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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, 2002                                         

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |  | For the transition period of        to                                                  

Commission File No. 1-14227

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

|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization) |  | 13-3317668
(I.R.S. Employer
Identification Number)
|                                                                        |  |                                                   
|399 EXECUTIVE BOULEVARD                                                 |  |                                                   
|ELMSFORD, NY
(Address of Principal Executive Offices)                   |  | 10523
(Zip Code)                                  

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES   x   NO   o

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

The aggregate market value of the common stock, $0.01 par value, held by
non-affiliates of the registrant, based upon the closing sale price of the
common stock on June 28, 2002, was approximately $18,357,730. Shares of common
stock held by each officer and director and by each person who controls 10% or
more of the outstanding voting power of the registrant have been excluded in
that such persons





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may be deemed to be affiliates. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.

The aggregate number of shares of common stock, $.01 par value,
outstanding on March 14, 2003 was 18,483,720.

DOCUMENTS INCORPORATED BY REFERENCE
NONE

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AMERICAN BANK NOTE HOLOGRAPHICS, INC.

2002 Form 10-K

Table of Contents

|                              |                                                                                                |     |    | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | --- | -- | 
|Part I                        |                                                                                                |     |    | 
|Item 1.                       | Business                                                                                       |     | 4  | 
|Item 2.                       | Properties                                                                                     |     | 19 | 
|Item 3.                       | Legal Proceedings                                                                              |     | 19 | 
|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                                                                        |     | 22 | 
|Item 7.                       | Managements Discussion and Analysis of Financial Condition
and Results of Operations          |     | 24 | 
|Item 7A.                      | Quantitative and Qualitative Disclosures About Market Risk                                     |     | 32 | 
|Item 8.                       | Financial Statements and Supplementary Data                                                    |     | 32 | 
|Item 9.                       | Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure           |     | 32 | 
|Part III                      |                                                                                                |     |    | 
|Item 10.                      | Directors, Executive Officers and Key Employees of Registrant                                  |     | 33 | 
|Item 11.                      | Executive Compensation                                                                         |     | 36 | 
|Item 12.                      | Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters |     | 43 | 
|Item 13.                      | Certain Relationships and Related Transactions                                                 |     | 45 | 
|Item 14.                      | Control Procedures                                                                             |     | 46 | 
|Part IV                       |                                                                                                |     |    | 
|Item 15.                      | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |     | 47 | 
|Index to Financial Statements |                                                                                                | F-1 |   

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Part I.

Item 1. BUSINESS.

American Bank Note Holographics, Inc. (ABNH or the Company) originates,
produces and markets holograms. Our holograms are used primarily for security
applications such as counterfeiting protection and authentication of
transaction cards, identification cards, documents of value and consumer
products. Our ability to 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, Quaker State and Eli Lilly, as well as
agencies of the United States government and certain foreign governments. We
also produce non-secure holograms for 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 over 20 years of experience in the industry,                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our expertise in holographic technology and production
techniques,                                                                                         
|
| |  |  | our origination laboratories, which enable us to produce
distinctive holograms with a variety of security features that make
them difficult to counterfeit,
|
| |  |  | our ISO 9000 certified manufacturing facilities, which
allow us to mass produce high-quality holograms 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, the viewer is able to see features
such as depth and movement, which is not typically possible in normal
two-dimensional photographs. Holograms can also include information that is
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 holographic industry includes products that protect
and authenticate transaction cards, documents of value, consumer products and
identification cards. Using holography, a combination of art and science, each
customer can develop its own unique hologram with which to identify and protect
its product. Holograms provide the following major benefits as security
devices:



| |  |  | difficult to copy - holograms cannot be copied with
conventional copying equipment such as color copiers or scanners.
The unique properties and high resolution of a security hologram
make it extremely difficult to replicate even with specialized
equipment and expertise.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | overt features - the unique visual aspects of a hologram
are easily recognizable, making                                                                                                                                                                                      

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authentication of products and documents practical for the general
public without special machinery, equipment or training. Overt
features that we offer include:



| |  |  | 3-D Imagery - an image that has three
dimensions and gives the illusion of depth or varying
distances.          
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | 2-D Imagery - an image that has two dimensions on a single plane.                                               
|
| |  |  | Tru Color - an image that retains the natural coloration of an object.                                          
|
| |  |  | Parallax - a two-dimensional image placed on
different planes to create depth and a rich three-dimensional
look.
|
| |  |  | Secondary Flip Image - an image that appears
and disappears when viewed at certain angles.                      
|
| |  |  | Diffractive Mercurial - a bright, sharp, color shifting two-dimensional image.                                  
|
| |  |  | Animation - a two or three-dimensional image that gives the illusion of motion.                                 



| |  | covert features - hidden features that can only be detected
with high-powered microscopes or specialized readers can be
incorporated into a hologram to make it more difficult to
counterfeit and support forensic investigation. Covert features
that we offer include:
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Hidden Latent Image - a hidden element within a
holographic image that is machine-readable only with a
proprietary reader.
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | HoloScan - a hidden machine readable code
within a holographic image that can only be viewed with a
proprietary reader   
|
| |  |  | Micro Imagery - text or a logo within a
holographic image that is visible only under magnification                        
|
| |  |  | Nano Imagery - microscopic text or a logo
within a holographic image that is visible only with
high-powered magnification 



| |  | application - the hologram can be combined with other
security techniques to further enhance the defense against
counterfeiting and provide tamper protection and other security
objectives.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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

Non-Security

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

The unique visual appeal of holograms makes them attractive for use on consumer
products. Holograms

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

Markets and Products

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

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

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

HoloCard. HoloCard incorporates a hologram on a cards entire face, creating
a customized marketing tool and a counterfeit deterrent. A full-faced hologram
can support brand recognition, product enhancement campaigns, customer
retention and overall product differentiation efforts. In addition, HoloCard
can be designed to include security features such as hidden images and codes,
micro imaging of lettering or logos and microscopic coding viewable with
high-powered magnification. While traditional holograms on cards are hot
stamped onto the cards after card production, HoloCard is adhered to the base
plastic sheets prior to card production in order to make the process more
efficient for our customers.

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

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

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

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

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

Product Authentication and Security Packaging.The use of holograms for product
authentication and security packaging is driven by concerns regarding
counterfeiting, piracy, pilfering, diversion and other infractions that can
result in lost sales, lost goodwill and product liability claims. Holograms are
used as authentication devices in, among others, pharmaceuticals, licensed
consumer products and high value consumer and industrial products. Product
authentication holograms are either machine or hand-applied to individual
products. A holographic label that is tampered with can become permanently
damaged, leaving a visible footprint on the product. Our products for this
market segment include:

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

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

HoloCap. HoloCap is ABNHs innovative approach to sealing bottles or
containers with a higher level of security. Utilizing an induction seal
process, this application provides for authentication, tamper-resistance and
branding. A holographic layer becomes part of the seal itself. HoloCap can be
combined with other security features to create an effective approach for the
security needs in packaging for pharmaceuticals, food and beverage, chemicals
and other industries.

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

Transparent Laminates for Identification Documents.We provide secure
holographic laminates for applications such as ID cards, passports, military
IDs and drivers licenses. We have patents on demetalized holograms which are
transparent and used to see printed information under the holograms. We
believe there are significant security advantages for demetalized holograms
used on ID cards and passports. We currently supply transparent laminates for
certain U.S. government ID cards as well as national IDs for certain foreign
countries. We believe there is a need to improve the security of certain ID
cards and passports and we are proposing security holograms as a component of
the security enhancements that are being considered by major issuers of
identification documents.

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Commercial.We also produce holographic imagery for decorative and promotional
purposes. Our products for this market segment include:

HoloMold. HoloMold is our patented technology for the incorporation of
holography into plastic products. With HoloMold, an ABNH hologram master is
incorporated into the mold by an injection molder and the holographic image is
formed as the plastic product is being produced.

Pressure Sensitive Labels. Our pressure-sensitive label is available with a
rich array of design. These devices can be combined with conventional and print
design elements. By combining multiple techniques, we can achieve eye-catching
appeal that is customized to our customers specific target audience.

Packaging.
Standard or customized holographic patterns and images can be applied to
board or packaging material and can be used for flexible packaging
applications. These attractive, consumer appealing products can serve as
substrates for a wide variety of packaged goods such as wrapping paper and
packaged consumer products.

Strategy

Protect and Enhance Our Position in Our Core Transaction Card Business.We hold
a leadership position in the market for holograms on transaction cards as a
result of our relationships with companies such as MasterCard, VISA, Europay,
Diners Club, Discover, American Express and many of the major security card
manufacturers. We intend to maintain our leadership position in the card
industry and grow through the distribution of new products that address the
security needs and design objectives of this market.

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

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

Broaden and Enhance Our Security Offerings. We are developing better
authentication solutions for our target markets and exploring opportunities to
combine other technologies and application methodologies with holography to
enhance the range of security solutions we can offer our customers.

Control Costs. The holographic industry is increasingly competitive and we
intend to prudently manage our expenses to strengthen our competitive position.

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

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Production Process

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

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

Design

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

Origination

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

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

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

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

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 plate making process is an important
component of our ability to mass-produce our secure holograms.

