<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

       For the fiscal year ended December 31, 2000

                                       OR

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

       For the transition period of _______ to _______

                           Commission File No. 1-14227

                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

             (Exact Name of Registrant as Specified in Its Charter)


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


                 399 EXECUTIVE BOULEVARD
                       ELMSFORD, NY                                                  10523
         (Address of Principal Executive Offices)                                 (Zip Code)
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                                 (914) 592-2355

              (Registrant's telephone number, including area code)

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

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

                                (Title of Class)

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

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

         The aggregate market value of the common stock, $.01 par value, held by
non-affiliates of the registrant on March 23, 2001 was $27,474,178.

         The aggregate number of shares of common stock, $.01 par value,
outstanding on March 15, 2001 was 17,388,720.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE
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                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.


                                 2000 Form 10-K


                                TABLE OF CONTENTS




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<S>                                                                                                             <C>
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............................................20

Part II

Item 5.           Market for Registrant's Common Equity and Related Stockholder Matters..........................21
Item 6.           Selected Financial Data........................................................................23
Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations......................................................................24
Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.....................................33
Item 8.           Financial Statements and Supplementary Data....................................................33
Item 9.           Changes In and Disagreements With Accountants on
                  Accounting and Financial Disclosure............................................................33

Part III

Item 10.          Directors, Executive Officers and Key Employees of Registrant..................................35
Item 11.          Executive Compensation.........................................................................38
Item 12.          Security Ownership of Certain Beneficial Owners and Management.................................43
Item 13.          Certain Relationships and Related Transactions.................................................44

Part IV

Item 14.          Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................46

Index to Financial Statements...................................................................................F-1
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                                     PART I


ITEM 1. BUSINESS.

American Bank Note Holographics, Inc. ("ABNH") originates, mass-produces and
markets holograms. Our holograms are used primarily for security applications
such as counterfeiting protection for credit and other transaction cards,
identification cards and documents of value, as well as for tamper resistance
and authentication of high-value consumer and industrial products. Our ability
to control the diffraction of light ("origination") using proprietary processes
in a secure, controlled manufacturing environment has enabled us to become a
market leader in security holography. Our products are used by over 150
companies worldwide, including MasterCard, VISA, American Express, Discover,
Diners Club, Europay, Nordstrom and Eli Lilly, as well as agencies of the United
States government and certain foreign governments. We also produce non-secure
holograms for packaging and promotional applications.

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

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

         -        our expertise in holographic technology and production,

         -        our extensive patent portfolio,

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

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

THE HOLOGRAPHY INDUSTRY

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

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

SECURITY

The security sector of the holography industry includes transaction cards,
documents of value, product authentication, security packaging and transparent
laminates. Holography, combining art and science, allows each customer to
develop its own unique hologram with which to identify and protect its product.
Holograms provide the following major benefits as security devices:


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

         -        covert features - the three-dimensional imagery, combined with
                  various proprietary hidden microscopic or machine-readable
                  security features, makes exact duplication and replication of
                  holograms extremely difficult and presents substantial
                  obstacles to counterfeiting,

         -        production - a high degree of skill and capital investment is
                  required to replicate high quality security holograms which
                  provides another obstacle to counterfeiting, and

         -        application - the hologram can be applied to the product to be
                  protected in various ways to achieve other security objectives
                  such as tamper protection, sealing, and defense against
                  counterfeiting and diversion.

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.

NON-SECURITY

The non-security sector of the holography 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 certain advertising. 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. The manufacturing processes utilized
for the creation of non-secure holograms are generally not as complex, secure or
proprietary as those used in creating 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 typically distinguish between suppliers primarily based upon price,
quality and production capacity.

MARKETS AND PRODUCTS

We have six target markets, and we have developed several 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:


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Holographic hot stamp foil. Our core market since our inception has been
security holograms embossed onto hot stamp foil, for credit card authentication.
Our customers in this market include MasterCard, Visa, American Express,
Europay, Discover, Diner's Club, as well as many of the major printers of
security cards.

HoloCard(TM). We have started to market larger full-faced holograms to support
the marketing and design objectives, as well as security of our customers. The
Nordstrom holograms that we designed are examples of this trend. We have
recently developed a novel technique for producing very attractive full-faced
holographic cards that offers production and design advantages to the card
industry.

HoloMag(TM). We have a patent on the concept of combining a hologram with the
magnetic stripe, which is typically found on the back of the card. HoloMag is a
new product that has significant security advantages for card issuers since it
is very difficult to replicate and it addresses the issue of data skimming off
of the magnetic tape which is currently a major security problem in the card
industry. It is also attractive to issuers because it efficiently utilizes the
real estate on the card to support the brand and the message of the card issuer.

DOCUMENTS OF VALUE. Concerns over counterfeiting and copying have led to an
increased use of holograms on documents of value, including currency, cheques,
gift certificates, stamps, tickets and other financial instruments. We believe
that an increasing number of countries are using holograms in their currencies
and we expect the market for holograms on currency to continue to grow. Our
products include:

Holographic thread. We produce security threads with our proprietary casting
process. This process provides significant advantages for brighter and more
durable threads compared to other methods of holographic embossing. The thread
offers significant security advantages and it can be incorporated into documents
of value such as a bank note either during the paper making process or the
printing process.

Holographic Ribbons. Ribbons are wider than threads and can also be applied to
the document either during the paper making process or the printing process.

Holographic Patch. Holograms are embossed onto hot stamp foil in shapes and
designs similar to the holograms that we typically supply for credit cards, and
are applied to documents of value typically by the security printer.

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

Labels. We supply holographic pressure sensitive labels, hangtags and foils to
be applied to consumer and industrial products for brand protection and product
authentication.


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HoloMold(TM). We have recently developed HoloMold based on our patented
technology to embed holograms directly into plastic products as part of the
injection molding process. This process further reduces cost, accelerates
production schedules, and makes counterfeiting extremely difficult.

HoloSeal(TM). HoloSeal is our patent pending product that combines unique
holographic features, blacklight verification and tamper apparent features into
a single label. HoloSeal is highly complex to replicate yet easy to verify in
the field.

SECURITY PACKAGING. We market a wide range of security packaging solutions that
provide tamper resistance, authentication and design options to our customers.
Our security packaging applications are designed to provide effective solutions
for manufacturers and marketers of packaged goods to protect their products
against counterfeiting, tampering and diversion. Our products include:

HoloCap(TM). HoloCap is our new patent pending approach to seal bottles or
containers with a higher level of security. We are working together with Unipac
Corporation, a leading provider of cap seals, to market this product to the
bottled goods and packaging industries.

HoloSeal(TM). HoloSeal is our new patent pending product that combines unique
holographic features, blacklight verification and tamper apparent features into
a single label. HoloSeal is highly complex to replicate, yet easy to verify in
the field. HoloSeal can be used for product authentication purposes as described
above, or for security packaging when it is used to seal a package.

TRANSPARENT LAMINATES. We provide heat and pressure activated laminates used to
authenticate ID cards, passports or other documents. Often these laminates are
demetallized with our patented technologies so that selected areas of the
hologram are transparent and printed information is visible underneath. Our
products include:

ID Cards. We currently supply transparent laminates for certain US government ID
cards as well as national IDs for China and other countries.

Passports. We have recently developed a product for passport laminates that
combine some of the technologies of our traditional ID laminates with certain
features of HoloSeal.

COMMERCIAL. We produce holograms for design, packaging and other decorative
applications. Our products include:

HoloMold(TM). We have recently developed HoloMold based on our patented
technology to embed holograms directly into plastic products as part of the
injection molding process. HoloMold is a very attractive and efficient way to
enhance the design of a wide variety of consumer products such as beverage
containers, CD cases, portable consumer electronics and toys.

Pressure Sensitive Labels. We design unique and attractive images that can
support the marketing and promotional objectives of our customers.

Packaging. Our proprietary Wide Web casting capabilities enable the production
of very bright and attractive imagery for holographic packaging applications.


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STRATEGY

In 2000, we continued to implement the strategy that we began in 1999 including
the following components:

STRENGTHEN FINANCIAL POSITION. In early 1999, we were in default on bank debt,
and we had very limited liquidity. Our objective was to improve our capital
structure. By the end of 2000, we had no debt and $7.9 million in cash. We
believe this improvement to our capital structure gives us additional
flexibility to invest in the business for the long term.

PROTECT AND ENHANCE OUR POSITION IN OUR CORE TRANSACTION CARD BUSINESS. We hold
a leadership position in the market for holograms on transaction cards as a
result of our relationships with companies such as MasterCard, VISA, Europay,
Diners Club, Discover, American Express and many of the major security card
manufacturers. We intend to maintain our leadership position in this market and
grow through the distribution of new products that address the security needs
and design objectives of this market.

DEVELOP NEW PRODUCTS AND MARKETS. We are a leading innovator in the origination
and mass production of secure holograms and we expect to continue to emphasize
the development of new technologies and products for our target markets. During
2000 we launched several new products and we are marketing those products as
solutions to critical problems in our target markets.

PROTECT AND LEVERAGE OUR INTELLECTUAL PROPERTY POSITION. We believe our patent
portfolio is very valuable and we intend to leverage our intellectual property
and patent rights. We intend to continue to protect our intellectual property
and enforce our patent rights.

GROW THROUGH STRATEGIC PARTNERSHIPS. During 2000 we entered into a strategic
partnership with Crane & Co. and we intend to continue pursuing strategic
partnerships or acquisitions that will 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 two ISO certified security production facilities
containing a total of nine origination laboratories and 17 mass replication
lines as well as extensive security and quality control procedures. We also have
a large and sophisticated distribution network for secure holographic products.

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

        DESIGN

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


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        ORIGINATION

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

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

The object beam then interferes with the reference beam, creating an
interference pattern which is recorded on the light sensitive photo-resist
glass. After developing the photo-resist glass, the film is re-illuminated
approximating the original angle(s) of the reference beam. The resulting
interference pattern within the film reflects some of the light, striking it
into a re-creation of the pattern of light that originally came from the object
beam, due to a property of light called diffraction. The reflected light, now
organized and containing all information that the object beam once carried,
allows the viewer to see all of the information in three dimensions, true color
or with other desired effect.

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

        PLATE MAKING

Once the origination process is completed, a plate is created in order to permit
mass production. The "one-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 proprietary plate making process is an important component
of our ability to mass produce our secure holograms.

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

        MASS PRODUCTION

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



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

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

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

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 invest in research and
development in order to develop better solutions for our customers' problems and
better methods of making our products.

MANUFACTURING FACILITIES

See "Item 2. Properties."

SALES AND MARKETING

In 2000, we provided holographic products to over 150 customers worldwide. We
are the exclusive supplier of holograms to MasterCard and we are one of only two
authorized manufacturers of VISA holograms for sale to approved manufacturers of
VISA cards. In addition, we supply holograms to American Express, Diners Club,
Discover, Europay, Nordstrom, agencies of the United States government, other
governments and numerous other companies.

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

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

COMPETITION

The holography industry is highly competitive and highly fragmented. A number of
our competitors are larger or are divisions of larger companies, and have
greater financial resources, than us. In the holography industry, competition is
generally based on technology, price, product quality and customer service. We


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also compete with other non-holographic methods or devices. We believe our
position in the security sector of the holography market is attributable to our
experience, reputation and expertise in the design, origination and mass
production of secure holograms.

TRADEMARKS AND PATENTS

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

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

EMPLOYEES

As of March 15, 2001, we employed approximately 111 persons, of which 61 are
covered by collective bargaining agreements. We consider our relations with our
employees to be good.

RISK FACTORS

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

In addition to other information in this Annual Report on Form 10-K, the
following risk factors should be carefully considered in evaluating 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:

         -        customers' promotions,

         -        card expiration patterns,

         -        the size, timing and recognition of revenue from significant
                  orders,

         -        inventory replenishment,

         -        increased competition,

         -        changes in our and our competitors' pricing policies,


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         -        changes in the cost of materials or labor,

         -        increased R&D expenses,

         -        expenses associated with stockholder litigation and government
                  investigations,

         -        financing costs,

         -        market acceptance of our products,

         -        changes in our business strategy, and

         -        general economic factors.


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.


WE DEPEND ON CREDIT CARD MANUFACTURERS FOR A SUBSTANTIAL PORTION OF OUR
BUSINESS.

During both 2000 and 1999, sales to credit card companies accounted for
approximately 71% of our total sales, including MasterCard and approved
manufacturers of VISA brand credit cards, which together accounted for
approximately 47% and 45% of our total sales in 2000 and 1999, respectively.
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, there would be a material adverse effect on our business, financial
condition and results of operations. See "Item 1. Business - Sales and
Marketing." We provide holograms to MasterCard pursuant to an agreement, which
expires in February 2003, subject to automatic renewal if not terminated by
either party. During 1999, MasterCard informed us that it believes that ABNH
breached certain terms of the agreement in 1997 and 1998. We have been working
closely with MasterCard to address issues raised by MasterCard, and we believe
we have a good relationship with MasterCard. Failure to obtain anticipated
orders or delays or cancellations of orders or significant pressure to reduce
prices from key customers could have a material adverse effect on our future
financial performance.

WE DEPEND ON SINGLE SUPPLIERS FOR SOME KEY PRODUCT COMPONENTS.

We have historically purchased certain key materials used in the manufacture of
our holograms from single suppliers with which we do not have supply contracts.
Although we seek to reduce our dependence on these sources, we may not be able
to find alternative sources in a timely manner if our suppliers become unwilling
or unable to supply us, or if they increase their prices. Our inability to
obtain components could cause delays or reduce product shipments, which could
cause our relationship with customers to suffer and our revenues to decline.

WE HAVE BEEN INVESTIGATED BY THE SECURITIES AND EXCHANGE COMMISSION AND THE U.S.
ATTORNEY'S OFFICE.

On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation in connection with matters giving rise to
the need to restate our previously issued financial statements for the years
ended December 31, 1997 and 1996 and first three quarters of 1998 that were
filed by former management. The SEC has concluded its investigation of ABNH and
has accepted our offer of settlement. On March 16, 2001, the Commissioners of
the SEC approved an order making findings and imposing a cease and desist order
on any future violations of Section 17(a) of the Securities Act, Sections 10(b),
13(a), 13(b)(2)(A) and (B), and 30A of the Exchange Act, and Exchange Act Rules
10b-5, 12b-20, and 13a-13. Without admitting or denying any liability, we agreed
to pay a $75,000 fine to the SEC


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because certain former senior ABNH officers allegedly violated provisions of the
Foreign Corrupt Practices Act. The fine was recorded as a charge to the
statement of operations in the fourth quarter of 2000. It is anticipated that
the order will be approved and filed by the Secretary of the SEC in the near
future.

