |      |       |      |   |       

Basic
and Diluted Net Income (Loss) per ShareBasic net income (loss) per share is computed based on the weighted average number of outstanding shares of common stock. The
basic weighted average number of shares outstanding were 18,483,720 for each of the years ended December 31, 2003, 2002 and 2001. Diluted net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common stock outstanding and dilutive potential shares of common stock. For the year ended December 31, 2003, the diluted number of
weighted shares outstanding was 18,525,914, which includes dilutive stock options of 42,194. For each of the years ended December 31, 2002 and 2001, the diluted weighted average number of
shares outstanding were 18,483,720. For the years ended December 31, 2002 and 2001, the effect of options to purchase 2,318,500 shares and 2,509,500 shares, respectively, of the Company's
common stock were excluded from the calculation of diluted net income (loss) per share because the effect of inclusion of such options would have been antidilutive. For the years ended
December 31, 2002 and 2001, the effect of warrants to purchase 863,647 shares and 215,912 shares, respectively, of the Company's common stock were excluded from the calculation of diluted net
income (loss) per share because the effect of inclusion of such warrants would have been antidilutive. The warrants expired on June 18, 2003.

Business
Concentration RisksSales to MasterCard were approximately 33%, 41% and 37% of sales for the years ended December 31, 2003, 2002 and 2001, respectively. At
December 31, 2003 and 2002, accounts receivable from MasterCard approximated $1.0 million and $1.6 million, respectively. The Company entered into an agreement with MasterCard
dated February 28, 2003, which replaced the agreement dated February 1, 1996, as amended. The Company and MasterCard entered into an amendment to this agreement on September 29,
2003, in which MasterCard retained the Company to

F-11

---

produce
a new hologram for the Debit MasterCard and extended the agreement to February 28, 2011, subject to automatic renewal if not terminated by either party. The agreement also provides that
MasterCard will receive three sequential price reductions of approximately 3% each, effective at the beginning of 2003, 2004 and 2006. The Company is currently the exclusive supplier to MasterCard.
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 30%, 26% and 23% of sales for the years ended December 31, 2003, 2002 and 2001,
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, 2003 and 2002, accounts receivable from these customers approximated $1.3 million and $1.5 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Export sales were 28%, 27% and 28% of sales for the years ended December 31, 2003, 2002 and 2001, respectively. All export sales are denominated in United
States dollars. At each of December 31, 2003 and 2002, accounts receivable from these customers approximated $0.5 million.

Comprehensive
IncomeIn 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes rules for the reporting of comprehensive income and
its components. For each of the years ended December 31, 2003, 2002, and 2001, there was no difference between the Company's net income (loss) and comprehensive income (loss).

Fair
Value of Financial InstrumentsThe Company's financial instruments consist of cash and cash equivalents, accounts receivables, accounts payable and accrued expenses. The
carrying amounts reported in the balance sheets approximate their fair value at both December 31, 2003 and 2002.

2.    INVENTORIES

December 31,2003

2002(In Thousands)Finished goods

$
800

$
1,226Finished goods on consignment with customers


417


377Work in process


764


455Raw materials


405


483Inventories

$
2,386

$
2,541


F-12

---

3.    MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

December 31,2003

2002(In Thousands)Machinery and equipment

$
10,583

$
10,205Leasehold improvements


1,145


1,08211,728


11,287Accumulated depreciation and amortization


9,238


8,505Machinery, equipment and leasehold improvements, net

$
2,490

$
2,782


Depreciation
and amortization of machinery and equipment and leasehold improvements for the years ended December 31, 2003, 2002 and 2001 were $733,000, $794,000 and $749,000,
respectively.

During
the quarter ended December 31, 2002, the Company recorded an asset impairment charge of $1.9 million to write off fixed assets consisting of master plates which will
no longer be used (see Note 1).