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

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 casting. We developed a proprietary casting
method, which we refer to as In-Situ Polymeric Replication. Using this method,
a polymer is transferred to a substrate (polyester, polypropylene, etc.) which
is then put in contact with the holographic plate so that holographic imagery
is replicated. The material is then metallized using a vacuum deposition
process.

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

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

Quality

Through the ISO 9000 certification program, we continually make improvements to
our processes through the use of an effective and efficient business management
system.

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

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

Our manufacturing facility located in Huntingdon Valley, Pennsylvania maintains
ISO 9002 certification covering quality assurance for production.

Information Technology

We implemented an integrated enterprise resource planning system starting in
2000 that provides more comprehensive information for management decision
making. We made improvements to this system in 2002 and we intend to make
further improvements in 2003.

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

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create new technologies and proprietary production processes and to deliver
innovative products to the marketplace. We intend to continue to make on-going
investments in Research and Development in order to:



| |  |  | Develop better solutions for our customers problems                                                 
| | - |  | -----------------------------------------------------------------------------------------------------
|
| |  |  | Create features which differentiate our products from those of our competitors                       
|
| |  |  | Develop and improve processing techniques to improve the
quality and reduce the costs of our products

Manufacturing Facilities

See Item 2. Properties.

Sales and Marketing

In 2002, we provided holographic products to approximately 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, Eli Lilly, Quaker State, agencies of
the United States government, foreign governments and numerous other companies.

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

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

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

Competition

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

Trademarks and Patents

We utilize a combination of patents, trade secrets and confidentiality
agreements, as well as restricted

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access and other forms of intellectual property protection, to safeguard
certain of our proprietary technology and processes. We also hold certain
trademarks with respect to certain products and services. We currently hold
approximately 30 U.S. patents and numerous foreign patents, as well as patents
pending and service marks that are used in our business.

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

Employees

As of March 14, 2003, we employed approximately 105 persons of which 61 are
covered by collective bargaining agreements. We consider our relations with
our employees to be good. We are party to collective bargaining agreements
with Paper, Allied-Industrial, Chemical & Energy Workers International Union
Local 1-0318 (Local 1-0318) and PACE International Union Local 286 (Local
286). The agreement with Local 1-0318 has a three-year term, will expire on
December 31, 2003 and covers 23 employees. The agreement with Local 286 has a
five-year term, will expire on January 28, 2005, and covers 38 employees.

Available Information

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

Risk Factors

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:



| |  |  | timing of customer orders,
| | - |  | --------------------------
|
| |  |  | customer business cycles, 
|
| |  |  | card expiration patterns, 
|
| |  |  | inventory replenishment,  
|
| |  |  | increased competition,    

12



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##### 





| |  |  | changes in our and our competitors pricing policies,       
| | - |  | ------------------------------------------------------------
|
| |  |  | patent expiration and fluctuating amounts of royalty income,
|
| |  |  | changes in the cost of materials or labor,                  
|
| |  |  | cost and availability of the services of subcontractors,    
|
| |  |  | costs of recruiting or relocating personnel,                
|
| |  |  | increased research and development expenses,                
|
| |  |  | expenses associated with litigation,                        
|
| |  |  | financing costs,                                            
|
| |  |  | market acceptance of our products,                          
|
| |  |  | the time required for customer testing and evaluation,      
|
| |  |  | costs associated with implementing changes in operations,   
|
| |  |  | 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, which could cause our
stock price to decrease.

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

Sales to credit card companies accounted for approximately 82% of our total
sales in 2002 and 76% of our total sales in 2001. Sales to MasterCard and
approved manufacturers of VISA brand credit cards together accounted for
approximately 67% of our total sales in 2002 and 60% of our total sales in
2001. We entered into an agreement with MasterCard dated February 28, 2003,
which replaces the agreement dated February 1, 1996, as amended. The new agreement expires in February 2008, subject to automatic
renewal if not terminated by either party. Under the terms of the new
agreement, MasterCard is obligated to purchase at least 80% of its holograms
from us, and has the right to utilize Crane & Co. to produce up to 20% of
MasterCards annual hologram requirements in coordination with us. The new
agreement provides that MasterCard will receive three sequential price reductions of
approximately 3% each, effective at the beginning of 2003, 2004 and 2006. Currently,
we are one of two companies authorized to manufacture and sell VISA brand
holograms to manufacturers of VISA brand credit cards. If either MasterCard or
VISA were to terminate its respective relationship with us, or if we were to
lose a substantial portion of our business with either of these entities our
business, operating results and financial condition would be materially and
adversely affected. In addition, if we fail to obtain anticipated orders from
these customers or if we experience delays or cancellations of orders or
pressure to reduce prices from these customers, our business and financial
performance will be materially and adversely affected.

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

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

13



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##### 



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



| |  |  | price,              
| | - |  | --------------------
|
| |  |  | technology,         
|
| |  |  | 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. We cannot assure you that we
will have sufficient resources to make the technological advances necessary to
maintain any competitive advantages. We also cannot assure you that the bases
of competition in the industries in which we compete will not shift.

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

Our business is dependent upon our proprietary technology. We utilize a
combination of patents, trade secrets and confidentiality agreements, as well
as restricted access and other forms of intellectual property protection to
safeguard certain of our proprietary technology and processes. We also hold
certain trademarks with respect to certain products and services. We cannot be
certain as to the degree of protection offered by any of our patents or as to
the likelihood that patents will be issued for any of our pending applications.
Certain of our patents have been declared invalid in the past, and other
patents will expire over the next several years. We anticipate that
the expiration of these patents will cause our royalty income to
decrease materially starting in 2003. We can not assure you that we
will be able to maintain the confidentiality of our trade secrets or that our
confidentiality agreements will provide meaningful protection of our trade
secrets or other proprietary information. In addition, litigation may be necessary in the future to enforce
our intellectual property rights or to determine the validity and scope of our
patents or of the proprietary rights of others. Such litigation might result in
substantial costs and diversion of resources and management attention.

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

We are subject to the risk of adverse claims and litigation alleging
infringement by us of the intellectual property rights of others. In the past,
third-parties have claimed, and may in the future claim, infringement by our
products. Any such claims, with or without merit, could result in significant
litigation costs and diversion of management attention, and could require us to
enter into royalty and license agreements that may be disadvantageous to us or
cause other harm to our business. If litigation is successful against us, it
could result in invalidation of our proprietary rights and liability for
damages, which could have a material adverse effect on our business and
financial condition.

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

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

14



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##### 



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

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



| |  |  | 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.

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

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



| |  |  | management,              
| | - |  | -------------------------
|
| |  |  | engineering,             
|
| |  |  | 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.

Our business could be adversely affected by the resolution of certain matters
arising from the actions of our former management. We have settled an
investigation by the Securities and Exchange Commission. Two of our former
officers have pled guilty, and a third former officer has been indicted by the
United States Attorney.

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 our 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 various provisions of the federal
securities laws. Without admitting or denying any liability, we paid a $75,000
fine to the SEC. In addition, two of our former officers have pled guilty and
one of our former officers has been indicted by the United States
Attorney in connection with alleged
violations of the securities laws. Several of our employees and employees of
some of our customers and vendors have been subpoenaed to testify in the trial
of this former officer,

15



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##### 



which we believe will take place in 2003. Such testimony may be a distraction
to these people and may result in substantial costs and diversion of our
resources. We cannot assure you that our business or results of operations
will not be adversely affected as a result of these events.

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

On December 8, 1999, ABN filed a petition and plan of reorganization under
Chapter 11 of the Federal Bankruptcy Code. In connection with negotiations on
the Chapter 11 plan, we reached an agreement with ABN which provided, among
other things, for ABN to be responsible for and pay all asserted and unasserted
income, franchise or similar tax liabilities of ours for the period January 1,
1990 through July 20, 1998 and indemnify us with respect to any such
liabilities. If ABN continues to experience significant financial difficulty,
it may result in its inability to perform under the terms of the agreement with
us which could have a material adverse effect on our financial position,
results of operations and cash flows.

We may be subject to significant product liability in connection with the
products which we provide to our customers.

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

Since a significant percentage of our sales are derived from overseas
customers, our exports and business may be subject to some risks related to
doing business internationally.

Sales derived from customers outside the United States were 27% or our total
sales in 2002 and 28% of our total sales in 2001. Our international sales are
subject to risks, including:



| |  |  | U.S. 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.

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

Our business is subject to environmental regulation and is always subject to
environmental liability.

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

16



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##### 



The issuance of shares of our common stock and warrants to purchase shares of
our common stock as part of our class action litigation settlement, together
with the potential sales of such shares in the public market, could result in
substantial dilution of your investment, a detrimental effect on our liquidity
and ability to raise additional capital, and a significant decline in the
market value of our common stock.