The U.S. Attorney's Office for the Southern District of New York has also
commenced an investigation in connection with matters giving rise to the need to
restate our previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act by certain former senior
ABNH officers. We have been advised that ABNH is not a target of the
investigation and we do not, therefore, anticipate any action being taken
against ABNH by the United States Attorney's Office.
See "Item 3. Legal Proceedings."

OUR COMMON STOCK CURRENTLY TRADES ON THE OTC BULLETIN BOARD.

Our common stock was suspended from trading on the New York Stock Exchange in
August 1999. Current pricing information on our common stock has been available
on the NASD 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:

         -        a loss of market makers,

         -        a lack of readily available bid and ask prices,

         -        a greater spread between the bid and ask prices of its stock,
                  and

         -        a general loss of liquidity compared to established stock
                  exchanges or the Nasdaq National Market

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.


WE MAY NOT BE ABLE TO CONTINUE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES.

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

         -        engineering,

         -        management,

         -        manufacturing,

         -        research and development,

         -        sales and marketing, and

         -        support personnel.

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.


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

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

         -        technology,

         -        price,

         -        product quality, and

         -        customer service.

In addition, an increased use of non-holographic methods or devices in place of
our products could reduce demand for our products. A number of our competitors
are larger than us or are divisions of larger companies, and have greater
financial resources, than us. Although we believe that we have certain technical
and other advantages over some of our competitors, maintaining these advantages
will require us to continue to invest in research and development, sales,
marketing and service. We cannot assure you that we will have sufficient
resources to continue to make these investments or that we will be able 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.

WE MAY NOT BE ABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY.

Our success is heavily 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.
There can be no assurance that we will be able to maintain the confidentiality
of our trade secrets or that our confidentiality agreements will provide
meaningful protection of our trade secrets or other proprietary information. See
"Business -- Trademarks and Patents." In addition, litigation may be necessary
in the future to enforce our intellectual property rights or to determine the
validity and scope of our patents or of the proprietary rights of others. Such
litigation might result in substantial costs and diversion of resources and
management attention.

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
suffer other harm to our business. If litigation is successful against us, it


                                      -13-
<PAGE>   14
could result in invalidation of our proprietary rights and liability for
damages, which could have a harmful effect on our business.

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

We provide holograms in connection with a wide range of our customers' products,
in which case it is possible that we are subjecting ourselves to product
liabilities in association with those products or in connection with the
holograms used with those products. Although we maintain product liability
insurance, there can be no assurance that such insurance would be available to
cover any such claim or available in amounts sufficient to cover all potential
liabilities.

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

In 2000 and 1999, 31% and 32%, respectively, of our sales were derived from
customers outside the United States. All export sales are denominated in U.S.
dollars. International sales are subject to risks, including:

         -        United States and international regulatory requirements and
                  policy changes,

         -        political and economic instability,

         -        difficulties in accounts receivable collection,

         -        tariffs and other barriers, and

         -        difficulty in attracting, retaining and managing international
                  representatives.

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

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

Our operations are subject to federal, state and local environmental laws and
regulations. If we fail to comply with applicable rules and regulations, we
could be subject to monetary damages and injunctive action, which could
materially and adversely affect our business, financial condition or results of
operations. We believe that we are currently in material compliance with
applicable laws and regulations. However, to the extent future laws and
regulations are adopted or interpretations of existing laws and regulations
change, new requirements may be imposed on our future activities or may create
liability retroactively.

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

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


                                      -14-
<PAGE>   15
THE EXERCISE OF OUTSTANDING WARRANTS OR PRE-EMPTIVE RIGHTS 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 SHARES.

As of March 15, 2001, we had approximately 17,389,000 common shares issued and
outstanding and we had approximately 3,336,000 additional common shares reserved
for issuance upon exercise of the warrants and outstanding stock options.
Additionally, as part of the settlement of the class action litigation, we are
committed to issue 1,460,000 share of our common stock, of which 365,000 have
already been issued. The warrants and our outstanding stock options also contain
or are subject to various anti-dilution and similar provisions which may require
us to issue additional common stock. If these securities are converted or
exercised, you may experience significant dilution in the market value of our
common stock. If all of the warrants that we are required to issue were
exercised as of March 15, 2001, the holders of the warrants would acquire
approximately 864,000 shares of our common stock at a price of $6.00 per share.
If these holders were to sell all or a substantial amount of these shares into
the open market, the sales could have a negative effect on the market price of
our common stock. The sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a price we deem
appropriate.

Additionally, on June 30, 2000, we entered into a Stock Purchase Agreement with
Crane & Co., Inc. Under the agreement, Crane has the right to purchase its
proportionate share of certain new issuances of our securities. If we issue
securities in the future and Crane exercises a preemptive right that it might
have, you could be subject to dilution. Also, in connection with the settlement
of any litigation that was outstanding as of June 29, 2000, which includes the
issuance of the shares and the warrants in connection with the settlement of the
consolidated class action, Crane will be allowed to purchase its proportionate
share of our common stock at a price of $3.35 per share.

OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS HAVE SUBSTANTIAL
CONTROL OVER ALL MATTERS REQUIRING STOCKHOLDER APPROVAL, INCLUDING A CHANGE OF
CONTROL THAT YOU MIGHT OTHERWISE APPROVE.

Our executive officers and directors and entities affiliated with them, in the
aggregate, beneficially own approximately 20.7% of our common stock as of March
15, 2001, which includes 18.3% owned by Crane & Co., Inc., an investor
affiliated with 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. In addition, they may dictate the management of
our business and affairs. 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. See "Item 12.
Security Ownership of Certain Beneficial Owners and Management."

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF ABNH.

         -        discourage potential acquisitions proposals,

         -        delay or prevent a change in control, and

         -        limit the price that investors might be willing to pay in the
                  future for shares of our common stock.


In particular, our board of directors may issue up to 5,000,000 shares of
preferred stock with rights and privileges that might be senior to our common
stock, without the consent of the holders of the common stock. We are also
subject to Section 203 of the Delaware General Corporation Law which generally


                                      -15-
<PAGE>   16
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-
<PAGE>   17
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.

Our 30,000 square foot leased facility at Huntingdon Valley, Pennsylvania is
dedicated to the production of security holograms.

Our 2,400 square foot leased facility at Dalton, Massachusetts was opened in
2000 and is also dedicated to the production of security holograms.

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


ITEM 3.           LEGAL PROCEEDINGS.

On February 9, 1999, the Division of Enforcement of the SEC issued a Formal
Order Directing Private Investigation in connection with matters giving rise to
the need to restate our previously issued financial statements for the years
ended December 31, 1997 and 1996 and the first three quarters of 1998 that were
filed by former management. The SEC has concluded its investigation of ABNH and
has accepted our offer of settlement. On March 16, 2001, the Commissioners of
the SEC approved an order making findings and imposing a cease and desist order
on any future violations of Section 17(a) of the Securities Act, Sections 10(b),
13(a), 13(b)(2)(A) and (B), and 30A of the Exchange Act, and Exchange Act Rules
10b-5, 12b-20, and 13a-13. Without admitting or denying any liability, we agreed
to pay a $75,000 fine to the SEC because certain former senior ABNH officers
allegedly violated provisions of the Foreign Corrupt Practices Act. The fine was
recorded as a charge to the statement of operations in the fourth quarter of
2000. It is anticipated that the order will be approved and filed by the
Secretary of the SEC in the near future.

The U.S. Attorney's Office for the Southern District of New York also commenced
an investigation in 1999 in connection with matters giving rise to the need to
restate our previously issued financial statements, as well as a possible
violation in 1998 of the Foreign Corrupt Practices Act by former senior ABNH
officers. We have been advised that ABNH is not a target of the investigation
and we do not, therefore, anticipate any action being taken against us by the
United States Attorney's Office.

A consolidated class action complaint against ABNH, certain of its former
officers and directors, its Former Parent, the four co-lead underwriters of the
Offering and its previous auditors, had been filed in the


                                      -17-
<PAGE>   18
United States District Court for the Southern District of New York (the
"Court"). The complaint alleges violations of the federal securities laws and
seeks to recover damages on behalf of all purchasers of ABNH's Common Stock
during the class period (July 15, 1998 through February 1, 1999). The complaint
seeks rescission of the purchase of shares of ABNH's Common Stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorney's fees. In October 2000, ABNH, all other defendants and the
plaintiffs entered into a definitive agreement to settle all of the claims that
are the subject of the class action, as well as claims asserted against the
Former Parent and other defendants in a separate class action. The settlement
agreement received the final approval of the Court on December 15, 2000. The
approval of the Bankruptcy Court for the Southern District of New York in which
the Chapter 11 proceeding of the Former Parent is pending has already been
given. Under the settlement, the insurance carrier for ABNH and the Former
Parent paid $12,500,000, the previous auditors paid $2,350,000 and ABNH will
issue and distribute 1,460,000 shares of its common stock as well as warrants to
purchase 863,647 shares of ABNH's common stock, at an exercise price of $6.00
per share. All of the shares, which will be issued in 2001 (365,000 have been
issued through March 15, 2001), have been included in shares outstanding in the
accompanying financial statements. The warrants will be exercisable for a 30
month period commencing on December 15, 2000. The Former Parent will also issue
and distribute certain of its securities as part of the settlement. In regard to
the settlement, ABNH recorded a charge to its statement of operations in the
fourth quarter of 2000 of $3,356,000. Such charge was comprised of the market
price of ABNH's common stock issued at the closing price of the stock on the day
of final settlement, the value of the warrants issued, which value was
determined using the Black-Scholes option pricing model and other related costs.

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

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

In 1998, ABNH fulfilled an order for holograms for approximately $600,000. In
1999, the customer alleged that ABNH breached its contract with such customer
based on problems that the ultimate user was experiencing with the holograms,
and claimed potential damages in excess of $6 million. On May 29, 2000 ABNH
entered into a settlement with the customer under which ABNH will provide a
product credit which the customer may apply against future invoices on certain
products sold to it by ABNH. The parties also exchanged general releases of all
claims. ABNH recorded a $775,000 warranty reserve during the first quarter of
1999, in regard to this matter, which ABNH considers to be a reasonable estimate
of the cost of the settlement. In the third quarter of 2000 ABNH's insurance
carriers agreed to pay $750,000 to ABNH as a product liability reimbursement on
this matter.


                                      -18-
<PAGE>   19
We currently and from time to time are involved in litigation (as both plaintiff
and defendant) incidental to the conduct of our business; however, other than
the shareholder litigation described above, we are not a party to any lawsuit or
proceeding which, in our opinion, is likely to have a material impact on our
financial position, results of operations or cash flows.


                                      -19-
<PAGE>   20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.


                                      -20-
<PAGE>   21
                                    PART II

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

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

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

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

Following the suspension of trading of our common stock on the NYSE, our common
stock has been traded in the over-the-counter market. From August 3, 1999 until
March 30, 2000, our common stock pricing information could be found in the "pink
sheets" published by National Quotation Bureau, LLC. Since March 31, 2000,
shares of our common stock have been quoted on the NASD's Over-the-Counter
Bulletin Board quotation service under the symbol "ABHH." 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 1999 during which it has traded on the
over-the-counter market.

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

2000
First Quarter                                                  $ 3.48                   $ 1.69
Second Quarter                                                   3.25                     1.59
Third Quarter                                                    2.31                     1.75
Fourth Quarter                                                   2.13                     1.09

2001
First Quarter (through March 23, 2001)                         $ 2.03                   $ 1.22
</TABLE>


                                      -21-
<PAGE>   22
During 2000, we issued an aggregate of 365,000 shares of our common stock and
warrants to purchase an aggregate of 215,910 shares of our common stock (we are
obligated to issue an additional 1,095,000 shares of our common stock and
warrants to purchase 647,737 shares of our common stock) in connection with the
settlement of a consolidated class action complaint against ABNH after the
plaintiffs' lawyers had delivered an allocation schedule to us. This
distribution was made in accordance with the exemption from registration
provided under Section 3(a)(10) of the Securities Act. See "Item 3. Legal
Proceedings."

As of March 23, 2001, there were approximately 60 holders of record of our
common stock. Because many of our shares of common stock are held of record by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of beneficial stockholders represented by these record
holders.

We have not paid cash dividends during the past two fiscal years. We have no
plans or intentions of paying dividends in the foreseeable future.


                                      -22-
<PAGE>   23
ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                 ------------------------------------------------------------
                                                   1996        1997        1998          1999        2000 (c)
                                                 -------     -------     --------      --------      --------
<S>                                              <C>         <C>         <C>           <C>           <C>
STATEMENT OF INCOME DATA:
   Revenue:
     Sales (a) .............................     $28,093     $23,560     $ 29,203      $ 21,194      $ 19,029
     Royalty income ........................         128         785          554           535           444
                                                 -------     -------     --------      --------      --------
                                                  28,221      24,345       29,757        21,729        19,473
   Costs and expenses:
     Cost of goods sold ....................      14,097      11,619       18,727        11,247         8,876
     Selling and administrative (a) (b) ....       5,288       6,288        6,825         9,803         8,085
     Research and development ..............         613         534          337           261           928
     Depreciation and amortization .........       1,141       1,136        1,080         1,026         1,076
                                                 -------     -------     --------      --------      --------
                                                  21,139      19,577       26,969        22,337        18,965
                                                 -------     -------     --------      --------      --------

   Operating income (loss) .................       7,082       4,768        2,788          (608)          508

  Other income (expense):
     Other income ..........................          68          36         --              24            --
     Interest, net .........................         305         146         (400)         (985)         (512)
     Settlement with Former Parent .........          --          --           --            --           519
     Settlement of shareholder litigation ..          --          --           --            --        (3,508)
                                                 -------     -------     --------      --------      --------

   (Loss) income before provision for
      (benefit from) income taxes ..........       7,455       4,950        2,388        (1,569)       (2,993)
   Provision for (benefit from) income taxes       3,117       2,130        1,269          (494)       (1,110)
                                                 -------     -------     --------      --------      --------

   Net (loss) income .......................     $ 4,338     $ 2,820     $  1,119      $ (1,075)     $ (1,883)
                                                 =======     =======     ========      ========      ========

   Net (loss) income per share:
     Basic and diluted .....................     $  0.32     $  0.21     $   0.08      $  (0.08)     $  (0.12)

   Weighted average shares outstanding:
     Basic .................................      13,636      13,636       13,636        13,636        15,421
     Diluted ...............................      13,636      13,636       13,701        13,636        15,421
</TABLE>

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                 ------------------------------------------------------------
                                                   1996        1997        1998          1999          2000
                                                 -------     -------     --------      --------      --------
<S>                                              <C>         <C>         <C>           <C>           <C>
BALANCE SHEET DATA:
   Working capital .........................     $ 9,431     $ 8,684     $  2,023      $  2,051      $ 10,377
   Total assets ............................      27,742      27,515       30,820        22,425        29,134
   Total debt ..............................          --         674        5,968         1,268            --
   Total stockholders' equity ..............      22,434      21,165       14,530        13,455        23,988
</TABLE>

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


                                      -23-
<PAGE>   24
(a)      Sales have been adjusted for each year presented to reflect the
         reclassification of shipping charges billed to customers, which were
         previously netted in selling and administrative expenses.