F-13

---

4.    ACCRUED EXPENSES

December 31,2003

2002(In Thousands)Accrued contract liability

$
357

$
357Warranty reserves


510


605Federal, state and local income taxes


61


66Salaries and wages


527


520Accrued professional fees


63


107Other


109


148$
1,627

$
1,803


5.    INCOME TAXES

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 allocation agreement. During 2000, the Company and the Former Parent reached an agreement, which provides, among other things that the Former Parent will be responsible for and shall pay all
asserted and unasserted income, franchise and similar tax liabilities of the Company for the period January 1, 1990 through July 20, 1998 and will indemnify the Company with respect to
any such liabilities. For periods subsequent to the Offering Date, the Company is filing its own U.S. Federal and state income tax returns.

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

Provision
for income taxes are as follows:

For the Years Ended
December 31,2003

2002

2001(In Thousands)Current:Federal

$


$


$
State and local














Deferred:Federal


573


655


423State and local


171


203


120744


858


543$
744

$
858

$
543


F-14

---

A
reconciliation of the taxes on income in 2003, 2002 and 2001 is as follows:

For the Years Ended
December 31,2003

2002

2001(In Thousands)Tax at statutory rate

$
613

$
(2,475
)
$
397Amortization and impairment of nondeductible goodwill and long-lived assets





3,161


122State and local taxes, net of Federal benefit


111


133


89Other


20


39


(65
)$
744

$
858

$
543


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

December 31,2003

2002(In Thousands)Current deferred tax assets:Uniform capitalization of inventory

$
230

$
228Bad debt reserve


76


89Warranty reserve


214


254Inventory obsolescence


173


492Accrued vacation


83


79Other liabilities


205


205Net current deferred tax asset

$
981

$
1,347Non current deferred tax asset:Net operating loss carryforward

$
108

$
574108


574Non current deferred tax liabilities:Excess tax over book depreciation


(1,316
)

(1,404
)Net non current deferred tax liability

$
(1,208
)
$
(830
)


At
December 31, 2003, the Company has net operating loss carryforwards of approximately $0.3 million, which expire through 2022, available to offset future Federal taxable
income. For the year ended December 31, 2003, the Company used net operating loss carryforwards of approximately $1.1 million to offset current Federal income taxes. Current or future
changes in ownership could limit the availability to use these net operating loss carryforwards.

7.    STOCKHOLDERS' EQUITY

On
June 11, 1998, the Company increased its authorized common stock to 30,000,000 shares and its authorized preferred stock to 5,000,000 shares. On July 20, 1998, 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. During 2001 and 2002 the
Company issued and distributed 1,460,000 shares of its common stock as well as warrants to purchase 863,647 shares of the

F-15

---

Company's
common stock, at an exercise price of $6.00 per share in settlement of the class action lawsuit filed against the Company in 1999. The warrants expired on June 18, 2003. None of the
warrants were exercised. On August 10, 2001, the Company's stockholders approved an amendment to the Company's Amended and Restated Articles of Incorporation increasing the number of authorized
shares of its common stock to 40,000,000 shares.

On
June 30, 2000, the Company entered into a Stock Purchase Agreement (the "Agreement") with Crane & Co., Inc. ("Crane"). Under the Agreement, the Company sold
3,387,720 shares of the
Company's common stock to Crane for an aggregate purchase price of $9,316,230. The Agreement also provides that the Board of Directors of the Company and the audit committee of the Board of Directors
each be expanded by one position, which was filled by Douglas A. Crane, a representative of Crane.

The
Agreement also contains a standstill provision, whereby Crane agreed, that, among other things, neither it nor its affiliates, except as otherwise provided for in the Agreement, will
acquire more than its current proportionate share of the outstanding securities of the Company. The standstill provision also provides that Crane will not offer, sell or transfer any of its voting
securities of the Company during a tender or exchange offer if such offer is opposed by the Company's Board of Directors.

During
2000, the Company entered into additional agreements with Crane under which the Company rents factory space and leases employees for the Company's facility in Dalton, MA. For the
years ended December 31, 2003, 2002 and 2001, the Company paid Crane under these agreements, $72,000 each year, for the rental of factory space and $162,000, $151,000 and $116,000,
respectively, for the leased employees, which are primarily included in cost of goods sold in the accompanying statements of operations. In addition, the Company paid Crane $5,700 for leasehold
improvements on the rental space for the year ended December 31, 2001. On February 28, 2003, the Company entered into a new agreement with MasterCard which entitles MasterCard to appoint
Crane as its second supplier to produce up to 20% of MasterCard's annual hologram requirements in coordination with the Company. In addition, the agreement allows MasterCard to appoint Crane as its
contingent supplier under certain circumstances.