As of March 14, 2003, we had approximately 18,483,720 shares of our common
stock issued and outstanding, which included 1,460,000 shares of our common
stock issued as part of the settlement of our class action litigation, and had
outstanding warrants to purchase 863,647 shares of our common stock at a price
of $6.00 per share issued and outstanding. As of March 14, 2003, we also had
2,343,500 additional shares of common stock reserved for issuance upon exercise
of outstanding stock options. If the holders of shares of common stock issued
as part of the settlement, or the holders of shares acquired upon the exercise
of outstanding options or warrants, were to sell a significant amount of their
shares into the open market, the market price of our common stock could be
adversely affected. The sales might also make it more difficult for us to sell
equity or equity-related securities in the future at a price we deem
appropriate.

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

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

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

Our executive officers and directors and entities related to them, in the
aggregate, beneficially own approximately 23.6% of our common stock as of March
14, 2003, which includes 18.4% owned by Crane & Co., Inc., an investor related
to Douglas A. Crane, one of our directors. These stockholders acting together
have the ability to exert substantial influence over all matters requiring
approval by our stockholders. These matters include the election and removal of
directors and any merger, consolidation or sale of all or substantially all of
our assets. Such a concentration of ownership could have the effect of
delaying, deferring or preventing a change in control, or impeding a merger or
consolidation, takeover or other business combination.

17



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##### 



Effects of anti-takeover provisions could inhibit the acquisition of ABNH.

Our certificate of incorporation permits our board of directors to issue up to
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of such shares without any further vote or action
by our stockholders. Although we have no current plans to issue shares of
preferred stock, the potential issuance of preferred stock may have the effect
of:



| |  |  | discouraging potential acquisitions proposals,                                                         
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | delaying or preventing a change in control, and                                                        
|
| |  |  | limiting the price that investors might be willing to pay
in the future for shares of our common stock.

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

18



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##### 



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 each facility, access and egress,
monitoring employee integrity, and safeguarding of machinery, materials,
work-in-process and finished product until shipping. The security department
witnesses material destruction and supervises the transfer of security
shipments. Each facility is equipped with full perimeter alarms enhanced by
window glass break sensors, internal motion detectors and closed circuit video
monitoring of security sensitive areas.

Item 3. LEGAL PROCEEDINGS.

A consolidated class action complaint
against us, certain of our former
officers and directors, our former parent company, American Banknote
Corporation (ABN or our Former Parent), the four co-lead underwriters of
our Initial Public Offering (the Offering) and Deloitte & Touche LLP, had
been filed in the United States District Court for the Southern District of New
York (the Court). The complaint alleged violations of the federal securities
laws and sought to recover damages on behalf of all purchasers of our common
stock during the class period (July 15, 1998 through February 1, 1999). The
complaint sought rescission of the purchase of shares of our common stock or
alternatively, unspecified compensatory damages, along with costs and expenses
including attorneys fees. In October 2000, we, all other defendants and the
plaintiffs entered into a definitive agreement to settle all of the claims that
were the subject of the class action, as well as claims asserted
against our
Former Parent and other defendants in a separate class action. The settlement
agreement received the final approval of the Court on December 15, 2000. Under
the settlement, the insurance carrier for us and our Former Parent paid
$12,500,000 and Deloitte & Touche LLP paid $2,350,000. In
addition, we
issued and distributed 1,460,000 shares of our common stock, of which 365,000
shares were issued and distributed in February 2001 and the remaining 1,095,000
shares were issued and distributed in May 2002. We also issued and
distributed warrants to purchase 863,647 shares of our common stock, at an
exercise price of $6.00 per share. The warrants expire on
June 18, 2003. Our
Former Parent also issued and distributed certain of its securities as part of
the settlement. In regard to the settlement, we recorded a charge to our
statement of operations in the fourth quarter of 2000 of $3,356,000. Such
charge was comprised of the cost of our common stock issued at the closing
price of the stock on the day the settlement agreement received the final
approval of the Court, the value of the warrants issued, which value was
determined using the Black-Scholes option pricing model and other related
costs.

During 1991, we entered into a Patent License Agreement (the License
Agreement), which required us to pay royalties in connection with certain
products that we produce. During 2002, the

19



---



##### 



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

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

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

None.

20



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##### 



Part II

Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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

The following table sets forth the high and low closing prices of our common
stock for each quarter of 2001, 2002 and the first two months of 2003.

|                                          |  |      |      |     |  |   |      | 
|----------------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                          |  | High |      | Low
|                                          |  |      |      |    
|2001                                      |  |      |      |     |  |   |      | 
|First Quarter                             |  | $    | 2.00 |     |  | $ | 1.34 | 
|Second Quarter                            |  |      | 2.40 |     |  |   | 1.41 | 
|Third Quarter                             |  |      | 2.25 |     |  |   | 1.60 | 
|Fourth Quarter                            |  |      | 2.10 |     |  |   | 1.61 | 
|2002                                      |  |      |      |     |  |   |      | 
|First Quarter                             |  | $    | 1.92 |     |  | $ | 1.39 | 
|Second Quarter                            |  |      | 2.08 |     |  |   | 1.14 | 
|Third Quarter                             |  |      | 1.39 |     |  |   | 0.85 | 
|Fourth Quarter                            |  |      | 0.93 |     |  |   | 0.63 | 
|2003                                      |  |      |      |     |  |   |      | 
|First Quarter (through February 28, 2003) |  | $    | 0.98 |     |  | $ | 0.71 | 

Warrants to purchase our common stock have been quoted on the NASDs
Over-the-Counter Bulletin Board quotation service since August 27, 2002.
During 2002, the warrants, which expire on June 18, 2003, had high and low
closing prices of $0.05 and $0.01, respectively, during the third quarter and a
high and low closing price of $0.01 during the fourth quarter. During the
period ended February 28, 2003, the warrants had a high and low closing price of
$0.01.

As of March 14, 2003, there were approximately 510 holders of record of our
common stock and 465 holders of warrants to purchase our common stock. Because
many of our shares of common stock and warrants to purchase our 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.

21



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##### 



Item 6. SELECTED FINANCIAL DATA.

|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|------------------------- | -------------------------------------------------------------- |  | ------------------------------------------- | ------ | ----------------------- | ------ | ------ | ------ | -------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | -
|                          |                                                                |  |                                             |        | Year Ended December 31,
|                          |                                                                |  |                                             |        |                        
|                          |                                                                |  |                                             |        | 1998                    |        | 1999   |        | 2000 (c) |        | 2001   |        | 2002
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |     
|STATEMENT OF INCOME DATA: |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |       
|                          | Revenue:                                                       |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |  
|                          |                                                                |  | Sales (a)                                   |        | $                       | 29,203 |        |        | $        | 21,194 |        |        | $    | 19,029 |        |        | $ | 20,016 |        |        | $ | 18,665 |  
|                          |                                                                |  | Royalty income                              |        |                         | 554    |        |        |          | 535    |        |        |      | 444    |        |        |   | 466    |        |        |   | 555    |  
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|                          |                                                                |  | 29,757                                      |        |                         |        | 21,729 |        |          |        | 19,473 |        |      |        | 20,482 |        |   |        | 19,220 |       
|                          | Costs and expenses:                                            |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |  
|                          |                                                                |  | Cost of goods sold                          |        |                         | 18,727 |        |        |          | 11,247 |        |        |      | 8,876  |        |        |   | 9,962  |        |        |   | 8,926  |  
|                          |                                                                |  | Selling and administrative (a) (b)          |        |                         | 6,825  |        |        |          | 9,803  |        |        |      | 8,085  |        |        |   | 7,314  |        |        |   | 7,136  |  
|                          |                                                                |  | Research and development                    |        |                         | 337    |        |        |          | 261    |        |        |      | 928    |        |        |   | 1,233  |        |        |   | 1,143  |  
|                          |                                                                |  | Depreciation and amortization               |        |                         | 1,080  |        |        |          | 1,026  |        |        |      | 1,076  |        |        |   | 1,097  |        |        |   | 800    |  
|                          |                                                                |  | Impairment of goodwill and fixed assets (d) |        |                         |       |        |        |          |       |        |        |      |       |        |        |   |       |        |        |   | 9,298  |  
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|                          |                                                                |  | 26,969                                      |        |                         |        | 22,337 |        |          |        | 18,965 |        |      |        | 19,606 |        |   |        | 27,303 |       
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |       
|                          | Operating income (loss)                                        |  |                                             | 2,788  |                         |        |        | (608   | )        |        |        | 508    |      |        |        | 876    |   |        |        | (8,083 | )
|                          | Other income (expense):                                        |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |  
|                          |                                                                |  | Other income                                |        |                         |       |        |        |          | 24     |        |        |      |       |        |        |   |       |        |        |   |       |  
|                          |                                                                |  | Interest, net                               |        |                         | (400   | )      |        |          | (985   | )      |        |      | (512   | )      |        |   | 258    |        |        |   | 113    |  
|                          |                                                                |  | Settlement with Former Parent               |        |                         |       |        |        |          |       |        |        |      | 519    |        |        |   |       |        |        |   |       |  
|                          |                                                                |  | Settlement of shareholder litigation        |        |                         |       |        |        |          |       |        |        |      | (3,508 | )      |        |   |       |        |        |   |       |  
|                          |                                                                |  | Patent settlement and other                 |        |                         |       |        |        |          |       |        |        |      |       |        |        |   |       |        |        |   | 691    |  
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|                          |                                                                |  | (400                                        | )      |                         |        | (961   | )      |          |        | (3,501 | )      |      |        | 258    |        |   |        | 804    |       
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|                          | Income (loss) before provision for
(benefit from) income taxes |  |                                             | 2,388  |                         |        |        | (1,569 | )        |        |        | (2,993 | )    |        |        | 1,134  |   |        |        | (7,279 | )
|                          | Provision for (benefit from) income taxes                      |  |                                             | 1,269  |                         |        |        | (494   | )        |        |        | (1,110 | )    |        |        | 543    |   |        |        | 858    |  
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|                          | Net income (loss)                                              |  | $                                           | 1,119  |                         |        | $      | (1,075 | )        |        | $      | (1,883 | )    |        | $      | 591    |   |        | $      | (8,137 | )
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |   |        |  
|                          | Net income (loss) per share:                                   |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |  
|                          |                                                                |  | Basic and diluted                           |        | $                       | 0.08   |        |        | $        | (0.08  | )      |        | $    | (0.12  | )      |        | $ | 0.03   |        |        | $ | (0.44  | )
|                          | Weighted average shares outstanding:                           |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |        |  
|                          |                                                                |  | Basic                                       |        |                         | 13,636 |        |        |          | 13,636 |        |        |      | 15,421 |        |        |   | 18,484 |        |        |   | 18,484 |  
|                          |                                                                |  | Diluted                                     |        |                         | 13,701 |        |        |          | 13,636 |        |        |      | 15,421 |        |        |   | 18,484 |        |        |   | 18,484 |  
|                         
|                          |                                                                |  |                                             |        | December 31,           
|                          |                                                                |  |                                             |        |                        
|                          |                                                                |  |                                             |        | 1998                    |        | 1999   |        | 2000     |        | 2001   |        | 2002
|                          |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |     
|BALANCE SHEET DATA:       |                                                                |  |                                             |        |                         |        |        |        |          |        |        |        |      |        |        |        |   |        |        |       
|                          | Working capital                                                |  | $                                           | 2,023  |                         |        | $      | 2,051  |          |        | $      | 10,377 |      |        | $      | 11,884 |   |        | $      | 14,091 |  
|                          | Total assets                                                   |  |                                             | 30,820 |                         |        |        | 22,425 |          |        |        | 29,134 |      |        |        | 28,586 |   |        |        | 20,130 |  
|                          | Total debt                                                     |  |                                             | 5,968  |                         |        |        | 1,268  |          |        |        |       |      |        |        |       |   |        |        |       |  
|                          | Total stockholders equity                                     |  |                                             | 14,530 |                         |        |        | 13,455 |          |        |        | 23,988 |      |        |        | 24,579 |   |        |        | 16,442 |  