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

(c)      During the year ended December 31, 2000 we incurred costs of $3.4
         million regarding the settlement of the shareholder litigation, and
         $0.1 million in connection with costs incurred regarding the SEC and US
         Attorney investigations. In addition, we reversed $0.5 million from
         accounts payable and accrued expenses resulting from a settlement,
         which we entered into with our former parent. These costs are included
         in other income (expense) on the accompanying statement of operations.
         Additionally in the third quarter of 2000, our insurance carriers
         agreed to pay us $750,000 as a product liability reimbursement, which
         we included in cost of sales.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

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

OVERVIEW

ABNH was, until July 20, 1998, a wholly-owned subsidiary of ABN. On that date,
ABN completed the sale of 13,636,000 shares of our common stock in a public
offering, representing ABN's entire investment in ABNH. We did not receive any
proceeds from the IPO.

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 credit card security
applications generally carry higher gross margins than sales for other
applications.

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

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,
2000, 1999 and 1998 were approximately 28%, 27%, and 30%, respectively. We are
the exclusive supplier of holograms to MasterCard pursuant to an agreement, as
amended, that extends until February 2003. The


                                      -24-
<PAGE>   25
agreement provides for automatic two-year renewal periods if not terminated by
either party. During 1999, we were informed by MasterCard that it believes that
we breached certain terms of the agreement in 1998 and 1997. We have been
working closely with MasterCard to address issues raised by MasterCard, and
believe our relationship with MasterCard is good. Sales to VISA card
manufacturers were approximately 19%, 18%, and 26%, respectively, of sales for
the years ended December 31, 2000, 1999 and 1998. We do not have long-term
purchase contracts with VISA and we supply holograms to approximately 50 VISA
authorized card manufacturers pursuant to purchase orders. Currently we are one
of two companies authorized to manufacture and sell VISA brand holograms to
manufacturers of VISA brand credit cards. If either MasterCard or VISA were to
terminate its respective relationship with us or substantially reduce their
orders, there would be a material adverse effect on our business, financial
condition, results of operations and cash flows.

Holograms are sold under purchase orders and contracts with customers. Sales and
the related cost of goods sold are generally recognized at the latter of the
time of shipment or when title passes to customers. In some situations, we have
shipped product with the right of return where we are unable to reasonably
estimate the level of returns and/or the sale is contingent upon the customers'
use of the product. In these situations, we do not recognize sales upon product
shipment, but rather when the buyer of the product informs us that the product
has been used. Additionally, pursuant to terms with a certain customer,
completed items are stored on behalf of the customer at our on-site secured
facility and, in that instance, sales are recognized when all of the following
have occurred: the customer has ordered the goods, the manufacturing process is
complete, the goods have been transferred to the on-site secured facility and
are ready for shipment, the risk of ownership has passed to the customer and the
customer has been billed for the order. At December 31, 2000 and 1999 accounts
receivable from this customer totaled $0.4 million and $0.5 million,
respectively.

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

During 2000, 1999 and 1998, export sales accounted for approximately 31%, 32%
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 and
marketing and advertising expenses for our services and products.


                                      -25-
<PAGE>   26
In accordance with a tax allocation agreement in effect through the date of our
IPO, we were included in the consolidated U.S. Federal income tax return and, in
certain instances, consolidated or combined state and local income tax returns
of ABN and made payments to ABN based on the amounts which would be payable as
Federal, state and local income taxes as if consolidated or combined returns
were not filed. We computed our Federal, state and local income tax provision as
if we were filing separate income tax returns, without regard to the tax
allocation agreement. During 2000, ABNH and the Former Parent reached an
agreement, subject to consummation of the Former Parent's Chapter II plan, to
exchange mutual, general releases for any obligations each may have to the other
pursuant to the separation agreement dated July 20, 1998, including all sums
allegedly owing by each of ABNH and Former Parent, and its affiliates, to each
other. The agreement 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 ABNH for the period January 1, 1990 through July 20,
1998 and will indemnify ABNH with respect to any such liabilities. Amounts paid
to the Former Parent in excess of amounts which would have been payable had ABNH
filed separate income tax returns have been charged to Due from Former Parent
and affiliates. For periods subsequent to the Offering Date, ABNH is filing its
own U.S. Federal and state income tax returns.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
1999

Sales. Sales decreased by $2.2 million, or 10.2%, from $21.2 million in 1999 to
$19.0 million in 2000. The decrease in sales was due primarily to a decrease in
sales of security holograms for credit cards of $1.7 million, due to what we
believe is the effect of high inventory levels in the transaction card market
since many banks acquired an extra inventory of cards in 1998 and 1999 in
anticipation of potential problems with the Year 2000 transition, a decrease of
other security holograms of $0.4 million and a decrease in freight billings of
$0.1 million.

Royalty Income. Royalty income decreased $0.1 million or 17.0%, from $0.5
million in 1999 to $0.4 million in 2000. The decrease was due to lower reported
licensee revenue in 2000.

Cost of Goods Sold. Cost of goods sold decreased by $2.3 million, or 21.1%, from
$11.2 million in 1999 to $8.9 million in 2000. As a percentage of sales, cost of
goods sold decreased from 53.1% in 1999 to 46.6% in 2000. The decrease was
comprised of a decrease in the provision for obsolete and excess inventory of
5%, a decrease in warranty expense of 7% primarily resulting from a $0.8 million
provision for settlement of a breach of contract claim relating to warranties in
1999 and a related insurance reimbursement recorded in 2000, partially offset by
an increase in product cost due to changes in product mix of 6%.

Selling and Administrative Expenses. Selling and administrative expenses
decreased by $1.7 million, from $9.8 million in 1999 to $8.1 million in 2000. As
a percentage of sales, selling and administrative expenses decreased from 46.3%
in 1999 to 42.5% in 2000. The decrease in expenses is primarily due to costs
incurred related to the audit committee investigation and related restatement
efforts of $3.5 million, which did not reoccur in 2000 and a decrease of bad
debt expense of $0.2 million, offset partially by increases in selling salaries
and benefits of $0.2 million due to the addition of personnel, other selling
expenses of $0.6 million, principally due to higher costs incurred for travel,
shows and marketing samples, administrative salaries and benefits of $0.6
million principally due to the reversal of accrued retirement benefits in 1999
that did not reoccur in 2000 and other administrative expenses of $0.6 million
principally due to professional and public company expenses.


                                      -26-
<PAGE>   27
Interest, net. Interest, net decreased by $0.5 million from $1.0 million in net
expense in 1999 to $0.5 million net expense in 2000. This decrease was due to a
greater write off of deferred financing costs associated with the repayment of
the then existing credit facility in 1999 than the write off of deferred
financing costs associated with the repayment of the Foothill Loans in 2000
($0.3 million) and an increase in interest income ($0.2 million).

Settlement of Shareholder Litigation. Shareholder litigation amounted to $3.5
million in 2000 and was comprised of $3.4 million regarding the settlement of
the shareholder litigation and $0.1 million in connection with costs incurred
regarding the SEC and US Attorney investigations.

Settlement with Former Parent. Settlement with Former Parent amounted to $0.5
million and was comprised of $0.3 million of accounts payable and $0.2 million
of accrued expenses, which were reversed in the fourth quarter of 2000,
resulting from a settlement, which we entered into with our Former Parent.

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

Sales. Sales decreased by $8.0 million, or 27.4%, from $29.2 million in 1998 to
$21.2 million in 1999. The decrease in sales was primarily due to a decrease in
sales of security holograms for credit cards of $5.7 million, as a result of
$3.0 million in sales in the fourth quarter of 1998 at a discount from normal
selling prices in exchange for immediate payment, generally lower purchases of
security holograms for credit cards by card manufacturers due to higher
purchases by our customers in 1998 due to concerns regarding potential Year 2000
issues and the distractions and impact to our business associated with the need
to restate the prior financial statements.

Cost of Goods Sold. Cost of goods sold decreased by $7.5 million, or 39.9%, from
$18.7 million in 1998 to $11.2 million in 1999. As a percentage of sales, cost
of goods sold decreased from 64.1% in 1998 to 53.1% in 1999. The decrease
reflects decreases in the amortization of origination costs of 11% relating to
the 1998 amortization of origination costs due to lower volumes of sales than
had originally been estimated and amortization costs incurred in anticipation of
orders that did not materialize, decreased provisions for obsolete and excess
inventory of 2% due to improved product quality and a decrease in royalty
expenses of 2% related to the royalty litigation settlement reserved for in
1998, offset by an increase in warranty expense of 3%, primarily resulting from
a $0.8 million provision for settlement of a breach of contract claim relating
to warranties and an increase in product cost of 1%.

Selling and Administrative Expenses. Selling and administrative expenses
increased by $3.0 million, or 43.6%, from $6.8 million in 1998 to $9.8 million
in 1999. As a percentage of sales, selling and administrative expenses increased
from 23.4% in 1998 to 46.3% in 1999. This increase in selling and administrative
expenses was due primarily to costs incurred related to the audit committee
investigation and related restatement efforts and defense of litigation of $3.5
million, net of insurance reimbursements of $0.6 million, and an increase in
administrative salaries and benefits of $0.4 million, offset by a decrease in
sales expenses of $0.5 million due to lower remuneration, travel and
transportation expenses and the reversal of a liability for post-retirement
healthcare benefits of $0.4 million since we decided not to establish our own
plan.

Interest, net. Interest, net increased by $0.6 million from $0.4 million in 1998
to $1.0 million in 1999. The increase was due to an increase in interest expense
due to the write off of deferred financing costs of $0.6 million related to the
amendments to and repayment of our credit agreement with Chase Manhattan Bank,
offset by a reduction of interest expense, which resulted from the decrease in
the revolving loan balances of


                                      -27-
<PAGE>   28
$0.2 million and a decrease in interest income of $0.2 million as a result of
the cancellation of the $5.3 million note receivable from the Former Parent that
bore interest at 7.75% per annum, which was included in the deemed dividend
discussed above.

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
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, 2000, we had $7.9 million of cash and cash equivalents and
working capital of $10.4 million. The $7.9 million cash balance includes the
proceeds generated by the equity investment in ABNH by Crane & Co., Inc. on June
30, 2000, net of the repayment of all amounts outstanding under the Loan and
Security Agreement with Foothill Capital Corporation (as amended, the "Foothill
Loan").

On August 23, 2000, we terminated and repaid all outstanding amounts under the
Foothill Loan. The Foothill Loan, which had a maturity date of September 29,
2004 and was secured by substantially all of our assets, provided for borrowings
in an aggregate amount of up to $10.0 million, subject to a borrowing base
formula, under a revolving credit facility, term loan and capital expenditure
loan. Borrowings under the Foothill Loan bore interest at the Lender's reference
rate, as defined, plus 1.5%. The Foothill Loan contained restrictive covenants
customary for credit facilities of a similar nature as well as specific
financial covenants and ratios.

As a result of terminating the Foothill Loan, we incurred in 2000 an early
termination fee of $0.1 million and wrote off approximately $0.2 million in
unamortized deferred financing costs related to such loans.

During the years ended December 31, 2000 and 1999, the weighted average interest
rate of outstanding borrowings was approximately 9.8% and 8.4%, respectively.
The average aggregate borrowings during 2000 and 1999 was approximately $0.9
million and $3.3 million, respectively.

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 taken by
Douglas A. Crane, an affiliate of Crane.


                                      -28-
<PAGE>   29
Under the Agreement, Crane has the right to purchase its proportionate share of
any new issuance of our securities, other than securities issued in connection
with an acquisition, securities issued in connection with any stock option plan
or agreement, securities issued in replacement of any outstanding securities,
securities issued to all holders of shares of common stock on a pro rata basis
or any securities issued in connection with a strategic investment. Also, in the
event that we issue shares of common stock and or securities convertible into or
exercisable for shares of common stock in connection with the settlement of any
litigation that was outstanding as of June 29, 2000, Crane will be allowed to
purchase its proportionate share of our common stock at a price of $3.35 per
share.

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.

For the year ended December 31, 2000, our operating activities provided cash
flow of $0.4 million compared to $1.5 million and $7.4 million of cash flow
provided by operating activities in 1999 and 1998, respectively. The decrease in
cash flows in 2000 was primarily due to decreased earnings of $0.8 million and a
decrease in cash provided by changes in accounts receivable, inventories and
prepaid expenses and other of $3.9 million offset by increases in cash provided
by changes in accounts payable, accrued expenses, customer advances and other of
$1.3 million and in adjustments to reconcile net income to net cash provided by
operations of $2.3 million.

Investing activities for the years ended December 31, 2000, 1999 and 1998 used
cash flows of approximately $0.7 million, $0.5 million, and $0.4 million,
respectively. These activities primarily reflected capital expenditures for the
respective years. We anticipate that capital expenditures in 2001 and 2002 will
be approximately $1.5 million for each year. These amounts relating to capital
expenditures required to improve production capabilities.

Financing activities for the years ended December 31, 2000, 1999 and 1998
provided a cash flow of $7.9 million, and used cash flows of $5.1 million and
$3.0 million, respectively. The activity in 2000 consisted of equity financing,
net of costs of $9.1 million, offset partially by the repayment of debt of $1.2
million. The activity in 1999 was comprised of repayment of revolving credit and
notes payable of $5.7 million and incurred deferred financing costs of $0.4
million, offset by borrowings under the term loan of $1.0 million. The activity
in 1998 was comprised principally of advances to the Former Parent and
affiliates of $7.8 million and deferred financing fees incurred of $0.5 million,
offset partially by revolving credit borrowings of $4.9 million and borrowings
under notes payable of $0.4 million.

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




                                      -29-
<PAGE>   30
NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS No. 137 and SFAS No. 138, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities, and is effective for all quarters of
all fiscal years beginning after June 15, 2000. We believe that the
implementation of SFAS No. 133 will not have a material impact on our results of
operations.

The Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB")
No. 101, Revenue Recognition, in December 1999. SAB No. 101 expresses the views
of the SEC staff in applying generally accepted accounting principles to certain
revenue recognition issues. In June 2000, the SEC issued SAB No. 101B to defer
the effective date of the implementation of SAB No. 101 until the fourth quarter
of fiscal 2000. We have concluded that the implementation of this SAB did not
have a material impact on our financial position or results of operations.

In March 2000, the FASB issued Interpretation (FIN) No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25. FIN 44 clarifies the definition of employees, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 is effective July 1, 2000 but certain
conclusions in the Interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. We adopted FIN 44 during July
2000. The adoption of this interpretation did not have a material impact on our
current or historical financial position, results of operations, or cash flows.

In September 2000, the Emerging Issues Task Force, ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. Under the provisions of
EITF 00-10, amounts billed to a customer in a sales transaction related to
shipping and handling should be classified as revenues. EITF 00-10 also requires
the disclosure in the statement of operations classification of any shipping and
handling costs, if material, unless these costs are included in cost of goods
sold.

Effective October 1, 2000, we adopted 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 $377,000,
$499,000 and $534,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. All comparative prior period financial statements have been
reclassified to reflect this change. The adoption of EITF has had no impact on
the determination of net income (loss).


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.


                                      -30-
<PAGE>   31
UNAUDITED QUARTERLY RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000
AND 1999.


<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31, 2000 (a)
                                         -----------------------------------------------------------------------------
                                         FIRST QUARTER       SECOND QUARTER        THIRD QUARTER        FOURTH QUARTER
                                         -------------       --------------        -------------        --------------

                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                      <C>                 <C>                   <C>                  <C>
Sales (b) .......................               $4,875               $4,485               $4,598               $ 5,071

Cost of goods sold (c) ..........                1,957                2,033                1,712                 3,174

Net (loss) income ...............                  235                  121                  115                (2,354)

Net (loss) income per share-basic
and diluted .....................               $ 0.02               $ 0.01               $ 0.01               $ (0.14)
</TABLE>


<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31, 1999 (d)
                                         -----------------------------------------------------------------------------
                                         FIRST QUARTER       SECOND QUARTER        THIRD QUARTER        FOURTH QUARTER
                                         -------------       --------------        -------------        --------------

                                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                      <C>                 <C>                   <C>                  <C>
Sales (b) .......................               $5,346               $5,882               $5,615               $ 4,351

Cost of goods sold (c) ..........                3,339                2,404                2,502                 3,002

Net income (loss) ...............               (1,452)                 609                 (405)                  173

Net income (loss) per share-basic
and diluted .....................               $(0.11)              $ 0.04               $(0.03)              $  0.01
</TABLE>

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

(a)      During the year ended December 31, 2000 we incurred costs of $3.4
         million regarding the settlement of the shareholder litigation and $0.1
         million in connection with the settlements of the SEC and US Attorney
         investigations. In addition, we reversed $0.5 million from accounts
         payable and accrued expenses resulting from a settlement, which we
         entered into with the Former Parent. These items are included in other
         income (expense) on the accompanying statement of operations.
         Additionally in the third quarter of 2000, our insurance carriers
         agreed to pay $750,000 to us as a product liability reimbursement,
         which we included in cost of sales.

(b)      Quarterly sales for the years ended December 31, 2000 and 1999 have
         been adjusted from the amounts originally reported to include shipping
         charges billed to customers, previously netted in general and
         administrative expenses, as required by the Securities and Exchange
         Commission.

(c)      Quarterly cost of goods sold for the years ended December 31, 2000 and
         1999, have been adjusted from the amounts previously reported due to
         the reclassification of research and development costs from cost of
         sales to a separate expense line item on the accompanying statement of
         operations.


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


                                      -32-
<PAGE>   33
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

On August 1, 2000, we dismissed our prior independent auditors, Deloitte &
Touche LLP. On July 31, 2000 our board of directors authorized the dismissal of
Deloitte & Touche and retained Arthur Andersen LLP as our new independent
accountants. Deloitte & Touche's report (which report expresses an unqualified
opinion and includes an explanatory paragraph relating to certain litigation) on
our financial statements for the two most recent years (i.e., the years ended
December 31, 1999 and December 31, 1998) contained no adverse opinion or a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. The decision to change our accountants was
recommended by our audit committee of our board of directors and was approved by
our board of directors.

During our last two fiscal years and the subsequent interim period, except as
noted below, there were no disagreements between us and Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte & Touche, would have caused them to make reference to
the subject matter of the disagreement in connection with their report.

ABNH and Deloitte & Touche were both defendants in a class action securities
litigation pending in the United States District Court for the Southern District
of New York. On June 28, 2000, we announced that we, along with certain other
defendants in the litigation, entered into a Memorandum of Understanding ("MOU")
which was an agreement in principle to settle the litigation. Deloitte & Touche
was not a party to the MOU. On June 30, 2000, in anticipation of Deloitte &
Touche's review of our second quarter interim financial information, Deloitte &
Touche requested that they be provided with copies of all agreements entered
into during the second quarter of 2000, including the MOU. We considered certain
portions of the MOU not relating to financial matters sensitive in light of the
ongoing litigation. On July 25, 2000, we offered to provide Deloitte & Touche
with a copy of the MOU with those sensitive portions redacted. On July 25, 2000,
Deloitte & Touche advised us that a redaction of any agreement, including the
MOU, was unacceptable to them and constituted a scope restriction, and requested
to meet with our audit committee on this topic. Deloitte & Touche advised us
that they would not commence their review of the interim financial information
for the six months ended June 30, 2000, which review was scheduled to begin on
July 26, 2000, until they met with our audit committee. Deloitte & Touche did
not meet with our audit committee. The subsequent dismissal of Deloitte & Touche
was not due to Deloitte & Touche's request for the MOU, and followed our
decision to consider replacing our auditors in March 2000.

None of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-K
occurred with respect to us within the last two fiscal years and the subsequent
interim period except as follows. In 1998, we had


                                      -33-
<PAGE>   34
reportable conditions representing material weaknesses in which the design or
operation of one or more of our internal controls did not reduce to a relatively
low level the risk that misstatements caused by error or fraud in amounts that
could be material in relation to the financial statements may occur and not be
detected within a timely period by employees in the normal course of performing
their assigned functions.


                                      -34-
<PAGE>   35
                                    PART III



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

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


<TABLE>
<CAPTION>
                   NAME                            AGE                              POSITION(S)
---------------------------------------            ---         --------------------------------------------------
<S>                                                <C>         <C>
DIRECTORS AND EXECUTIVE OFFICERS:

Kenneth H. Traub.......................            39          President, Chief Executive Officer and Director

Salvatore F. D'Amato...................            72          Chairman of the Board

Stephen A. Benton*.....................            59          Director

Fred J. Levin*.........................            38          Director

Douglas A. Crane*......................            41          Director

Russell LaCoste........................            50          Executive Vice President, Corporate Development and
                                                               Marketing

Alan Goldstein.........................            54          Vice President and Chief Financial Officer

KEY EMPLOYEES:

Michael T. Banahan.....................            43          Vice President, Sales and Marketing

George Condos..........................            38          Controller
</TABLE>

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

*    Member of the audit committee.

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

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

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


                                      -35-
<PAGE>   36
Fred J. Levin has served as a director since February 2000. Mr. Levin has been
the President of the Concord Watch Division of Movado Group, Inc., a
manufacturer and marketer of watches, since March 1998. Mr. Levin also served
with Movado Group, Inc. as Senior Vice President, International from April 1995
to February 1998 and as Vice President, Distribution from February 1994 to March
1995. Prior thereto, Mr. Levin was a management consultant with McKinsey &
Company. Mr. Levin holds a B.S. in Industrial Engineering from Northwestern
University and a M.B.A. from the Harvard Graduate School of Business
Administration.

Douglas A. Crane has served as a director since June 2000. Mr. Crane has been
the manager of corporate strategic planning for Crane & Co., Inc. a manufacturer
of paper products, since 1998. Mr. Crane also served with Crane & Co., Inc. 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, an MS in Paper
Chemistry from the Institute of Paper Science and Technology and a M.B.A. from
the Massachusetts Institute of Technology.

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

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

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

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

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

Section 16(a) under the Securities Exchange Act of 1934 requires our executive
officers and directors, and persons who beneficially own more than ten percent
of our common stock, to file initial reports of ownership and reports of changes
in ownership with the SEC. Executive officers, directors and greater


                                      -36-
<PAGE>   37
than ten percent beneficial owners are required by the SEC to furnish us with
copies of all Section 16 forms they file.

Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that the
reporting requirements of Section 16, as amended, applicable to our executive
officers, directors and greater than ten percent beneficial owners were complied
with on a timely basis for all transactions that occurred during 2000, except
that Fred Levin and Douglas Crane, who became directors of ABNH in 2000, did not
timely report such events on Form 3. These events have been subsequently
reported.


                                      -37-
<PAGE>   38
ITEM 11. EXECUTIVE COMPENSATION.

The following table provides information concerning compensation paid to or
earned during 1998, 1999 and 2000 by each individual who served as our CEO or in
a similar capacity during 2000 and the next two most highly compensated
executive officers during 2000 (the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                     LONG-TERM
                                                           ANNUAL COMPENSATION                     COMPENSATION
                                               --------------------------------------------     -----------------
                                                                                                 SHARES OF COMMON
                                                                             OTHER ANNUAL        STOCK UNDERLYING
                                                SALARY         BONUS       COMPENSATION (1)           OPTIONS
              NAME                YEAR           ($)            ($)               ($)                   (#)
-------------------------------   ----         -------        -------      ----------------      ----------------
<S>                               <C>          <C>            <C>          <C>                   <C>
Kenneth H. Traub (2)............  1998              --             --                --                     --
President and Chief Executive     1999         253,846        150,000             6,280                350,000
    Officer                       2000         295,449        150,000             9,600                425,000

Salvatore F. D'Amato (3)........  1998              --             --                --                     --
Chairman of the Board             1999         100,100         40,000            54,900                175,000
                                  2000         177,458         70,000            13,380                150,000

Russell LaCoste (4).............  1998              --             --                --                     --
Executive Vice President          1999          51,202         10,000             1,800                150,000
                                  2000         225,000         35,000             9,000                 25,000

Alan Goldstein (5)..............  1998              --             --                --                     --
Chief Financial Officer           1999         112,718         45,000             4,656                100,000
                                  2000         167,083         50,000             5,868                 73,000
</TABLE>

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

(1)  Other Annual Compensation in 1999 for Mr. D'Amato consisted of $6,690 for
     the use of an automobile paid for by us and $48,300 that he received from
     us for his work as a consultant prior to becoming an employee. Other Annual
     Compensation in 2000 for Mr. D'Amato and 1999 and 2000 for Messrs. Traub,
     LaCoste and Goldstein consisted of the use of automobiles paid for by us.

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

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

(4)  Mr. LaCoste has served as Executive Vice President, Sales and Marketing
     since October 1999.

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


                                      -38-
<PAGE>   39
The following table provides information concerning option grants during 2000 to
the Named Executive Officers. No options were exercised during 2000.

                              OPTION GRANTS IN 2000

<TABLE>
<CAPTION>
                                                                                             POTENTIAL REALIZABLE
                                                                                           VALUE AT ASSUMED ANNUAL
                                                                                             RATES OF STOCK PRICE
                                                                                           APPRECIATION FOR OPTION
                                                  INDIVIDUAL GRANTS                                  TERM
                              ------------------------------------------------------------------------------------
                                SHARES OF      PERCENT OF
                              COMMON STOCK   TOTAL OPTIONS
                               UNDERLYING      GRANTED TO     EXERCISE
                                 OPTIONS      EMPLOYEES IN      PRICE       EXPIRATION         5%           10%
            NAME                   (#)            2000        ($/SHARE)        DATE           ($)           ($)
------------------------------------------------------------------------------------------------------------------
<S>                           <C>            <C>              <C>           <C>             <C>           <C>
Kenneth H. Traub (1)........     175,000            15.4         2.03125     08/10/10       223,552       566,526
                                 250,000            22.0         1.93750     12/14/10       304,621       771,969

Salvatore F. D'Amato (2)....      75,000             6.6         2.03125     08/10/10        95,808       242,797
                                  75,000             6.6         1.93750     12/14/10        91,386       231,591


Russell LaCoste (3).........      25,000             2.2         2.03125     08/10/10        31,936        80,932

Alan Goldstein (4)..........      33,000             2.9         2.03125     08/10/10        42,156       106,831
                                  40,000             3.5         1.93750     12/14/10        48,739       123,515
</TABLE>

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

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

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

(3)  Mr. LaCoste has served as Executive Vice President Sales and Marketing
     since October 1999.

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

The following table provides information concerning the number and value of
unexercised options held by each of the Named Executive Officers on December 31,
2000.

                           2000 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                         SHARES OF COMMON STOCK UNDERLYING       VALUE OF UNEXERCISED IN-THE-MONEY
                                                UNEXERCISED OPTIONS                OPTIONS AT DECEMBER 31, 2000
                                                        (#)                                   ($) (1)
                                         -------------------------------------------------------------------------
    NAME                                 EXERCISABLE         UNEXERCISABLE        EXERCISABLE       UNEXERCISABLE
------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>                  <C>               <C>
Kenneth H. Traub...................        195,833              579,167                --                 --

Salvatore F. D'Amato...............         87,500              237,500                --                 --

Russell LaCoste....................         50,000              125,000                --                 --

Alan Goldstein.....................         50,000              123,000                --                 --
</TABLE>

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

(1)  Based on the difference between $1.31, which was the closing price per
     share on December 31, 2000, and the exercise price per share of the
     options.


                                      -39-
<PAGE>   40
STOCK INCENTIVE PLANS

On August 4, 2000, we adopted the American Bank Note Holographics, Inc. 2000
Stock Incentive Plan (the "2000 Plan"), which was subsequently approved by our
stockholders at our annual meeting on September 12, 2000. Subsequent to the
Offering Date, 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 2,613,000 shares of Common Stock.
Options to purchase 2,472,500 shares of common stock were outstanding under the
Plans at December 31, 2000. Options to purchase an additional 165,000 shares of
common stock were outstanding outside the Plans at December 31, 2000. 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 33 1/3% 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.