8.    SETTLEMENT AGREEMENT

ABNH and Leonhard Kurz GmbH & Co. KG ("Kurz") entered into a Settlement Agreement dated as of July 1, 2002. Pursuant to the Settlement Agreement,
Kurz will make payments to ABNH totaling $900,000 over two years, with $300,000 paid upon settlement and the remainder payable in eight quarterly installments of $75,000 beginning in
October 2002 in exchange for a release from any past, present and future infringements of ABNH's demetallizing and hot-stamping patents except for a future use of a specific
interpretation of the demetallizing patents which is subject to a royalty based license. ABNH recorded such amounts as other income in the accompanying statement of operations in 2002, net of legal
expenses of $280,000 and imputed interest of $50,000.

9.    STOCK INCENTIVE PLANS

On August 4, 2000, the Company adopted the American Bank Note Holographics, Inc. 2000 Stock Incentive Plan (as amended, the "2000 Plan"), which was
subsequently approved by the Company's stockholders at the annual meeting on September 12, 2000. On July 20, 1998, the Company adopted the 1998 Stock Incentive Plan (as amended, the
"1998 Plan", and collectively with the 2000 Plan, the "Plans"). The Plans were adopted for the purpose of granting various stock incentives to officers, directors, employees and consultants of the
Company. The Board of Directors (or a committee

F-16

---

appointed
by the Board of Directors) has discretionary authority, subject to certain restrictions, to administer the Plans. The total number of shares reserved for issuance under the Plans are
3,213,000 shares of common stock. Options to purchase 390,000 shares of common stock are available for future grants at December 31, 2003 under the Plans. Options to purchase 2,823,000 shares
of common stock were outstanding under the Plans at December 31, 2003. Options to purchase an additional 15,000 shares of common stock were outstanding outside the Plans at December 31,
2003. The exercise price of options granted under the Plans 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 Plans
generally become vested and exercisable for up to 25% or 331/3% of the total optioned shares upon each succeeding anniversary of the date of grant. 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.

A
summary of the status of the Company's outstanding stock options as of December 31, 2003, 2002 and 2001 and changes during the years then ended follows:

|                                                                   |           | 2003 |           | 2002    |   | 2001
|------------------------------------------------------------------ | --------- | ---- | --------- | ------- | - | ----
|
|Outstanding, beginning of year                                     |           |      | 2,318,500 |         | $ | 2.55
|                                                                   | Granted   |      |           | 586,000 |   |     
|                                                                   | Forfeited |      |           | (66,500 | ) |     
|                                                                   |           |      |           |         |   |     
|Outstanding, end of year                                           |           |      | 2,838,000 |         |   | 2.19
|                                                                   |           |      |           |         |   |     
|Exercisable, end of year                                           |           |      | 2,170,251 |         |   | 2.54
|                                                                   |           |      |           |         |   |     
|Weighted average fair value of options
    granted during the year |           | $    | 0.78      |         |   |     
|                                                                   |           |      |           |         |   |     

The
following table summarizes information concerning outstanding and exercisable options at December 31, 2003:

Options Outstanding



Options ExercisableRange of
Exercise Prices

Options
Outstanding

Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

Options
Exercisable

Weighted
Average
Exercise
Price$0.68 - $1.18

607,000

9.54

$
0.95

9,334

$
1.03$1.67 - $1.9375

855,000

6.53

$
1.86

817,417

$
1.86$2.03125 - $2.50

1,233,833

5.83

$
2.31

1,201,333

$
2.31$8.50

142,167

4.55

$
8.50

142,167

$
8.50$0.68 - $8.50

2,838,000

6.77

$
2.19

2,170,251

$
2.54


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

2003

2002

2001Expected volatility

62.30%

63.10%

76.84%Risk-free interest rate

3.15% to 4.25%

3.63% to 4.02%

4.97% to 5.52%Dividend yield





Expected life

7.5 years

7.5 years

7.5 years


F-17

---

10.    EMPLOYEE BENEFITS PLANS

Retirement PlansOn October 1, 1999, the Company implemented defined contribution plans for its employees. Aggregate contributions to such
plans, which have been charged to the Company's operations, were approximately $56,000, $51,000 and $48,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