---

|(a) |  | Sales have been adjusted from 1998 through 2000 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

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|    |  | 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 fines and costs incurred regarding the SEC and
U.S. 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.
|   
|(d) |  | As a result of our annual test for impairment of goodwill, we recorded an
impairment charge of $7.4 million during the quarter ended December 31,
2002 (see Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 of the Notes to the
Financial Statements). As a result of our review of long-lived assets
for impairment during the quarter ended December 31, 2002, we recorded an
impairment charge of $1.9 million (see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations and Note 1 of
the Notes to the Financial Statements).                                                  

23



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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

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

Overview

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

ABNH originates, mass-produces and markets holograms. Our holograms are used
primarily for security applications such as counterfeiting protection for
credit and other transaction cards, identification cards and documents of
value, as well as for tamper resistance and authentication of high-value
consumer and industrial products. We also produce non-secure holograms for
packaging and promotional applications. Our sales of holograms for security
applications generally carry higher gross margins than sales for non-security
applications.

Concerns regarding counterfeiting, piracy and other infractions that can result
in lost sales, lost goodwill and product liability claims drive the use of
product authentication holograms. Companies in various industries have utilized
holograms as authentication devices to reduce potential losses. Also, concerns
over counterfeiting and copying have prompted the use of holograms on documents
of value, including currency, passports, business checks, 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,
2002, 2001 and 2000 were approximately 41%, 37%, and 28%, respectively. We
entered into an agreement with MasterCard dated February 28, 2003, which
replaces the agreement dated February 1, 1996, as amended. The new agreement expires in February 2008, subject to automatic
renewal if not terminated by either party. Under the terms of the new
agreement, MasterCard is obligated to purchase at least 80% of its holograms
from us, and has the right to utilize Crane & Co. to produce up to 20% of
MasterCards annual hologram requirements in coordination with us. The new
agreement provides that MasterCard will receive three sequential price reductions of
approximately 3% each, effective at the beginning of 2003, 2004 and 2006.
We are currently the exclusive supplier to MasterCard. Sales to
VISA card manufacturers were approximately 26%, 23%, and 19%, respectively, of
sales for the years ended December 31, 2002, 2001 and 2000. 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,

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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, 2002 and 2001, accounts receivable from this
customer totaled $1.6 million and $1.0 million, respectively.

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

During 2002, 2001 and 2000, export sales accounted for approximately 27%, 28%
and 31%, respectively, of total sales. All of our export sales are presently
denominated in U.S. dollars.

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

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

Selling and administrative expenses primarily consist of salaries, benefits and
commissions for our corporate, sales, marketing and administrative personnel,
marketing and promotion expenses, legal and accounting expenses and expenses
associated with being a public company.

In accordance with a tax allocation agreement in effect through the date of our
Offering, we were included in the consolidated Federal income tax return and,
in certain instances, consolidated or combined state and local income tax
returns of ABN and made payments to ABN based on the amounts which would be
payable as Federal, state and local income taxes as if consolidated or combined
returns were not filed. We computed our federal, state and local income tax
provision as if we were filing separate income tax returns, without regard to
the tax allocation agreement. During 2000, we reached
an agreement with ABN which provided, among other things, for ABN to be
responsible for and pay all of our asserted and unasserted income, franchise and
similar tax liabilities for the period January 1, 1990 through July 20,
1998 and indemnify us with respect to any such liabilities. For
periods subsequent to the date of the Offering, we have been filing our own federal and state income tax returns.

Critical Accounting Policies

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

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

Revenue Recognition

We recognize revenue in accordance with the provisions of the Securities and
Exchange Commissions (SEC) Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition. Specifically, sales and the related cost of goods sold
are generally recognized at the latter of the time of shipment or when title
passes to customers. In some situations, we have shipped product 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.

Allowance for Doubtful Accounts

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

Inventory Valuation

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

Impairment of Goodwill and Long-Lived Assets

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

26



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carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. During the quarter ended December 31,
2002, we recorded a charge for the impairment of long-lived assets of $1.9
million to write off fixed assets consisting of master plates which will no
longer be used. This charge represents the full impairment of this long-lived
asset on our balance sheet. The goodwill and the long-lived assets arose
through purchase accounting by our Former Parent, as it related to us, in
connection with our Former Parents 1990 merger.

Results of Operations

Comparison
of the Year Ended December 31, 2002 to the Year Ended December 31, 2001

Sales.Sales decreased by $1.3 million, or 6.7%, from $20.0 million in 2001 to
$18.7 million in 2002. The decrease in sales was due primarily to a decrease in
sales of non-credit card security holograms due to the conclusion of certain
lower margin programs in 2001. In 2003, we anticipate that sales will
be adversely affected by price reductions to certain existing
accounts and reduced volume of shipments to certain older accounts.
We believe these factors will be at least partially offset by
sales to new accounts in 2003.

Royalty Income.Royalty income increased $0.1 million or 19.1%, from $0.5
million in 2001 to $0.6 million in 2002. The increase was due to higher
reported licensee revenue in 2002. We anticipate that the expiration of
certain patents will cause our royalty income to decrease materially in 2003.

Cost of Goods Sold.Cost of goods sold decreased by $1.1 million, or 10.4%,
from $10.0 million in 2001 to $8.9 million in 2002. As a percentage of sales,
cost of goods sold decreased from 49.8% in 2001 to 47.8% in 2002. The decrease
was comprised of a decrease in production costs of 3% primarily resulting from
the effect of cost reductions put in place during 2002 and the elimination of
some lower margin sales, and a decrease of 2% resulting from the settlement of
a vendor dispute offset by an increase in the provision for inventory
obsolescence of 1%, an increase in warranty expense of 1% and an increase in
royalty expense of 1% related to a settlement of a patent license
matter. In 2003, we anticipate cost of goods sold as a percentage of
sales will be adversely impacted by price reductions. We believe this
will be at least partially offset by cost reductions which have been
implemented.

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

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

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

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SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

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

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

Comparison
of the Year Ended December 31, 2001 to the Year Ended December 31, 2000

Sales.Sales increased by $1.0 million, or 5.2%, from $19.0 million in 2000 to
$20.0 million in 2001. The increase in sales was due primarily to an increase
in sales of security holograms for credit cards of $1.6 million partially
offset by a decrease of other security holograms of $0.6 million.

Royalty Income.Royalty income remained relatively unchanged.