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

RETIREMENT PLANS

On October 1, 1999, we implemented defined contribution plans for our employees.
Prior to October 1, 1999, we participated in the defined contribution plan of
the Former Parent. Aggregate contributions to such plans, which have been
charged to our operations, were approximately $46,000, $77,000 and $200,000 for
the years ended December 31, 2000, 1999 and 1998, 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.

EMPLOYMENT AGREEMENTS

We entered into an employment agreement with Kenneth Traub in February 1999 for
an initial term of one year. As amended, the agreement provides for an annual
base salary of $300,000, to be increased by not less than 3% per year upon
renewal. In addition, Mr. Traub is eligible to receive bonuses at the discretion


                                      -40-
<PAGE>   41
of our board of directors, including a target bonus of $25,000 per quarter. The
quarterly bonus is required to be paid unless the Board determines otherwise
based on certain factors. Also in connection with the agreement, we granted to
Mr. Traub options to purchase up to 250,000 shares of our common stock at an
exercise price of $1.75 per share. In May 1999, Mr. Traub was granted additional
options to purchase up to 100,000 shares of our common stock at an exercise
price of $2.50 per share. In August 2000 and December 2000, Mr. Traub was
granted additional options to purchase up to 175,000 shares of our common stock
at an exercise price of $2.03125 and 250,000 shares of our common stock at an
exercise price of $1.9375, respectively. In the event of Mr. Traub's termination
for any reason other than for cause, as defined in the agreement, or in the
event of his resignation for good reason, as defined in the agreement, (1) we
are required to pay him his salary then in effect with any bonus which may have
been accrued or which otherwise would have been granted by the board to him for
a period of two years following such termination (2) we are required to continue
any benefits to Mr. Traub and (3) all unvested options to purchase common stock
granted under the Plans to him will vest immediately. Upon termination of Mr.
Traub's employment following a change of control, or Mr. Traub's resignation for
a good reason, as defined in the agreement, following a change in control, we
are required to pay him as severance an amount equal to twice his annual salary
and bonus then in effect if such termination or resignation is within one year
of such change of control and an amount equal to three times his salary and
bonus then in effect if such termination or resignation is more than one year
after such change of control. In connection with his employment agreement, Mr.
Traub agreed not to compete with us during his term of employment and for one
year thereafter.

We entered into an employment agreement with Salvatore F. D'Amato in April 1999
for an initial term of two years. As amended, the agreement provides for a base
salary of $180,000 per year. In addition, Mr. D'Amato is eligible to receive
bonuses at the discretion of our board of directors, including a target bonus of
$10,000 per quarter. The quarterly bonus is required to be paid unless the Board
determines otherwise based on certain factors. 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 August 2000, and December 2000
Mr. D'Amato was granted additional options to purchase up to 75,000 shares of
our common stock at an exercise price of $2.03125 and 75,000 shares of our
common stock at an exercise price of $1.9375, respectively. 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 Russell LaCoste in September 1999.
The agreement provides for a base salary of $225,000 per year. In addition, Mr.
LaCoste is eligible to receive bonuses at the discretion of our board of
directors, including a target bonus of $10,000 per quarter. In connection with
the agreement, we granted to Mr. LaCoste options to purchase up to 150,000
shares of our common stock at an exercise price of $2.50 per share. In August of
2000, Mr. LaCoste was granted additional options to purchase up to 25,000 shares
of our common stock at an exercise price of $2.03125. In the event of Mr.
LaCoste's termination for any reason other than for cause, we are required to
continue to pay him his salary then in effect for a period of three months
following such termination. Upon termination of Mr. LaCoste's employment within
three months before or after a change of control, we are required to pay him an
amount equal to $250,000.


                                      -41-
<PAGE>   42
We entered into an employment agreement with Alan Goldstein in April 1999 for an
initial term of one year. 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.
In addition, Mr. Goldstein is eligible to receive bonuses at the discretion of
our board of directors, including a target bonus of $10,000 per quarter. In
connection with the agreement, we granted to Mr. Goldstein options to purchase
up to 100,000 shares of our common stock at an exercise price of $2.50 per
share. In August 2000 and December 2000, Mr. Goldstein was granted additional
options to purchase up to 33,000 shares of our common stock at an exercise price
of $2.03125 and 40,000 shares of our common stock at an exercise price of
$1.9375, respectively. In the event of Mr. Goldstein's termination for any
reason other than for cause, as defined in the agreement, or in the event of his
resignation for good reason, as defined in the agreement, (1) we are required to
pay him his salary then in effect with any bonus which may have been accrued or
which otherwise would have been granted by the board to him for a period of six
months following such termination or resignation for good reason, (2) we are
required to continue any benefits to Mr. Goldstein and (3) all unvested options
to purchase common stock granted under the Plans to him will vest immediately.
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 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. Benton, Levin and
Crane. Mr. Crane is an affiliate of Crane & Co., Inc. See "Item 13. Certain
Relationships and Related Transactions"


                                      -42-
<PAGE>   43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth as of March 15, 2001 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 Boulrvard, Elmsford, NY 10523 unless otherwise
indicated.

<TABLE>
<CAPTION>
         NAME AND ADDRESS                                                      NUMBER (1)   PERCENTAGE
---------------------------------------------------------------------          ---------    ----------
<S>                                                                            <C>          <C>
Crane & Co., Inc.....................................................          3,387,720       18.3%
   30 South Street
   Dalton, MA  01226

Putnam Investments, Inc. (2).........................................          1,920,102       10.4%
    One Post Office Square
    Boston, MA 02109

Libra Advisors, LLC (3)..............................................          1,856,000       10.0%
   277 Park Avenue, 26th Floor
   New York, NY 10172

Kenneth H. Traub (4).................................................            254,167        1.4%

Salvatore F. D'Amato (5).............................................            118,667         *

Russell LaCoste (6)..................................................             78,500         *

Alan Goldstein (7)...................................................             66,667         *

Stephen A. Benton (8)................................................             15,000         *
Fred J. Levin (9)....................................................             10,000         *

Douglas A. Crane (10)..............................................    ..      3,387,720       18.3%

All executives officers and directors as a group
  (7 persons)  (11)..................................................          3,930,721       20.7%
</TABLE>

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

*    Less than 1%.

(1)  Beneficial ownership is determined in accordance with the rules of the SEC,
     and includes general voting power and/or investment power with respect to
     securities. Shares of common stock subject to options currently exercisable
     or exercisable within 60 days of March 15, 2001 are deemed outstanding for
     computing the percentage beneficially owned by the person holding such
     options.

(2)  The information provided is based solely on a Schedule 13G filed with the
     SEC on February 4, 1999. Putnam Investments, Inc., which is a wholly-owned
     subsidiary of Marsh & McLennan Companies, Inc., wholly owns two registered
     investment advisers: Putnam Investment Management, Inc., which is the
     investment adviser to the Putnam family of mutual funds and which
     beneficially owns 877,200 shares of


                                      -43-
<PAGE>   44
     our common stock, and The Putnam Advisory Company, Inc., which is the
     investment adviser to Putnam's institutional clients and which beneficially
     owns 1,042,902 shares of our common stock. Both subsidiaries have
     dispository power over the shares as investment managers, but each of the
     mutual fund's trustees have voting power over the shares held by each fund,
     and The Putnam Advisory Company, Inc. has shared voting power over the
     shares held by the institutional clients. Putnam Investments, Inc. and
     Marsh & McLennan Companies, Inc. have declared that the filing of a
     Schedule 13G with the SEC shall not be deemed an admission by either or
     both of them that they are, for the purposes of Section 13(d) or 13(g)
     under the Securities Exchange Act of 1934, as amended, the beneficial owner
     of any shares of our common stock, and have further stated that neither of
     them have any power to vote or dispose of, or direct the voting or
     disposition of, any shares of our common stock.

(3)  The information provided is based solely on a Schedule 13G, as amended,
     filed with the SEC on May 26, 2000. Libra Advisors, LLC, the general
     partner of Libra Fund, LP owns 1,821,000 shares of common stock. Libra
     Advisors, LLC is also the investment adviser of an offshore fund that owns
     35,000 shares of our common stock. Libra Advisors, LLC has the power to
     vote and to direct the voting of and the power to dispose and direct the
     disposition of these 1,856,000 shares. Ranjon Tandon is the sole voting
     member and manager of Libra Advisors, LLC and may be deemed to have the
     power to vote and to direct the voting of and the power to dispose and
     direct the disposition of the 1,856,000 shares of common stock beneficially
     owned by Libra Advisors, LLC.

(4)  Includes 254,167 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2001.

(5)  Includes 116,667 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2001.

(6)  Consists of 75,000 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2001.

(7)  Consists of 66,667 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2001.

(8)  Consists of 15,000 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2001.

(9)  Consists of 5,000 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2001.

(10) Consists of 3,387,720 shares of common stock owned by Crane & Co., Inc., a
     privately owned corporation that Mr. Crane and his family own. Mr. Crane
     may be deemed the beneficial owner of the shares held by Crane & Co., Inc.

(11) Includes 532,501 shares of common stock subject to options currently
     exercisable or exercisable within 60 days of March 15, 2000.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ABNH and the Former Parent were related parties until April 4, 1999 at which
time the Former Parent's Chairman and Chief Executive Officer resigned as the
ABNH's Chairman and Chief Executive Officer.


                                      -44-
<PAGE>   45
On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the federal Bankruptcy Code. On November 3,
2000, the bankruptcy court confirmed the Former Parent's Chapter 11 plan. In
connection with negotiations on the Chapter 11 plan, we reached an agreement
with the Former Parent to exchange mutual, general releases for any obligations
each may have to the other pursuant to the separation agreement between ABNH and
the Former Parent, dated July 20, 1998, and all sums allegedly owing by each of
ABNH and Former Parent, and its affiliates, to each other. The agreement is
subject to the consummation of the Chapter 11 plan and also provides that (i) we
will receive 25,000 shares of stock of the reorganized Former Parent, (ii) the
Former Parent will be responsible for and shall pay all asserted and unasserted
income, franchise or similar tax liabilities of ours for the period January 1,
1990 through July 20, 1998 and will indemnify us with respect to any such
liabilities and (iii) we will withdraw our claim against the Former Parent in
the Chapter 11 case. The above described settlement between ABNH and the Former
Parent was made a part of the Chapter 11 plan which the bankruptcy court
approved on November 3, 2000. The Former Parent has experienced significant
financial difficulty. The Former Parent's financial difficulty may result in its
inability to perform under the terms of the indemnification provided, which
could have a material adverse effect on our financial position, results of
operations and cash flows

In connection with the above agreement we included approximately $0.5 million
relating to the reversal of accounts payable and accrued expenses due to the
Former Parent and affiliates in other income (expenses) on the accompanying
statement of operations.

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

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 taken by
Douglas A. Crane, an affiliate of Crane.

Under the Agreement, Crane has the right to purchase its proportionate share of
any new issuance of our securities, other than securities issued in connection
with an acquisition, securities issued in connection with any stock option plan
or agreement, securities issued in replacement of any outstanding securities,
securities issued to all holders of shares of common stock on a pro rata basis
or any securities issued in connection with a strategic investment. Also, in the
event that we issue shares of common stock and or securities convertible into or
exercisable for shares of common stock in connection with the settlement of any
litigation that was outstanding as of June 29, 2000, Crane will be allowed to
purchase its proportionate share of our common stock at a price of $3.35 per
share.

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.

During 2000 we entered into agreements with Crane under which we rent factory
space and lease employees for our facility in Dalton, MA. Under these agreements
we paid Crane $12,000 for the rental of the factory space and $11,000 for the
leased employees. In addition we paid Crane $50,000 for leasehold improvements
on the rental space.


                                      -45-
<PAGE>   46
                                    PART IV

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


(a)      (1) Financial Statements

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

         (2) Financial Statement Schedules

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

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

         (3) Exhibits

         See (c) below.

(b)      Reports on Form 8-K

         None.

(c)      Exhibits

          3.1     Amended and Restated Certificate of Incorporation.*

          3.2     Amended and Restated By-Laws.*

          4.1     Form of Common Stock Certificate.*

          4.2     Stock Purchase Agreement by and between Crane & Co., Inc. and
                  American Bank Note Holographics, Inc. dated as of June 29,
                  2000. (Incorporated by reference on Form 10-Q filed on
                  August 14, 2000.)

          4.3     Warrant Agreement by and between American Bank Note
                  Holographics, Inc. and American Stock & Transfer Company,
                  dated as of December 18, 2000.

          4.4     Form of Warrant Certificate.

         10.1     Form of Separation Agreement.*

         10.2     Form of License Agreement.*

         10.3     Form of Transitional Services Agreement.*

         10.4     Form of Employee Benefits Allocation Agreement.*

         10.5     Form of 1998 Stock Incentive Plan.*

         10.6     Form of 2000 Stock Incentive Plan (Incorporated by reference
                  from the Proxy on Schudule DEF 14A filed on August 11, 2000.)

         10.7     Form of Defined Contribution Plan.*

         10.8     Production Agreement between MasterCard International
                  Incorporated and American Bank Note Holographics, Inc., dated
                  as of February 1, 1996.*


                                      -46-
<PAGE>   47
         10.9     Letter Agreement, dated June 29, 1998, between MasterCard
                  International Incorporated and American Bank Note
                  Holographics, Inc., amending the Production Agreement dated as
                  of February 1, 1996.**+

         10.10     Letter Agreement, dated March 3, 1999, between MasterCard
                  International Incorporated and American Bank Note
                  Holographics, Inc., further amending the Production Agreement
                  dated as of February 1, 1996.**

         10.11    Loan and Security Agreement, dated as of September 29, 1999,
                  between Foothill Capital Corporation and American Bank Note
                  Holographics, Inc., together with Amendment No. 1 dated
                  December 31, 1999 and letter dated January 4, 2000.
                 (Incorporated by reference from the Annual Report on Form 10-K
                  for 1999.)

         10.12    Employment Agreement, dated April 20, 1999, between Salvatore
                  F. D'Amato and American Bank Note Holographics, Inc.**

         10.13    Employment Agreement, dated February 3, 1999, between Kenneth
                  H. Traub and American Bank Note Holographics, Inc.**

         10.14    Employment Agreement, dated April 30, 1999, between Alan
                  Goldstein and American Bank Note Holographics, Inc.**

         10.15    Employment Agreement, dated September 15, 1999, between
                  Russell LaCoste and American Bank Note Holographics, Inc.**

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

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

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

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

(d)      Financial Statement Schedules


         See (a)(2) above.


                                      -47-

<PAGE>   48
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.