11.    COMMITMENTS AND CONTINGENCIES

During 1991 ABNH entered into a Patent License Agreement (the "License Agreement"), which required ABNH to pay royalties in connection with certain products that
ABNH produces. During 2002, the licensor under the License Agreement filed a lawsuit against ABNH in the United States District Court for the Eastern District of Washington, alleging breach of the
License Agreement. In December 2002, ABNH entered into a settlement agreement whereby ABNH paid $431,250 on December 31, 2002. The payment satisfied all obligations by ABNH to pay
royalties that may have been owed both for the past and the future under the License Agreement. ABNH recorded $231,250 as royalty expense in 2002, in the accompanying statements of operations to cover
allegedly past due royalties and $200,000 is being amortized over the remaining life of the patents, which expire in 2005 and 2007.

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, 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, 2003 and 2002, accruals for litigation matters approximated $15,000 and $10,000, respectively. The Company believes, based on
information known at December 31, 2003, that anticipated probable costs of litigation matters as of December 31, 2003 have been adequately provided to the extent determinable.

Indemnification
from Former ParentAs described in Note 5, during 2000, the Company and its Former Parent entered into an agreement, which, among other matters,
provide for the indemnification, under certain circumstances, of the Company by the Former Parent. The Former Parent has experienced significant financial difficulty, which may result in its inability
to perform under the terms of the indemnification provided, which could have a material adverse effect on the Company's financial position, results of operations and cash flows.

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.

Rental
expense was approximately $1.3 million each year for the years ended December 31, 2003, 2002 and 2001, respectively.

F-18

---

At
December 31, 2003, future minimum lease payments under noncancelable operating leases, expiring through 2007, are as follows: $1.0 million in 2004; $0.9 million
in 2005; $0.9 million in 2006; and $0.8 million in 2007.

Employment
AgreementsThe Company entered into employment agreements with certain of its current officers, which provide for, among other matters, minimum compensation of
approximately $421,000 in 2004 and $328,000 in 2005. The agreements also provide for bonuses. In connection with these agreements, the Company granted options to acquire 1,553,000 shares of its common
stock from February 1999 through December 2003, at prices ranging from $0.85 to $2.50 per share, representing the fair market value of the Company's common stock on the dates of grants.

F-19

---



Schedule II

AMERICAN BANK NOTE HOLOGRAPHICS, INC.    VALUATION AND QUALIFYING ACCOUNTS  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                              |                                                                     |  |   | Additions |  |   |     | 
|----------------------------- | ------------------------------------------------------------------- |  | - | --------- |  | - | --- | 
|
|
|Year ended December 31, 2003: |                                                                     |  |   |           |  |   |     | 
|                              | Allowance for doubtful accounts (deducted from accounts receivable) |  | $ | 210       |  | $ |    | 
|                              |                                                                     |  |   |           |  |   |     | 
|                              | Allowance for obsolescence (deducted from inventory)                |  | $ | 1,171     |  | $ | 124 | 
|                              |                                                                     |  |   |           |  |   |     | 
|Year ended December 31, 2002: |                                                                     |  |   |           |  |   |     | 
|                              | Allowance for doubtful accounts (deducted from accounts receivable) |  | $ | 75        |  | $ | 160 | 
|                              |                                                                     |  |   |           |  |   |     | 
|                              | Allowance for obsolescence (deducted from inventory)                |  | $ | 725       |  | $ | 710 | 
|                              |                                                                     |  |   |           |  |   |     | 
|Year ended December 31, 2001: |                                                                     |  |   |           |  |   |     | 
|                              | Allowance for doubtful accounts (deducted from accounts receivable) |  | $ | 75        |  | $ | 17  | 
|                              |                                                                     |  |   |           |  |   |     | 
|                              | Allowance for obsolescence (deducted from inventory)                |  | $ | 678       |  | $ | 300 | 
|                              |                                                                     |  |   |           |  |   |     | 

---

S-1

---

QuickLinks