Cost of Goods Sold.Cost of goods sold increased by $1.1 million, or 12.2%,
from $8.9 million in 2000 to $10.0 million in 2001. As a percentage of sales,
cost of goods sold increased from 46.6% in 2000 to 49.8% in 2001. The increase
in cost of goods sold as a percentage of sales of 3% was primarily due to a one
time insurance settlement of $750,000 in 2000, related to a product liability
matter expensed in 1999, which did not recur in 2001 (4%), and an increase in
the reserve for obsolescence (2%) offset by a decrease in production costs
(3%).

Selling and Administrative Expenses.Selling and administrative expenses
decreased by $0.8 million, from $8.1 million in 2000 to $7.3 million in 2001.
As a percentage of sales, selling and administrative expenses decreased from
42.5% in 2000 to 36.5% in 2001. The decrease in selling and administrative
expenses is primarily due to lower professional fees of $0.8 million resulting
from the resolution of prior legal and accounting matters and the reduction of
other administration expenses of $0.1 million, offset partially by increases in
sales salaries, benefits and expenses of $0.1 million.

Research and Development. Research and development expenses increased from $0.9
million in 2000 to $1.2 million in 2001. As a percentage of sales, research and
development expenses increased from 4.9% in 2000 to 6.1% in 2001. The increase
reflects our increased emphasis on development and testing new products for our
target markets.

Other Income (Expense).Other income (expense) changed from a net expense of
$3.5 million in 2000 to income of $0.3 million in 2001. The increase was
primarily due to expenses recorded in 2000 associated with settling the
shareholder litigation and prepayment of debt partially offset by a gain from
the settlement with the Former Parent, all of which did not recur in 2001.

Income Taxes. Income tax expense increased from a benefit of $1.1 million, or
37% of the pre-tax loss in 2000 to an expense of $0.5 million or 48% of pre-tax
income in 2001. The effective tax rate for 2001 was increased due to the
difference in the treatment of amortization of goodwill for book and tax
purposes.

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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, 2002, we had $8.7 million of cash and cash equivalents and
working capital of $14.1 million.

On August 23, 2000, we terminated and repaid all outstanding amounts under the
Loan and Security Agreement between ABNH and Foothill Capital Corporation (as
amended, the Foothill Loan), which was entered into on September 29, 1999.
Borrowings under the Foothill Loan bore interest at the Lenders reference
rate, as defined, plus 1.5%.

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 year ended December 31, 2000, the weighted average interest rate of
outstanding borrowings was approximately 9.8%. The average aggregate borrowings
during 2000 was approximately $0.9 million.

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

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

Net cash provided by operating activities increased by $1.4 million to $1.6
million for the year ended

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December 31, 2002, as compared to $0.2 million of cash provided by operating
activities for the prior year. For the year ended December 31, 2002, our net
loss adjusted for non-cash charges provided cash of $3.0 million compared to
$2.3 million of cash provided by our net income adjusted for non-cash charges
in the prior year. For the year ended December 31, 2002, cash used for changes
in operating assets and liabilities was $1.4 million compared to $2.1 million
of cash used for changes in operating assets and liabilities in the prior year.

Investing activities for the years ended December 31, 2002 and 2001 used cash
flows of approximately $0.4 million and $0.7 million, respectively. These
activities primarily reflected capital expenditures for the respective years.
We anticipate that capital expenditures in 2003 and 2004 will be approximately
$1.5 million for each year. These amounts relating to capital expenditures are
intended to improve production capabilities and reduce costs.

There were no financing activities for the years ended December 31, 2002 and
2001.

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

On March 17, 2003, our board of directors authorized the repurchase of up to
$2.0 million of our outstanding common stock. Under the terms of the repurchase
plan, we are authorized to make purchases from time-to-time, either on the open
market or through privately negotiated transactions as conditions warrant, over
a period of twelve months. The stock repurchase will not commence prior to the
release of our first quarter 2003 financial results. Depending on market
conditions and other factors, these purchases may be suspended or resumed at
any time or from time-to-time without prior notice.

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

|                  |  |       |       |        |  |           |       |       |  |         |       |           |  |   |       |  |  |   |   | 
|----------------- |  | ----- | ----- | ------ |  | --------- | ----- | ----- |  | ------- | ----- | --------- |  | - | ----- |  |  | - | - | 
|                  |  |       |       |        |  | Less than |       | 2-3   |  | 4-5     |       | More than
|                  |  | Total |       | 1 year |  | years     |       | years |  | 5 years
|                  |  |       |       |        |  |           |       |       |  |        
|Lease obligations |  | $     | 4,639 |        |  | $         | 1,074 |       |  | $       | 1,839 |           |  | $ | 1,726 |  |  | $ |  | 

New Accounting Standards

In December 2002, the Financial Accounting Standards Boards (FASB) issued
SFAS No. 148, Accounting for Stock Based CompensationTransition and
Disclosurean amendment of FASB Statement No. 123. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation from the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation. We adopted the disclosure
requirements of SFAS No. 148 effective December 31, 2002. As allowed by SFAS
No. 123, the Company has elected to continue to apply the intrinsic value-based
method of accounting 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.

30



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Impact of Inflation

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

Unaudited Quarterly Results of Operations for the Years Ended December 31, 2002 and 2001.

|                                              |  |                                       |       |         |  |         |       |         |  |   |       |  |  |   |        |  
|--------------------------------------------- |  | ------------------------------------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ------ | -
|                                              |  | Year Ended December 31, 2002         
|                                              |  |                                      
|                                              |  | First                                 |       | Second  |  | Third   |       | Fourth 
|                                              |  | Quarter                               |       | Quarter |  | Quarter |       | Quarter
|                                              |  |                                       |       |         |  |         |       |        
|                                              |  | (In Thousands, Except Per Share Data)
|Sales                                         |  | $                                     | 4,620 |         |  | $       | 4,836 |         |  | $ | 4,712 |  |  | $ | 4,497  |  
|Cost of goods sold                            |  |                                       | 2,314 |         |  |         | 2,506 |         |  |   | 2,032 |  |  |   | 2,074  |  
|Net income (loss)                             |  |                                       | 67    |         |  |         | 134   |         |  |   | 694   |  |  |   | (9,032 | )
|Net income (loss) per share-basic and diluted |  | $                                     | 0.00  |         |  | $       | 0.01  |         |  | $ | 0.04  |  |  | $ | (0.49  | )

|                                              |  |                                       |       |         |  |         |       |         |  |   |       |  |  |   |       |  
|--------------------------------------------- |  | ------------------------------------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ----- | -
|                                              |  | Year Ended December 31, 2001         
|                                              |  |                                      
|                                              |  | First                                 |       | Second  |  | Third   |       | Fourth 
|                                              |  | Quarter                               |       | Quarter |  | Quarter |       | Quarter
|                                              |  |                                       |       |         |  |         |       |        
|                                              |  | (In Thousands, Except Per Share Data)
|Sales                                         |  | $                                     | 5,032 |         |  | $       | 5,008 |         |  | $ | 5,137 |  |  | $ | 4,839 |  
|Cost of goods sold                            |  |                                       | 2,373 |         |  |         | 2,469 |         |  |   | 2,457 |  |  |   | 2,663 |  
|Net income (loss)                             |  |                                       | 290   |         |  |         | 239   |         |  |   | 103   |  |  |   | (41   | )
|Net income (loss) per share-basic and diluted |  | $                                     | 0.02  |         |  | $       | 0.01  |         |  | $ | 0.01  |  |  | $ | 0.00  |  

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Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

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

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

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

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

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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 other 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.

|                               |  |     |  |                                                      
|------------------------------ |  | --- |  | -----------------------------------------------------
|Name                           |  | Age |  | Position(s)                                          
|                               |  |     |  |                                                      
|Directors, Executive Officers: |  |     |  |                                                      
|Kenneth H. Traub               |  | 41  |  | President, Chief Executive Officer and Director      
|Salvatore F. DAmato           |  | 74  |  | Chairman of the Board                                
|Stephen A. Benton*             |  | 61  |  | Director                                             
|Fred J. Levin*                 |  | 40  |  | Director                                             
|Douglas A. Crane*              |  | 42  |  | Director                                             
|Mark J. Bonney**               |  | 49  |  | Director                                             
|Alan Goldstein                 |  | 56  |  | Vice President, Chief Financial Officer and
Secretary
|Key Employees:                 |  |     |  |                                                      
|Michael T. Banahan             |  | 45  |  | Vice President, Sales                                
|Adam L. A. Scheer              |  | 31  |  | Vice President, Corporate Development                
|George Condos                  |  | 40  |  | Controller                                           



---

|*  |  | Member of the audit and compensation committees.
|-- |  | ------------------------------------------------
|  
|** |  | Member of the audit committee.                  

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

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

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degree in Engineering from Columbia University.

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

Fred J. Levinhas served as a director since February 2000. Mr. Levin has been
the President and Chief Executive Officer of the LGI Network LLC, a market
research and information service company, since February 2002. Previously, Mr.
Levin was the President of the Concord Watch Division of Movado Group, Inc., a
manufacturer and marketer of watches, from March 1998 to January 2002. Mr.
Levin also served with Movado Group, Inc. as Senior Vice President,
International from April 1995 to February 1998 and as Vice President,
Distribution from February 1994 to March 1995. Prior thereto, Mr. Levin was a
management consultant with McKinsey & Company. Mr. Levin holds a B.S. in
Industrial Engineering from Northwestern University and a M.B.A. from the
Harvard Graduate School of Business Administration.