                                TABLE OF CONTENTS




<TABLE>
<CAPTION>
                                                                                                 PAGE
                                                                                                 ----
<S>                                                                                              <C>
    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ...............................................     F-2
    INDEPENDENT AUDITORS' REPORT ...........................................................     F-3
    FINANCIAL STATEMENTS:
      Balance Sheets, December 31, 2000 and 1999 ...........................................     F-4
      Statements of Operations for the Years Ended December 31,
         2000, 1999 and 1998 ...............................................................     F-5
      Statements of Stockholders' Equity for the Years Ended
         December 31, 2000, 1999 and 1998 ..................................................     F-6
      Statements of Cash Flows for the Years Ended December 31,
         2000, 1999 and 1998 ...............................................................     F-7
      Notes to Financial Statements ........................................................     F-8
      Schedule II - Valuation and Qualifying Accounts ......................................     S-1
</TABLE>


                                      F-1
<PAGE>   49
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying balance sheet of American Bank Note
Holographics, Inc. (a Delaware corporation) as of December 31, 2000 and the
related statements of operations, stockholders' equity and cash flows for the
year 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 audit.

We conducted our audit 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 audit provides 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, 2000 and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.

Our audit was 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 audit 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.


                                                             Arthur Andersen LLP
New York, New York
March 16, 2001


                                      F-2
<PAGE>   50
                          INDEPENDENT AUDITORS' REPORT

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

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

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

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

As discussed in Note 11 to the financial statements, the Company is involved in
certain litigation and potential litigation.


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


                                      F-3
<PAGE>   51
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                                 BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                      2000            1999
                                                                    --------        --------
<S>                                                                 <C>             <C>
                               ASSETS
CURRENT ASSETS:
     Cash and cash equivalents ..............................       $  7,926        $    266
     Accounts receivable, net of allowance for doubtful
        accounts of $75 and $390 ............................          3,000           3,224
     Inventories, net of allowances of $678 and $2,806 ......          3,015           2,915
     Deferred income taxes ..................................          1,191           2,143
     Prepaid expenses and other .............................            391             282
                                                                    --------        --------
          Total current assets ..............................         15,523           8,830
MACHINERY, EQUIPMENT AND LEASEHOLD
   IMPROVEMENTS -- Net of accumulated depreciation
   and amortization of $7,709 and $7,115 ....................          5,117           5,195
DEFERRED INCOME TAXES .......................................            727              --
OTHER ASSETS ................................................             14             303
GOODWILL  - Net of accumulated amortization
  of $2,608 and $2,264 ......................................          7,753           8,097
                                                                    --------        --------
TOTAL ASSETS ................................................       $ 29,134        $ 22,425
                                                                    ========        ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Accounts payable .......................................       $  2,298        $  2,494
     Accrued expenses .......................................          2,687           3,266
     Customer advances ......................................            161             607
     Revolving credit .......................................             --              74
     Current portion of notes payable .......................             --             138
     Current portion of long-term debt ......................             --             200
                                                                    --------        --------
          Total current liabilities .........................          5,146           6,779
LONG-TERM DEBT ..............................................             --             800
OTHER LONG-TERM LIABILITIES .................................             --              56
DEFERRED INCOME TAXES .......................................             --           1,335
                                                                    --------        --------
          Total liabilities .................................          5,146           8,970
                                                                    --------        --------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
     Preferred Stock, authorized, 5,000,000 shares; no shares
            issued or outstanding ...........................             --              --
     Common Stock, par value $.01 per share, authorized,
       30,000,000 shares; issued and outstanding, 18,483,720
       shares and 13,636,000 shares .........................            185             136
     Additional paid-in capital .............................         23,994          11,627
     Retained (deficit) earnings ............................           (191)          1,692
                                                                    --------        --------
          Total stockholders' equity ........................         23,988          13,455
                                                                    --------        --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................       $ 29,134        $ 22,425
                                                                    ========        ========
</TABLE>

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


                                       F-4
<PAGE>   52
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                            STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                      2000            1999            1998
                                                    --------        --------        --------

<S>                                                 <C>             <C>             <C>
REVENUE:
      Sales .................................       $ 19,029        $ 21,194        $ 29,203
      Royalty income ........................            444             535             554
                                                    --------        --------        --------
           Total revenue ....................         19,473          21,729          29,757
                                                    --------        --------        --------

COSTS AND EXPENSES:
     Cost of goods sold .....................          8,876          11,247          18,727
     Selling and administrative .............          8,085           9,803           6,825
     Research and development ...............            928             261             337
     Depreciation and amortization ..........          1,076           1,026           1,080
                                                    --------        --------        --------
           Total costs and expenses .........         18,965          22,337          26,969
                                                    --------        --------        --------

     Operating income (loss) ................            508            (608)          2,788
                                                    --------        --------        --------

OTHER INCOME (EXPENSE):
     Interest income ........................            229              31             183
     Other income ...........................             --              24              --
     Interest expense .......................           (741)         (1,016)           (583)
     Settlement with Former Parent (Note 7) .            519              --              --
     Settlement of shareholder litigation
        (Note 11)  ..........................         (3,508)             --              --
                                                    --------        --------        --------
           Total other income (expense) .....         (3,501)           (961)           (400)
                                                    --------        --------        --------

(LOSS) INCOME BEFORE PROVISION FOR
       (BENEFIT FROM) INCOME TAXES ..........         (2,993)         (1,569)          2,388

PROVISION FOR (BENEFIT FROM)
       INCOME TAXES .........................         (1,110)           (494)          1,269
                                                    --------        --------        --------

NET (LOSS) INCOME ...........................       $ (1,883)       $ (1,075)       $  1,119
                                                    ========        ========        ========

NET (LOSS) INCOME PER SHARE:
     Basic and diluted ......................       $  (0.12)       $  (0.08)       $   0.08
                                                    ========        ========        ========
</TABLE>

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


                                      F-5
<PAGE>   53
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                           DUE FROM
                                                     COMMON STOCK          ADDITIONAL      RETAINED         FORMER
                                               ---------------------         PAID-IN      (DEFICIT)       PARENT AND
                                               SHARES         AMOUNT         CAPITAL       EARNINGS       AFFILIATES         TOTAL
                                               ------         ------       ----------      --------       ----------         -----
<S>                                            <C>           <C>            <C>            <C>             <C>             <C>
BALANCE, JANUARY 1, 1998  .............         13,636       $    136       $ 11,627       $ 35,536        $(26,134)       $ 21,165
     Change during year ...............             --             --             --             --          (7,754)         (7,754)
     Deemed dividend to Former Parent
        and affiliates (see Note 1)  ..             --             --             --        (33,888)         33,888              --
     Net income .......................             --             --             --          1,119              --           1,119
                                              --------       --------       --------       --------        --------        --------
BALANCE, DECEMBER 31 1998  ............         13,636            136         11,627          2,767              --          14,530
     Net (loss)  ......................             --             --             --         (1,075)             --          (1,075)
                                              --------       --------       --------       --------        --------        --------

BALANCE, DECEMBER 31, 1999 ............         13,636            136         11,627          1,692              --          13,455
     Equity financing .................          3,388             34          9,109             --              --           9,143
     Issuance of shares in settlement
        of shareholder litigation .....          1,460             15          2,859             --              --           2,874
     Issuance of warrants in settlement
        of shareholder litigation .....             --             --            399             --              --             399
     Net (loss) .......................             --             --             --         (1,883)             --          (1,883)
                                              --------       --------       --------       --------        --------        --------

BALANCE, DECEMBER 31, 2000 ............         18,484       $    185       $ 23,994       $   (191)       $     --        $ 23,988
                                              ========       ========       ========       ========        ========        ========
</TABLE>

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


                                      F-6
<PAGE>   54
                     AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                            STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       2000           1999           1998
                                                                     -------        -------        -------
<S>                                                                  <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net (loss) income .......................................       $(1,883)       $(1,075)       $ 1,119
     Adjustments to reconcile net (loss) income to net cash
        provided by operating activities:
        Depreciation and amortization ........................         1,076          1,026          1,080
        Deferred income taxes ................................        (1,110)          (494)        (1,196)
        Deferred financing costs .............................           235            626             --
        Gain on sale of equipment ............................            --            (12)            --
        Non-cash charges relating to the issuance of common
          stock and warrants .................................         3,273             --             --
     Changes in operating assets and liabilities:
        Accounts receivable ..................................           224            799          1,874
        Inventories ..........................................          (100)         2,912            204
        Prepaid expenses and other ...........................           (55)           248           (459)
        Accounts payable, accrued expenses and other .........          (775)        (1,639)         3,313
        Customer advances ....................................          (446)          (853)         1,460
                                                                     -------        -------        -------
          Net cash provided by operating activities ..........           439          1,538          7,395
                                                                     -------        -------        -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures ....................................          (654)          (577)          (359)
     Proceeds from sale of equipment .........................            --             38             --
                                                                     -------        -------        -------
          Net cash used in investing activities ..............          (654)          (539)          (359)
                                                                     -------        -------        -------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Revolving credit borrowings (repayment), net ............           (74)        (5,517)         4,917
     Notes payable, net ......................................          (194)          (183)           377
     Long-term debt repayment ................................        (1,000)         1,000             --
     Proceeds from equity financing, net of costs ............         9,143             --             --
     Deferred financing costs ................................            --           (352)          (510)
     Advances to Former Parent and affiliates, net ...........            --             --         (7,754)
                                                                     -------        -------        -------
          Net cash provided by (used in) financing activities          7,875         (5,052)        (2,970)
                                                                     -------        -------        -------

INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS ................................................         7,660         (4,053)         4,066
CASH AND CASH EQUIVALENTS, BEGINNING OF
  YEAR .......................................................           266          4,319            253
                                                                     -------        -------        -------
CASH AND CASH EQUIVALENTS, END OF YEAR .......................       $ 7,926        $   266        $ 4,319
                                                                     =======        =======        =======

SUPPLEMENTAL CASH PAYMENTS:
     Taxes (including amounts paid to Former Parent)  ........       $    20        $     1        $ 2,799
                                                                     =======        =======        =======
     Interest ................................................       $   542        $ 1,031        $    --
                                                                     =======        =======        =======
</TABLE>

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


                                      F-7
<PAGE>   55
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                          NOTES TO FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

American Bank Note Holographics, Inc. (the "Company") 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").

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

USE OF ESTIMATES -- The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of sales and expenses during the reporting
period. Actual results may differ materially from those estimates.

CASH AND CASH EQUIVALENTS -- All highly liquid investments with a maturity of
three months or less, when purchased, are considered to be cash equivalents and
are stated at cost, which approximates market.


                                      F-8
<PAGE>   56
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

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

CONCENTRATIONS OF CREDIT RISK -- A significant portion of the Company's accounts
receivable are due from credit card issuers and related credit card
manufacturers located throughout the United States and Europe. The Company
establishes its credit polices 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. Hologram originations
(which represent costs of a unique master hologram, that is made to customer
specifications and is an integral part of the production process) are
capitalized and charged to cost of goods sold over the production period.

REVENUE RECOGNITION-- Sales and the related cost of goods sold are generally
recognized at the latter of the time of shipment or when title passes to
customers. In some situations, the Company has shipped product with the right of
return where the Company is unable to reasonably estimate the level of returns
and/or the sale is contingent upon the customers' use of the product. In these
situations, the Company does not recognize sales upon product shipment, but
rather when the buyer of the product informs the Company that the product has
been used. Additionally, pursuant to terms with a certain customer, completed
items are stored on behalf of the customer at the Company's on-site secured
facility and, in that instance, sales are recognized when all of the following
have occurred: the customer has ordered the goods, the manufacturing process is
complete, the goods have been transferred to the on-site secured facility and
are ready for shipment, the risk of ownership has passed to the customer and the
customer has been billed for the order. At December 31, 2000 and 1999, accounts
receivable from this customer totaled $0.4 million and $0.5 million,
respectively. In the first quarter of 1998, the Company recorded sales of
approximately $6.5 million under this arrangement.

At December 31, 2000 and 1999, customer advances approximating $0.2 and $0.6
million, respectively, represent payments received from customers for products
which have not yet been shipped ($0.2 million and $0.1 million, respectively)
and for products shipped with the right of return (none and $0.5 million,
respectively) where the Company is unable to reasonably estimate the level of
returns. These customer advances are classified as current liabilities on the
accompanying balance sheets.

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


                                      F-9
<PAGE>   57
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

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

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

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

LONG-LIVED ASSETS -- In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed, the Company reviews its long-lived
assets for impairment when changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Such changes in circumstances may
include, among other factors, a significant change in technology that may render
an asset or an asset group obsolete or noncompetitive, a significant change in
the extent or manner in which an asset is used, evidence of a physical defect in
an asset or asset group or an operating loss. If changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, the
Company estimates the future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition, and records an impairment loss (equal to the amount by which the
carrying amount of the asset exceeds the fair value of the asset) if such
estimated cash flows are less than the carrying amount of the asset.

GOODWILL -- The excess of cost over net assets acquired is being amortized over
30 years by the straight-line method. The Company reviews enterprise level
goodwill for impairment when changes in circumstances, similar to those
described above for long-lived assets, indicate that the carrying value may not
be recoverable. Under these circumstances, the Company estimates future cash
flows using the recoverability method (undiscounted and including related
interest charges), as a basis for recording any impairment loss. An impairment
loss is then recorded to adjust the carrying value of goodwill to the
recoverable amount.

DEFERRED FINANCING COSTS -- Costs incurred in connection with obtaining
financing are deferred and amortized as a charge to interest expense over the
term of the related borrowing using the interest method. The Company has no
deferred financing costs capitalized as of December 31, 2000.

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


                                      F-10
<PAGE>   58
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

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

RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred.

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

The Company has chosen to account for its stock options using the intrinsic
value based method prescribed in APB Opinion No. 25 and, accordingly, does not
recognize compensation expense for stock option grants made at an exercise price
equal to or in excess of the fair market value of the stock at the date of
grant. Pro forma net income and net income per share amounts as if the fair
value method had been adopted are presented in Note 9. SFAS No. 123 does not
impact the Company's results of operations, financial position or cash flows.

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE -- Basic net income per share is
computed based on the weighted average number of outstanding shares of common
stock, after giving retroactive effect to the stock split. The basic weighted
average number of shares outstanding were 15,421,064, 13,636,000 and 13,636,000
for the years ended December 31, 2000, 1999 and 1998, respectively. 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 (all related to outstanding stock options in
1998). For the years ended December 31, 2000 and 1999, options to purchase
2,472,500 shares and 1,420,000 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 year ended December 31, 1998, the dilutive effect of approximately
65,000 equivalent shares related to stock options was used in determining the
diluted weighted average shares outstanding. For the years ended December 31,
2000, 1999 and 1998, the diluted weighted average number of shares outstanding
were 15,421,064, 13,636,000 and 13,701,000, respectively.


                                      F-11
<PAGE>   59
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

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

BUSINESS CONCENTRATION RISKS -- Sales to MasterCard were approximately 28%, 27%
and 30% of sales for the years ended December 31, 2000, 1999 and 1998,
respectively. Approximately 75% of the 1998 MasterCard sales were recorded in
the first quarter of 1998. At December 31, 2000 and 1999, accounts receivable
from MasterCard approximated $0.4 and $0.5 million, respectively. The Company is
the exclusive supplier of holograms to MasterCard pursuant to an agreement, as
amended, that extends until February 2003. The agreement provides for automatic
two-year renewal periods if not terminated by either party. During 1999, the
Company was informed by MasterCard that it believes that the Company breached
certain terms of the agreement in 1998 and 1997. The Company has been working
closely with MasterCard to address issues raised by MasterCard, and believes its
relationship with MasterCard is good. 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 19%, 18% and 26% of sales for the years ended December 31, 2000,
1999 and 1998, 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, 2000 and
1999, accounts receivable from these customers approximated $0.6 million and
$0.5 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 31%, 32% and 28% of sales for the years ended
December 31, 2000, 1999 and 1998, respectively. All export sales are denominated
in United States dollars. At December 31, 2000 and 1999, accounts receivable
from these customers approximated $0.9 million and $0.5 million, respectively.

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, 2000, 1999,
1998, there was no difference between the Company's net income and comprehensive
income.

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


                                      F-12
<PAGE>   60
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

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

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS
No. 137 and SFAS No. 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities, and is effective for all quarters of all fiscal years beginning
after June 15, 2000. Management believes that the implementation of SFAS No. 133
will not have a material impact on the Company's results of operations.

The Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB")
No. 101, Revenue Recognition, in December 1999. SAB No. 101 expresses the views
of the SEC staff in applying generally accepted accounting principles to certain
revenue recognition issues. In June 2000, the SEC issued SAB No. 101B to defer
the effective date of the implementation of SAB No. 101 until the fourth quarter
of fiscal 2000. Management has implemented this SAB as of the fourth quarter
2000. The adoption of SAB No. 101 has not had a material impact on the Company's
financial position or results of operations.

In March 2000, the FASB issued Interpretation (FIN) No. 44, Accounting for
Certain Transactions Involving Stock Compensation -- An Interpretation of APB
Opinion No. 25. FIN 44 clarifies the definition of employees, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 is effective July 1, 2000 but certain
conclusions in the Interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company adopted FIN 44 during
July 2000. The adoption of this interpretation did not have a material impact on
the Company's current or historical financial position, results of operations,
or cash flows.

In September 2000, the Emerging Issues Task Force, ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. Under the provisions of
EITF 00-10, amounts billed to a customer in a sales transaction related to
shipping and handling should be classified as revenues. EITF 00-10 also requires
the disclosure in the statement of operations classification of any shipping and
handling costs, if material, unless these costs are included in cost of goods
sold.

Effective October 1, 2000, the Company adopted 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
$377,000, $499,000 and $534,000 for the years ended December 31, 2000, 1999 and
1998, respectively. All comparative prior period financial statements have been
reclassified to reflect this change. The adoption of EITF has had no impact on
the determination of net income (loss).


                                      F-13
<PAGE>   61
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

2. INVENTORIES

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                   ----------------------
                                                    2000           1999
                                                   -------        -------
                                                      (IN THOUSANDS)
<S>                                                <C>            <C>
    Finished goods .............................   $ 1,744        $ 3,498
    Finished goods on consignment with customers       435            228
    Work in process ............................       955          1,096
    Origination and cylinder costs .............        --            114
    Raw materials ..............................       559            785
                                                   -------        -------
                                                     3,693          5,721
    Less: Reserve for obsolescence .............      (678)        (2,806)
                                                   -------        -------
                                                   $ 3,015        $ 2,915
                                                   =======        =======
</TABLE>

The reduction of the reserve for obsolescence in 2000 was primarily due to the
destruction of nonsalable products reserved for in 1998 and 1999.

3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                     ---------------------
                                                      2000          1999
                                                     -------       -------
                                                        (IN THOUSANDS)
<S>                                                  <C>            <C>
    Machinery and equipment ..................       $11,860       $11,420
    Leasehold improvements ...................           966           890
                                                     -------       -------
                                                      12,826        12,310
    Accumulated depreciation and amortization          7,709         7,115
                                                     -------       -------
                                                     $ 5,117       $ 5,195
                                                     =======       =======
</TABLE>

Depreciation and amortization of machinery and equipment and leasehold
improvements for the years ended December 31, 2000, 1999 and 1998 were $732,000,
$681,000 and $729,000, respectively.


4. ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                -------------------
                                                 2000         1999
                                                ------       ------
                                                   (IN THOUSANDS)
<S>                                             <C>          <C>
    Accrued contract liability ..........       $  340       $  472
    Accrued interest expense ............           --           36
    Warranty reserve ....................          935          935
    Federal, state and local income taxes          102          143
    Salaries and wages ..................          420          619
    Accrued professional fees ...........          610          240
    Royalty settlement reserve ..........           --          315
    Other ...............................          280          506
                                                ------       ------
                                                $2,687       $3,266
                                                ======       ======
</TABLE>


                                      F-14
<PAGE>   62
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS


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, subject to
consummation of the Former Parent's Chapter 11 plan, to exchange mutual, general
releases for any obligations each may have to the other pursuant to the
Separation Agreement dated July 20, 1998, including all sums allegedly owing by
each of the Company and Former Parent, and its affiliates, to each other. The
agreement 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. Amounts paid to the Former Parent in excess of amounts which would
have been payable had the Company filed separate income tax returns have been
charged to Due from Former Parent and affiliates. For periods subsequent to the
Offering Date, the Company 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 (benefit from) income taxes are as follows:

<TABLE>
<CAPTION>
                                   FOR THE YEARS ENDED
                                       DECEMBER 31,
                           -------------------------------------
                             2000           1999           1998
                           -------        -------        -------
                                      (IN THOUSANDS)
<S>                        <C>            <C>            <C>
Current:
     Federal ..........    $    --        $    --        $ 2,025
     State and local...         --             --            440
                           -------        -------        -------
                                --             --          2,465
                           -------        -------        -------
Deferred:
     Federal ..........       (817)          (383)        (1,020)
     State and local...       (293)          (111)          (176)
                           -------        -------        -------
                            (1,110)          (494)        (1,196)
                           -------        -------        -------
                           $(1,110)       $  (494)       $ 1,269
                           =======        =======        =======
</TABLE>


                                      F-15
<PAGE>   63
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

5.  INCOME TAXES (CONTINUED)

A reconciliation of the taxes on income and the amount computed by applying the
Federal income tax statutory rate of 35% in 2000, 1999 and 1998 follows:

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED
                                                                 DECEMBER 31,
                                                    -------------------------------------
                                                      2000          1999           1998
                                                    -------        -------        -------
                                                               (IN THOUSANDS)
<S>                                                 <C>            <C>            <C>
Statutory tax ...............................       $(1,048)       $  (549)       $   836
Amortization of nondeductible goodwill ......           122            122            122
State and local taxes, net of Federal benefit          (190)           (72)           172
Nondeductible fee ...........................            --             --             84
Other .......................................             6              5             55
                                                    -------        -------        -------
                                                    $(1,110)       $  (494)       $ 1,269
                                                    =======        =======        =======
</TABLE>


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

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                          ----------------------
                                                           2000           1999
                                                          -------        -------
                                                              (IN THOUSANDS)
<S>                                                       <C>            <C>
Current deferred tax assets:
     Uniform capitalization of inventory ..........       $   253        $   212
     Bad debt reserve .............................            31            160
     Warranty reserve .............................           383            383
     Inventory obsolescence .......................           278          1,150
     Accrued vacation .............................            46             38
     Other liabilities ............................           200            200
                                                          -------        -------
     Net current deferred tax asset ...............       $ 1,191        $ 2,143
                                                          =======        =======
Non current deferred tax asset:
     Net operating loss carryforward ..............       $ 2,274        $   490
Non current deferred tax liabilities:
     Excess tax over book depreciation ............        (1,547)        (1,825)
                                                          -------        -------

     Net non current deferred tax asset (liability)       $   727        $(1,335)
                                                          =======        =======
</TABLE>

At December 31, 2000, the Company has net operating loss carryforwards of
approximately $5.5 million, which expire through 2020, available to offset
future federal taxable income. Current or future changes in ownership could
limit the availability to use these net operating loss carryforwards.


                                      F-16
<PAGE>   64
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

6. REVOLVING CREDIT AGREEMENT

On August 23, 2000, the Company terminated and repaid all outstanding amounts
under the Loan and Security Agreement between the Company and Foothill Capital
Corporation (as amended, the "Foothill Loan"). The Foothill Loan, which had a
maturity date of September 29, 2004 and was secured by substantially all of the
Company's assets, provided for borrowings in an aggregate amount of up to $10.0
million, subject to a borrowing base formula, under a revolving credit facility,
term loan and capital expenditure loan. Borrowings under the Foothill Loan bore
interest at the Lender's reference rate, as defined, plus 1.5%. The Foothill
Loan contained restrictive covenants customary for credit facilities of a
similar nature as well as specific financial covenants and ratios. At December
31, 1999, the Company had $74,000 outstanding on the revolving credit facility
and $1.0 million outstanding on the term loan which was payable in monthly
installments of $16,667 beginning January 2000. At December 31, 1999 no loans
were outstanding on the capital expenditure line.

On September 29, 1999 contemporaneously with the Foothill Loan, the Company
terminated and repaid all outstanding amounts under its previous credit facility
agreement. The credit facility was originally entered into on July 20, 1998 and
as subsequently amended permitted maximum borrowing of $4.0 million, which was
to decline to $2.6 million at December 31, 1999. The amended credit facility
matured on January 2000 and provided for borrowings under a revolving credit
line bearing interest at the lender's alternative base rate, as defined, plus
2%, subject to a borrowing base formula, as defined.

As a result of terminating the Foothill Loan, the Company incurred in 2000 an
early termination fee of $0.1 million and wrote off approximately $0.2 million
in unamortized deferred financing costs related to such loans. During 1999, the
Company wrote-off unamortized deferred financing costs of approximately $0.6
million relating to the amendments to and repayment of the Company's previous
credit facility.

During the years ended December 31, 2000 and 1999 the weighted average interest
rate of outstanding borrowings was approximately 9.8% and 8.4%, respectively.
The average aggregate borrowings during 2000 and 1999 was approximately $0.9
million and $3.3 million, respectively.

On December 8, 2000, the Company terminated and repaid $59,000 of notes payable
which bore interest at 5.85%.


                                      F-17
<PAGE>   65
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

7. RELATED PARTY TRANSACTIONS

The Company and the Former Parent were related parties until April 4, 1999 at
which time the Former Parent's Chairman and Chief Executive Officer resigned as
the Company's Chairman and Chief Executive Officer. At December 31, 1999,
accounts payable and accrued expenses include approximately $0.3 million and
$0.2 million, respectively, due to the Former Parent and its affiliates.

On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the federal Bankruptcy Code. During 2000, the
Company submitted a substantial claim against the Former Parent in the
bankruptcy proceedings. In connection with negotiations on the Chapter 11 plan,
the Company reached an agreement with the Former Parent to exchange mutual,
general releases for any obligations each may have to the other pursuant to the
separation agreement between the Company and the Former Parent, dated July 20,
1998, and all sums allegedly owing by each of the Company and the Former Parent,
and its affiliates, to each other. The agreement is subject to consummation of
the Chapter 11 plan and also provides that (i) the Company will receive 25,000
shares of stock of the reorganized Former Parent, (ii) the Former Parent will be
responsible for and shall pay all asserted and unasserted income, franchise or
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 and (iii) the Company will withdraw its claim against the Former
Parent in the Chapter 11 case. The above described settlement between the
Company and the Former Parent was made a part of the Chapter 11 plan which the
bankruptcy court approved on November 3, 2000.

In connection with the above agreement the Company included in the accompanying
statement of operations in 2000, approximately $0.5 million relating to the
reversal of accounts payable and accrued expenses due to the Former Parent and
affiliates.

In addition to the above, the Company sold $1.0 million and $0.6 million of
products and services in 1999 and 1998, respectively, to its Former Parent and
affiliates in the normal course of business. There were no purchases by the
Company from the Former Parent and affiliates in the normal course of business
in 1999 and 1998. At December 31, 1999, trade accounts receivable from the
Former Parent and affiliates were $31,000. Included in the above, the Company
acted as a subcontractor to an affiliate of the Former Parent under a government
contract. Sales under this subcontract, which are billed to the affiliate of the
Former Parent approximated $0.2 million and $0.3 million in 1999 and 1998,
respectively. At December 31, 1999, trade accounts receivable from the affiliate
of the Former Parent under this sub-contract of $135,000 were reclassified to
accrued expenses to reduce reserves for royalties in accordance with an
agreement with the Former Parent in which the Former Parent used the proceeds
from such sales to settle certain litigation involving royalties in which the
Company and the Former Parent were joint defendants.

The 1998 financial statements reflect both allocated and, where readily
determinable, actual expenses for services provided by the Company's Former
Parent and affiliates. Where allocations have been utilized, the Company, its
Former Parent and affiliates recorded transactions based upon systematic


                                      F-18
<PAGE>   66
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

7.  RELATED PARTY TRANSACTIONS (CONTINUED)

and reasonable methods, including but not limited to sales, asset values and
headcount, all as a percent of total.