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

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

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

Michael T. Banahanhas served as our Vice President, Sales 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.

Adam L.A. Scheerhas served as our Vice President, Corporate Development since
May 2001. Mr. Scheer was Vice President, Finance and Administration and Acting
Chief Financial Officer of Streetmail.com, Inc., an email marketing company,
from January 2000 to May 2001. From June 1996 to January 2000, Mr. Scheer was
Assistant to the President of Trans-Resources, Inc., a diversified
multinational holding

34



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##### 



company. From June 1995 to June 1996, Mr. Scheer was a financial analyst in the
investment banking division of Cowen & Company, a securities firm. Mr. Scheer
holds a B.A. in History from Williams College.

George Condoshas 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) of the Securities Exchange Act of 1934, as amended, requires our
directors and executive officers, and persons who beneficially own more than
10% of our common stock, to file with the Securities and Exchange Commission
reports of their ownership and changes in their ownership of common stock.
Based upon a review of the copies of the filings with the Securities and
Exchange Commission and written representations from our executive officers,
directors and persons who beneficially own more than 10% of our common stock,
we believe that the Section 16(a) filing requirements applicable to our
executive officers, directors and persons who beneficially own more than 10% of
our common stock in fiscal 2002 were complied with on a timely basis.

35



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Item 11. EXECUTIVE COMPENSATION.

The following table provides information concerning compensation paid to or
earned during 2000, 2001 and 2002 by each individual who served as our chief
executive officer or in a similar capacity during 2002 and the other three
executive officers during 2002 (the Named Executive Officers).

Summary Compensation Table

|                         |  |                     |      |              |  |        |         |           |  |              |         |         |  |              |        |              |  |           |         |  |  |  |       | 
|------------------------ |  | ------------------- | ---- | ------------ |  | ------ | ------- | --------- |  | ------------ | ------- | ------- |  | ------------ | ------ | ------------ |  | --------- | ------- |  |  |  | ----- | 
|                         |  |                     |      |              |  |        |         | Long-Term |  |              |         |        
|                         |  | Annual Compensation |      | Compensation |  |        |         |          
|                         |  |                     |      | Shares of    |  |        |         |          
|                         |  |                     |      |              |  |        |         |           |  |              |         |         |  | Other        |        | Common Stock |  |           |         | 
|                         |  |                     |      |              |  |        |         |           |  |              |         |         |  | Annual       |        | Underlying   |  | All Other
|                         |  |                     |      |              |  | Salary |         | Bonus     |  | Compensation |         | Options |  | Compensation
|Name                     |  | Year                |      | ($)          |  | ($)    |         | (1) ($)   |  | (#)          |         | (2) ($)
|                         |  |                     |      |              |  |        |         |           |  |              |         |        
|Kenneth H. Traub (3)     |  |                     | 2000 |              |  |        | 295,449 |           |  |              | 150,000 |         |  |              | 9,600  |              |  |           | 425,000 |  |  |  | 3,222 | 
|President and Chief      |  |                     | 2001 |              |  |        | 300,000 |           |  |              | 150,000 |         |  |              | 10,208 |              |  |           |        |  |  |  | 4,473 | 
|Executive Officer        |  |                     | 2002 |              |  |        | 309,000 |           |  |              | 145,000 |         |  |              | 9,312  |              |  |           |        |  |  |  | 5,050 | 
|                        
|Salvatore F. DAmato (4) |  |                     | 2000 |              |  |        | 177,458 |           |  |              | 70,000  |         |  |              | 13,380 |              |  |           | 150,000 |  |  |  | 2,355 | 
|Chairman of the Board    |  |                     | 2001 |              |  |        | 180,000 |           |  |              | 70,000  |         |  |              | 13,380 |              |  |           |        |  |  |  | 2,149 | 
|                         |  |                     | 2002 |              |  |        | 185,400 |           |  |              | 70,000  |         |  |              | 42,502 |              |  |           |        |  |  |  | 2,449 | 
|                        
|Alan Goldstein (6)       |  |                     | 2000 |              |  |        | 167,083 |           |  |              | 50,000  |         |  |              | 5,868  |              |  |           | 73,000  |  |  |  | 2,760 | 
|Vice President, Chief    |  |                     | 2001 |              |  |        | 170,000 |           |  |              | 50,000  |         |  |              | 5,868  |              |  |           |        |  |  |  | 2,948 | 
|Financial Officer and    |  |                     | 2002 |              |  |        | 175,100 |           |  |              | 40,000  |         |  |              | 6,835  |              |  |           |        |  |  |  | 3,248 | 
|Secretary                |  |                     |      |              |  |        |         |           |  |              |         |         |  |              |        |              |  |           |         |  |  |  |       | 



---

|(1) |  | Other Annual Compensation in 2002 for Mr. DAmato consisted of $12,447
for the use of an automobile paid for by us and $30,055 resulting from our
purchase, on his behalf, of the automobile formally leased by us for his
benefit. Other Annual Compensation in 2000 and 2001 for Mr. DAmato and
2000, 2001 and 2002 for Messrs. Traub and Goldstein consisted of the use
of automobiles paid for by us.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | All other compensation in 2002 includes term life insurance premiums and
employer contributions to our 401(k) retirement plan paid by us for Mr.
Traub of $3,050 and $2,000, respectively, for Mr. DAmato of $449 and
$2,000, respectively and for Mr. Goldstein of $1,248 and $2,000,
respectively.                                                                                                     
|   
|(3) |  | Mr. Traub has served as President and Chief Executive Officer since March
2000. He served as President and Chief Operating Officer from February
1999 to March 2000.                                                                                                                                                                                                                                      
|   
|(4) |  | Mr. DAmato has served as Chairman of the Board since April 1999.                                                                                                                                                                                                                                                                                                                                         
|   
|(5) |  | Mr. Goldstein has served as Vice President and Chief Financial Officer
since April 1999.                                                                                                                                                                                                                                                                                                                  

We did not grant any options during 2002 to the Named Executive Officers and no
options were exercised in 2002 by them.

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The following table provides information concerning the number and value of
unexercised options held by each of the Named Executive Officers on December
31, 2002.

2002 Year-End Option Values

|                     |  |                        |         |                                   |  |             |         |               |  |  |   |  |  |  |   | 
|-------------------- |  | ---------------------- | ------- | --------------------------------- |  | ----------- | ------- | ------------- |  |  | - |  |  |  | - | 
|                     |  | Shares of Common Stock |         |                                   |  |             |         |               |  | 
|                     |  | Underlying             |         | Value of Unexercised In-the-Money
|                     |  | Unexercised Options    |         | Options at December 31, 2002     
|                     |  | (#)                    |         | ($) (1)                          
|                     |  |                        |         |                                  
|Name                 |  | Exercisable            |         | Unexercisable                     |  | Exercisable |         | Unexercisable
|                     |  |                        |         |                                   |  |             |         |              
|Kenneth H. Traub     |  |                        | 647,917 |                                   |  |             | 127,083 |               |  |  |  |  |  |  |  | 
|Salvatore F. DAmato |  |                        | 325,000 |                                   |  |             |        |               |  |  |  |  |  |  |  | 
|Alan Goldstein       |  |                        | 151,417 |                                   |  |             | 21,583  |               |  |  |  |  |  |  |  | 



---

|(1)    Based on the difference between $0.73, which was the closing price per
share on December 31, 2002, and the exercise price per share of the options.
|----------------------------------------------------------------------------------------------------------------------------------------------------------

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Stock Incentive Plans

On August 4, 2000, we adopted the American Bank Note Holographics, Inc. 2000
Stock Incentive Plan (as amended, the 2000 Plan), which was subsequently
approved by our stockholders at our annual meeting on September 12, 2000. In
August 2001, our stockholders approved an amendment to the 2000 Plan increasing
the shares available for issuance thereunder by 600,000 to 1,350.000 shares. On
July 20, 1998, we adopted the 1998 Stock Incentive Plan (as amended, the 1998
Plan, and collectively with the 2000 Plan, the Plans). The Plans were
adopted for the purpose of granting various stock incentives to officers,
directors, employees and consultants of ABNH. The board of directors (or a
committee appointed by the board of directors) has discretionary authority,
subject to certain restrictions, to administer the Plans. The total number of
shares reserved for issuance under the Plans are 3,213,000 shares of common
stock. Options to purchase 2,303,500 shares of common stock were outstanding
under the Plans at December 31, 2002. Options to purchase an additional 15,000
shares of common stock were outstanding outside the Plans at December 31, 2002.
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.

Retirement Plans

On October 1, 1999, we implemented defined contribution plans for our
employees. Aggregate contributions to such plans, which have been charged to
our operations, were approximately $51,000, $48,000 and $46,000 for the years
ended December 31, 2002, 2001 and 2000, 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 H. Traub in February 1999
for an initial term of one year, which renews automatically for successive one
year terms, unless we give at least 60 days written notice prior to the end of
the current term. As amended in March 2000, the agreement provides for an
annual base salary of $300,000, to be increased by not less than 3% per year
upon renewal and further provides that, if we do not renew his employment
agreement, Mr. Traub will receive severance equal to two times his annual
salary and bonus. Pursuant to the agreement, Mr. Traub shall receive quarterly
bonuses of $25,000 unless the board of directors or a committee designated
thereby shall, in its sole discretion, determine the payment of such quarterly
bonus should not be paid based on the performance of Mr. Traub and/or the
business, results of operations or financial condition of ABNH. Additionally,
the

38



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##### 



board of directors or compensation committee may, in its sole discretion, award
Mr. Traub additional quarterly and year-end bonuses. In connection with the
agreement, we granted to Mr. Traub options to purchase up to 250,000 shares of
our common stock at an exercise price of $1.75 per share. In the event of Mr.
Traubs termination by us for any reason other than for cause, as defined in
the agreement, or his resignation for good reason, as defined in the agreement,
we are generally required to (1) pay him his salary then in effect with any
bonus which may have been accrued or which otherwise would have been granted by
the board to him for a period of two years following such termination, (2)
continue to provide employee benefits to Mr. Traub, and (3) accelerate vesting
on any unvested options granted to him under the 1998 Plan and permit the
exercise of vested options under such plan for a period of two years
thereafter. Upon the termination of Mr. Traubs employment by us following a
change of control, as defined in the agreement, or Mr. Traubs resignation for
good reason following a change in control, we are required to (1) pay him a
severance amount equal to two times his annual salary and bonus then in effect
(or, if such termination or resignation for good reason is more than one year
after such change of control, an amount equal to three times his salary and
annual bonus then in effect), (2) accelerate vesting on any unvested options
granted under the 1998 Plan and any shares of restricted stock purchased by Mr.
Traub, and (3) to the extent such amounts are subject to excise taxes under
Section 4999 of the Internal Revenue Code, provide a tax gross up to him for
any additional amounts due. In connection with his employment agreement, Mr.
Traub has agreed not to compete with, or solicit from, us during his term of
employment and for one year thereafter and has agreed not to disclose or use
our confidential information.

We entered into an employment agreement with Salvatore F. DAmato in April 1999
for an initial term of two years, which renews upon mutual agreement for
successive one year terms. As amended, the agreement provides for a base salary
of $180,000 per year. Pursuant to the Agreement Mr. DAmato is eligible to
receive bonuses at the discretion of our board of directors, with a target
bonus of $10,000 per quarter. The quarterly bonus is required to be paid unless
the board determines otherwise based on certain factors. In connection with the
agreement, we granted to Mr. DAmato options to purchase up to 175,000 shares
of our common stock at an exercise price of $2.50 per share. In the event of
Mr. DAmatos termination for any reason other than for cause, as defined in
the agreement, or in the event of his resignation for good reason, as defined
in the agreement, we are required to continue to pay his salary then in effect,
together with any bonus that may have accrued, for the remainder of his
employment term. Upon termination of Mr. DAmatos employment following a
change of control, or Mr. DAmatos resignation for good reason within one year
of a change of control, we are required to pay him an amount equal to his
annual salary and bonus. In connection with his employment agreement, Mr.
DAmato agreed not to compete with us during his term of employment and for one
year thereafter.

We entered into an employment agreement with Alan Goldstein in April 1999 for
an initial term of one year which renews automatically for successive one year
terms, unless we give at least 60 days written notice prior to the end of the
current term. As amended, the agreement provides for an annual base salary of
$170,000, to be increased by not less than 3% per year upon renewal and further
provides that, if we do not renew his employment agreement, Mr. Goldstein will
receive severance equal to one-half of his annual salary and bonus. Pursuant to
the agreement Mr. Goldstein is eligible to receive bonuses at the discretion of
our board of directors, with a target bonus of $10,000 per quarter. In
connection with the agreement, we granted to Mr. Goldstein options to purchase
up to 100,000 shares of our common stock at an exercise price of $2.50 per
share. In the event of Mr. Goldsteins termination by us for any reason other
than for cause, as defined in the agreement, or his resignation for good
reason, as defined in the agreement, we are required to (1) pay him his salary
then in effect with any bonus which may have been accrued or which otherwise
would have been granted by the board to him for a period of six months
following such termination or resignation for good reason, (2) continue to
provide employee benefits to Mr. Goldstein and (3) accelerate vesting on any
unvested options granted to him under the 1998 Plan and permit the exercise of
vested options under such plan for a period of two years thereafter. Upon
termination of Mr. Goldsteins employment following a change of control, or Mr.
Goldsteins resignation

39



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

Compensation Committee Interlocks and Insider Participation

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

Compensation Committee Report on Executive Compensation

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

Chief Executive Officer Compensation

The Compensation Committee reviews the compensation arrangements for our Chief
Executive Officer at least annually, typically in the fourth and/or first
quarter of the fiscal year. Mr. Traubs employment agreement, which renewed as
of February 2002 for an additional one-year term, includes provisions described
above under the heading Employment Agreements for the payment of a base
salary and the payment of quarterly and other bonuses. In determining whether
to renew Mr. Traubs employment agreement and his total compensation for fiscal
2002, the Compensation Committee considered the terms of his employment
agreement, his length of service with us, our financial performance during the
preceding year, our history since our initial public offering in 1998,
competitive pay practices, and Mr. Traubs individual performance and
contributions to us. The Compensation Committee believes that Mr. Traub has
provided strong leadership in what continues to be a challenging operating
environment for ABNH. The Compensation Committee also believes Mr. Traub has
been instrumental in maintaining and strengthening our relationships with our
key customers, negotiating key partnerships and business relationships,
strengthening our management team, reestablishing our reputation in our
industry, improving our corporate culture, launching several new products to
support our future growth plans, and evaluating and asserting our intellectual
property rights.

In making its compensation decisions with respect to Mr. Traub, the
Compensation Committee exercised its discretion and judgment based on the above
factors, relying more heavily on qualitative factors compared to quantitative
criteria and results. No specific formula was applied to determine the weight
of each factor. As part of its review of executive compensation, the
Compensation Committee met with and was advised by independent
compensation consultants. In fiscal 2002, Mr. Traubs contractual base compensation was
$309,000. Mr. Traub was also paid the $25,000 quarterly bonus contemplated
under his employment agreement and an additional year-

40



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end discretionary bonus of $45,000.

ABNHS General Compensation Policy for Executive Officers

The fundamental policy of the Compensation Committee is to provide our
executive officers with competitive compensation opportunities based upon their
contribution to our development and financial success and their personal
performance. It is the Compensation Committees objective to have a portion of
each executive officers compensation contingent upon our performance as well
as upon each executive officers own level of performance. Therefore, the
compensation package for each executive officer is comprised of three different
elements: (1) base salary which reflects individual performance and is designed
primarily to be competitive with salary levels in the industry; (2) cash
bonuses which reflect the achievement of performance qualitative and
quantitative objectives and goals; and (3) long-term stock-based incentive
awards which strengthen the mutuality of interest between the executive
officers and our stockholders.

Factors. The principal factors (together with the factors specified above
with respect to Mr. Traub) that the Compensation Committee considered with
respect to each executive officers compensation for fiscal 2002 are summarized
below. The Compensation Committee may, however, in its discretion, apply
entirely different factors for executive compensation in future years.

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

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

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

Based on the stock options granted to the executive officers in 1999 and 2000,
the Compensation Committee believes an adequate incentive for top management
exists at this time, and, therefore, no options were granted to executive
officers in 2001 or 2002.

41



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Internal Revenue Code Limits on the Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
denies publicly-held corporations a federal income tax deduction for
compensation exceeding $1,000,000 paid to the Chief Executive Officer or any of
the four other highest paid executive officers, excluding performance-based
compensation. Through December 31, 2002, this provision has not limited our
ability to deduct executive compensation, but the Compensation Committee will
continue to monitor the potential impact of Section 162(m) on our ability to
deduct executive compensation. We believe that our compensation philosophy of
paying our executive officers with competitive salaries, cash bonuses and
long-term incentives, as described in this report, serves the best interest of
ABNH and its stockholders.

| |                           
| | --------------------------
| | THE COMPENSATION COMMITTEE

Stephen A. Benton
Fred J. Levin
Douglas A. Crane

42



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

The following table sets forth as of March 14, 2003 certain information
regarding beneficial ownership of our common stock by (1) each person who is
known to us to be the beneficial owner of more than 5% of the outstanding
shares of our common stock, (2) each director, (3) each of the Named Executive
Officers and (4) all directors and executive officers as a group. All persons
listed have sole voting and investment power with respect to their shares
unless otherwise indicated. The address of all persons listed is c/o American
Bank Note Holographics, Inc., 399 Executive Boulevard, Elmsford, NY 10523,
unless otherwise indicated.