The amounts by major category of historical transactions with the Former Parent
and affiliates for the year ended December 31, 1998 follow:

<TABLE>
<CAPTION>
                                                       1998
                                                       ----
                                                   (IN THOUSANDS)
<S>                                                <C>
Due from (to) Former Parent and affiliates:
  Balance at beginning of year ...............       $ 26,134
     Income tax liability payable to Former
       Parent ................................         (2,272)
     Taxes paid to Former Parent .............          2,422
     Cash advances to Former Parent ..........          7,685
     Allocation of employee benefits(1)  .....           (402)
     Sales to affiliates .....................             --
     Allocation of security services .........           (100)
     Sales and administration expenses(2)  ...           (244)
     Allocation of general liability insurance             --
     Intercompany interest(3) ................            156
     Reversal of SERP liability ..............            (56)
     Executive benefits(4)  ..................            (13)
     Other ...................................            578
     Deemed dividend to Former Parent (see
       Note 8) ...............................        (33,888)
                                                     --------
  Balance at end of year .....................       $     --
                                                     ========
</TABLE>


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

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

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

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


                                      F-19
<PAGE>   67
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

8. STOCKHOLDERS' EQUITY

On June 11, 1998, the Company declared a 1,363.6 to one stock split, effective
July 2, 1998, in the form of a stock dividend to the Former Parent, of its
Common Stock and increased its authorized Common Stock to 30,000,000 shares and
its authorized Preferred Stock to 5,000,000 shares. 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. In connection with the Offering, the amounts due from the Former Parent
and affiliates of approximately $33.9 million were canceled and deemed to be a
dividend (see Note 7). For financial reporting purposes, the amounts due from
the Former Parent and affiliates prior to the Offering Date have been classified
within stockholders' equity.

On June 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 taken by Douglas A. Crane, an affiliate of
Crane.

Under the Agreement, Crane has the right to purchase its proportionate share of
any new issuance of the Company's securities, other than securities issued in
connection with an acquisition, securities issued in connection with any stock
option plan or agreement, securities issued in replacement of any outstanding
securities, securities issued to all holders of shares of common stock on a pro
rata basis or any securities issued in connection with a strategic investment.
Also, in the event that the Company issues shares of common stock and or
securities convertible into or exercisable for shares of common stock in
connection with the settlement of any litigation that was outstanding as of June
29, 2000, Crane will be allowed to purchase its proportionate share of the
Company's common stock at a price of $3.35 per share. As of March 15, 2001, no
proportionate purchase has been made.

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 agreements with Crane under which the
Company rents factory space and leases employees for the Company's facility in
Dalton, MA. Under these agreements the Company paid Crane $12,000 for the rental
of the factory space and $11,000 for the leased employees. In addition the
Company paid Crane $50,000 for leasehold improvements on the rental space.


                                      F-20
<PAGE>   68
                     AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                         NOTES TO FINANCIAL STATEMENTS

9. STOCK INCENTIVE PLANS

On August 4, 2000, the Company adopted the American Bank Note Holographics, Inc.
2000 Stock Incentive Plan (the "2000 Plan"), which was subsequently approved by
the Company's stockholders at the annual meeting on September 12, 2000.
Subsequent to the Offering Date, 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 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
2,613,000 shares of Common Stock. Options to purchase 2,472,500 shares of common
stock were outstanding under the Plans at December 31, 2000. Options to purchase
an additional 165,000 shares of common stock were outstanding outside the Plans
at December 31, 2000. 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 33 1/3% 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, 2000, 1999 and 1998 and changes during the years then ended
follows:

<TABLE>
<CAPTION>
                                                           2000                         1999                          1998
                                                -------------------------     ------------------------      -----------------------
                                                                 WEIGHTED                     WEIGHTED                     WEIGHTED
                                                                 AVERAGE                      AVERAGE                      AVERAGE
                                                                 EXERCISE                     EXERCISE                     EXERCISE
                                                   SHARES         PRICE          SHARES         PRICE        SHARES          PRICE
                                                -----------      --------     -----------     --------      ----------     --------
<S>                                             <C>              <C>          <C>             <C>           <C>            <C>
Outstanding, beginning of year ...........       1,420,000        $3.22          984,250        $8.50               --       $  --
     Granted .............................       1,136,500         1.99        1,244,000         2.35          984,250        8.50
     Forfeited ...........................         (84,000)        4.32         (808,250)        8.31               --
                                                ----------                    ----------                    ----------
Outstanding, end of year .................       2,472,500         2.64        1,420,000         3.22          984,250        8.50
                                                ==========                    ==========                    ==========
Exercisable, end of year .................         696,666         3.38           67,333         8.50               --        8.50
                                                ==========                    ==========                    ==========
Weighted average fair value of
   options outstanding during the year ...      $     1.56                    $     1.97                    $     6.19
                                                ==========                    ==========                    ==========
</TABLE>


                                      F-21
<PAGE>   69
                     AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                         NOTES TO FINANCIAL STATEMENTS

9.  STOCK INCENTIVE PLANS (CONTINUED)

The following table summarizes information about stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                                                     WEIGHTED-
                                                                      AVERAGE                 WEIGHTED-
                                                                     REMAINING                 AVERAGE
          RANGE OF                      NUMBER                      CONTRACTUAL                EXERCISE
       EXERCISE PRICES                OUTSTANDING                  LIFE (YEARS)                 PRICE
       ---------------                -----------                  ------------                 -----
<S>   <C>                             <C>                          <C>                        <C>
      $1.6875 to $8.50                 2,472,500                       8.90                     $ 3.38
</TABLE>


The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
outstanding stock options. Had compensation cost for the Company's outstanding
stock options been determined based on the fair value at the grant dates for
those options consistent with SFAS No. 123, the Company's 2000, 1999 and 1998
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 amounts):

<TABLE>
<CAPTION>
                                                       2000             1999             1998
                                                     ---------        ---------        ---------
<S>                                                  <C>              <C>              <C>
Net income (loss):
     As reported                                     $  (1,883)       $  (1,075)       $   1,119
                                                     =========        =========        =========
     Pro forma                                       $  (2,598)       $  (2,295)       $     132
                                                     =========        =========        =========
Basic and diluted net income (loss) per share:
     As reported                                     $   (0.12)       $   (0.08)       $    0.08
                                                     =========        =========        =========
     Pro forma                                       $   (0.17)       $   (0.17)       $    0.01
                                                     =========        =========        =========
</TABLE>

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


<TABLE>
<CAPTION>
                                   2000                 1999                 1998
                              --------------       --------------       --------------
<S>                           <C>                  <C>                  <C>
Expected volatility                    70.10%               71.25%               71.25%
Risk-free interest rate       5.23% to 6.60%       4.84% to 5.92%                 5.48%
Dividend yield                            --                   --                   --
Expected life                      7.5 years            7.5 years            7.5 years
</TABLE>


                                      F-22
<PAGE>   70
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

10. EMPLOYEE BENEFITS PLANS

RETIREMENT PLANS -- On October 1, 1999, the Company implemented defined
contribution plans for its employees. Prior to October 1, 1999, the Company
participated in the defined contribution plan of the Former Parent. Aggregate
contributions to such plans, which have been charged to the Company's
operations, were approximately $46,000, $77,000 and $200,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

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


                                      F-23
<PAGE>   71
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

11. COMMITMENTS AND CONTINGENCIES

SEC AND U.S. ATTORNEY INVESTIGATIONS -- On February 9, 1999, the Division of
Enforcement of the SEC issued a Formal Order Directing Private Investigation in
connection with matters giving rise to the need to restate the Company's
previously issued financial statements for the years ended December 31, 1997 and
1996 and the first three quarters of 1998 that were filed by former management.
The SEC has concluded its investigation of the Company and has accepted the
Company's offer of settlement. On March 16, 2001, the Commissioners of the SEC
approved an order making findings and imposing a cease and desist order on any
future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a),
13(b)(2)(A) and (B), and 30A of the Exchange Act, and Exchange Act Rules 10b-5,
12b-20, and 13a-13. Without admitting or denying any liability the Company has
agreed to pay a $75,000 fine, which the Company recorded as a charge to its
statement of operations in the fourth quarter of 2000, because former senior
officers of the Company allegedly violated provisions of the Foreign Corrupt
Practices Act. It is anticipated that the order will be approved and filed by
the Secretary of the SEC in the near future.

The U.S. Attorney's Office for the Southern District of New York had also
commenced an investigation in 1999 in connection with matters giving rise to the
need to restate the Company's previously issued financial statements, as well as
a possible violation in 1998 of the Foreign Corrupt Practices Act by certain
former senior officers of the Company. The Company has been advised that it is
not a target of the investigation and management does not, therefore, anticipate
any action being taken against the Company by the United States Attorney's
Office.

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

In October 2000, the Company, all other defendants and the plaintiffs entered
into a definitive agreement to settle all of the claims that are the subject of
the class action, as well as claims asserted against the Former Parent and other
defendants in a separate class action. The settlement agreement received the
final approval of the Court on December 15, 2000. The approval of the Bankruptcy
Court for the Southern District of New York in which the Chapter 11 proceeding
of the Former Parent is pending has already been given. Under the settlement,
the insurance carrier for the Company and the Former Parent will pay
$12,500,000, the previous auditors will pay $2,350,000 and the Company will
issue and distribute 1,460,000 shares of its common stock as well as warrants to
purchase 863,647 shares of the Company's common stock, at an exercise price of
$6.00 per share. The shares, which will be issued in 2001 (365,000 have been
issued through March 15, 2001), have been included in shares outstanding in the
accompanying financial statements. The warrants will be exercisable for a 30
month period commencing on December 15, 2000.


                                      F-24
<PAGE>   72
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Former Parent will also issue and distribute certain of its securities as
part of the settlement. In regard to the settlement, the Company recorded a
charge to its statement of operations in fourth quarter of 2000 of $3,356,000.
Such charge was comprised of the cost of the Company's common stock issued at
the closing price of the stock on the day of final settlement, the value of the
warrants issued, which value was determined using the Black-Scholes option
pricing model, and other related costs.

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

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


                                      F-25
<PAGE>   73
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

In 1998, the Company fulfilled an order for holograms for approximately
$600,000. In 1999, the customer alleged that the Company breached its contract
with such customer based on problems that the ultimate user was experiencing
with the holograms, and claimed potential damages in excess of $6 million. On
May 29, 2000 the Company entered into a settlement with the customer under which
the Company will provide a product credit which the customer may apply against
future invoices on certain products sold to it by the Company. The parties also
exchanged general releases of all claims. The Company recorded a $775,000
warranty reserve during the first quarter of 1999, in regard to this matter,
which the Company considers to be a reasonable estimate of the cost of the
settlement. In the third quarter of 2000 the Company's insurance carriers agreed
to pay $750,000 to the Company as a product liability reimbursement on this
matter.

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

Amounts accrued for litigation matters represent the anticipated costs (damages
and/or settlement amounts) in connection with pending litigation and claims. The
costs are accrued when it is both probable that an asset has been impaired or a
liability has been incurred and the amount can be reasonably estimated. The
accruals are based upon the Company's assessment, after consultation with
counsel, of probable loss based on the facts and circumstances of each case, the
legal issues involved, the nature of the claim made, the nature of the damages
sought and any relevant information about the plaintiffs, and other significant
factors which vary by case. When it is not possible to estimate a specific
expected cost to be incurred, the Company evaluates the range of probable loss
and records the minimum end of the range. As of December 31, 2000 and 1999,
accruals for litigation matters approximated $40,000 and $315,000, respectively.
It is anticipated that the $40,000 accrual will be paid in 2001. The Company
believes, based on information known at December 31, 2000, that anticipated
probable costs of litigation matters as of December 31, 2000 have been
adequately provided to the extent determinable.

INDEMNIFICATION FROM FORMER PARENT -- As described above and in Notes 5 and 7,
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.


                                      F-26
<PAGE>   74
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

11.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

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

Net rental expense was approximately $1.2 million, $1.3 million and $1.2 million
for the years ended December 31, 2000, 1999 and 1998, respectively.

At December 31, 2000, future minimum lease payments under noncancelable
operating leases are as follows: $1.1 million in 2001; $0.9 million in 2002;
$0.8 million in 2003; $0.8 million in 2004; $0.8 million in 2005; and $1.2
million thereafter.

EMPLOYMENT AGREEMENTS -- In 1999, the Company entered into employment agreements
with certain officers, which provide for among other matters minimum
compensation of approximately $627,000 in 2001 and $75,000 in 2002. The
agreements also provide for bonuses. In connection with these agreements, the
Company granted options to acquire 1,448,000 shares of its Common Stock at
prices ranging from $1.75 to $2.88 per share, representing the fair market value
of the Company's Common Stock on the dates of grant.


                                      F-27
<PAGE>   75
                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.
                          NOTES TO FINANCIAL STATEMENTS

12.  SPECIAL INVESTIGATION AND RELATED RESTATEMENT EXPENSES

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


                                      F-28
<PAGE>   76
                                                                     SCHEDULE II

                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                    ADDITIONS
                                                             -------------------------
                                               BALANCE,      CHARGED TO     CHARGED TO                   BALANCE,
                                              BEGINNING       COSTS AND        OTHER                        END
                DESCRIPTION                    OF YEAR        EXPENSES       ACCOUNTS     DEDUCTIONS      OF YEAR
                -----------                   ---------      ----------     ----------    ----------     --------
                                                                        (IN THOUSANDS)
<S>                                           <C>              <C>          <C>          <C>             <C>
  Year ended December 31, 2000:
       Allowance for doubtful accounts
         (deducted from accounts
         receivable)...................       $   390           $     81                  $    396 (1)    $   75
                                              =======           ========                  ========        ======
       Allowance for obsolescence
         (deducted from inventory).....        $2,806           $    244                  $  2,372         $ 678
                                               ======           ========                  ========         =====

  Year ended December 31, 1999:
       Allowance for doubtful accounts
         (deducted from accounts
         receivable)...................       $   131           $    342                  $     83 (1)     $ 390
                                              =======           ========                 =========         =====
       Allowance for obsolescence
         (deducted from inventory).....       $ 2,756           $  1,295                  $  1,245        $2,806
                                              =======           ========                  ========        ======

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

----------

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


                                      F-29
<PAGE>   77
                                   SIGNATURES

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

                                      AMERICAN BANK NOTE HOLOGRAPHICS, INC.



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

MARCH 30, 2001
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                                         TITLE                                DATE
---------                                                         -----                                ----
<S>                                           <C>                                                   <C>
/s/ Kenneth H. Traub                          President, Chief Executive Officer and                March 30, 2001
-------------------------------------
KENNETH H. TRAUB                              Director (Principal Executive Officer)

/s/ Alan Goldstein                            Chief Financial Officer                               March 30, 2001
-------------------------------------
ALAN GOLDSTEIN                                (Principal Financial and
                                              Accounting Officer)
/s/ Salvatore F. D'Amato                      Chairman of the Board                                 March 30, 2001
-------------------------------------
SALVATORE F. D'AMATO

/s/ Stephen A. Benton                         Director                                              March 30, 2001
-------------------------------------
STEPHEN A. BENTON

/s/ Fred J. Levin                             Director                                              March 30, 2001
-------------------------------------
FRED J. LEVIN

/s/ Douglas A. Crane                          Director                                              March 30, 2001
-------------------------------------
DOUGLAS A. CRANE
</TABLE>