|                                                                  |                             |            |           |                |  |  |      |   | 
|----------------------------------------------------------------- | --------------------------- | ---------- | --------- | -------------- |  |  | ---- | - | 
|Name and Address                                                  |                             | Number (1) |           | Percentage (1)
|                                                                  |                             |            |           |               
|Crane & Co., Inc.                                                 |                             |            | 3,387,720 |                |  |  | 18.3 | %
|                                                                  | 30 South Street             |            |           |                |  |  |      |   | 
|                                                                  | Dalton, MA 01226            |            |           |                |  |  |      |   | 
|Libra Advisors, LLC (2)                                           |                             |            | 1,856,000 |                |  |  | 10.0 | %
|                                                                  | 277 Park Avenue, 26th Floor |            |           |                |  |  |      |   | 
|                                                                  | New York, NY 10172          |            |           |                |  |  |      |   | 
|Levy, Harkins & Co., Inc. (3)                                     |                             |            | 1,174,800 |                |  |  | 6.4  | %
|                                                                  | 570 Lexington Avenue        |            |           |                |  |  |      |   | 
|                                                                  | New York, NY 10022          |            |           |                |  |  |      |   | 
|Kenneth H. Traub (4)                                              |                             |            | 697,917   |                |  |  | 3.6  | %
|Salvatore F. DAmato (5)                                          |                             |            | 327,000   |                |  |  | 1.7  | %
|Alan Goldstein (6)                                                |                             |            | 160,250   |                |  |  |      | *
|Stephen A. Benton (7)                                             |                             |            | 34,000    |                |  |  |      | *
|Fred J. Levin (8)                                                 |                             |            | 41,200    |                |  |  |      | *
|Douglas A. Crane (9)                                              |                             |            | 3,398,520 |                |  |  | 18.4 | %
|Mark J. Bonney                                                    |                             |            |          |                |  |  |      | *
|All executives officers and
directors as a group (6
persons) (10) |                             |            | 4,658,887 |                |  |  | 23.6 | %



---

|* |  | 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. At March 14, 2003, we had 18,483,720 shares of common stock
outstanding. These percentages were calculated based on the total of shares of
common stock outstanding and shares of common stock subject to options
currently exercisable or exercisable within 60 days of March 14, 2003, which
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, 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

43



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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.

(3)  The information provided is based solely on a Schedule 13G filed with the
SEC on February 5, 2003. Levy, Harkins & Co., Inc. (LHC) is the beneficial
owner of 7,500 shares of common stock and may be deemed the beneficial owner of
792,800 shares of common stock. The Gracy Fund, L.P. is the beneficial owner
of 294,500 of common stock. Edwin A. Levy and Michael J. Harkins are the sole
shareholders of LHC and the sole general partners of the Gracy Fund, L.P. and
have shared power to vote or direct the vote of, and dispose or to direct the
disposition of the 1,094,800 shares beneficially owned or deemed beneficially
owned by LHC and beneficially owned by The Gracy Fund, L.P. Mr. Levy,
individually is the beneficial owner of 80,000 of common stock.

(4)  Includes 697,917 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003.

(5)  Includes 325,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003.

(6)  Includes of 160,250 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003.

(7)  Includes of 30,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003.

(8)  Includes of 15,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003.

(9)  Includes of 10,000 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003 and 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 disclaims beneficial
ownership of the shares held by Crane & Co., Inc.

(10)  Includes 1,238,167 shares of common stock subject to options currently
exercisable or exercisable within 60 days of March 14, 2003.

44



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Equity Compensation Plan Information

|                                                           |        |                         |                         |                         |                  |                         |                     |  |  |  |                         |         | 
|---------------------------------------------------------- | ------ | ----------------------- | ----------------------- | ----------------------- | ---------------- | ----------------------- | ------------------- |  |  |  | ----------------------- | ------- | 
|                                                           |        |                         |                         |                         |                  |                         |                     |  |  |  | Number of securities   
|                                                           |        |                         |                         |                         |                  |                         |                     |  |  |  | remaining available for
|                                                           |        |                         |                         |                         |                  |                         |                     |  |  |  | future issuance under  
|                                                           |        |                         | Number of securities to |                         | Weighted-average |                         | equity compensation
|                                                           |        |                         | be issued upon exercise |                         | exercise price   |                         | plans (excluding   
|                                                           |        | of outstanding options, |                         | of outstanding options, |                  | securities reflected in
|Plan Category                                              |        | warrants and rights     |                         | warrants and rights     |                  | column (a))            
|                                                           |        |                         |                         |                         |                  |                        
|                                                           |        |                         | (a)                     |                         | (b)              |                         | (c)                
|Equity compensation plans
approved by security
holders     |        |                         | 1,763,000               |                         |                  | $                       | 2.71                |  |  |  | 100,000                 |        
|Equity compensation plans
not approved by security
holders |        |                         | 540,500                 |                         |                  | $                       | 1.86                |  |  |  | 809,500                 |        
|                                                           |        |                         |                         |                         |                  |                         |                     |  |  |  |                         |        
|                                                           | Total: |                         |                         | 2,303,500               |                  |                         |                     |  |  |  |                         | 909,500 | 
|                                                           |        |                         |                         |                         |                  |                         |                     |  |  |  |                         |        

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
ABNHs Chairman and Chief Executive Officer.

On December 8, 1999, ABN filed a petition and plan of reorganization under
Chapter 11 of the Federal Bankruptcy Code. In connection with negotiations on
the Chapter 11 plan, we reached an agreement with ABN which provided, among
other things, for ABN to be responsible for and pay all asserted and unasserted
income, franchise or similar tax liabilities of ours for the period January 1,
1990 through July 20, 1998 and indemnify us with respect to any such
liabilities. If ABN continues to experience significant financial difficulty it
may result in its inability to perform under the terms of the agreement with
us, which could have a material adverse effect on our financial position,
results of operations and cash flows.

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 in 2000.

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

45



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

During 2000, we entered into agreements with Crane under which we rent factory
space and lease employees for our facility in Dalton, MA. For the years ended
December 31, 2002, 2001 and 2000, we paid Crane under these agreements $72,000,
$72,000 and $12,000, respectively, for the rental of the factory space and
$151,000, $116,000 and $11,000, respectively, for the leased employees. In
addition, we paid Crane $5,700 and $50,000 for leasehold improvements on the
rental space for the years ended December 31, 2001 and 2000, respectively. On
February 28, 2003, we entered into a new agreement with MasterCard which
entitles MasterCard to appoint Crane as its second supplier to produce up to
20% of MasterCards annual hologram requirements in coordination with us. In
addition, the agreement allows MasterCard to appoint Crane as its contingent
supplier under certain circumstances.

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

Item 14. CONTROLS AND PROCEDURES

(a)    Evaluation of disclosure controls and procedures Within 90 days prior to
the date of this report, we carried out an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic filings with the Securities and
Exchange Commission. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.

(b)    Changes
in internal controls  There have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.

46



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Part IV

Item 15. 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. (1)                                                                                          
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 3.2 |  |  | Amended and Restated By-Laws. (1)                                                                                                               
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 3.3 |  |  | Amendment to the Amended and Restated Certificate of Incorporation. (2)                                                                         
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.1 |  |  | Form of Common Stock Certificate. (1)                                                                                                           
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.2 |  |  | Stock Purchase Agreement by and between Crane & Co., Inc. and
American Bank Note Holographics, Inc. dated as of June 29, 2000. (3)              
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.3 |  |  | Warrant Agreement by and between American Bank Note
Holographics, Inc. and American Stock & Transfer Company, dated as of
December 18, 2000. (4)
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.4 |  |  | Form of Warrant Certificate. (4)                                                                                                                
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.5 |  |  | Form of Option Agreement for American Bank Note Holographics, Inc. 1998
Stock Incentive Plan as amended. (5)                                    
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.6 |  |  | Form of Option Agreement for American Bank Note Holographics, Inc. 2000
Stock Incentive Plan. (5)                                               
| |  |  |     |  |  |                                                                                                                                                 
| |  |  | 4.7 |  |  | Option Agreement between Dr. Stephen Benton and American Bank Note
Holographics, Inc., dated July 20, 1998. (5)                                 

47



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##### 



| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 4.8   |  |  | Option Agreement between Mr. Russell LaCoste and American Bank
Note Holographics, Inc., dated October 11, 1999. (5)                                                                                                                     
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.1  |  |  | Form of Separation Agreement, by and between American Bank Note
Corporation and American Bank Note Holographics, Inc. dated July 20, 1998.
(1)                                                                                          
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.2  |  |  | Form of License Agreement. (1)                                                                                                                                                                                                          
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.3  |  |  | Form of Transitional Services Agreement. (1)                                                                                                                                                                                            
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.4  |  |  | Form of Employee Benefits Allocation Agreement. (1)                                                                                                                                                                                     
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.5  |  |  | Form of 1998 Stock Incentive Plan. (1)                                                                                                                                                                                                  
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.6  |  |  | Form of 2000 Stock Incentive Plan. (6)                                                                                                                                                                                                  
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.7  |  |  | Form of Defined Contribution Plan. (1)                                                                                                                                                                                                  
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.8  |  |  | Production Agreement between MasterCard International Incorporated and
American Bank Note Holographics, Inc., dated as of February 1, 1996. (1)                                                                                         
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 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. (7)(+)                                  
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.10 |  |  | Letter Agreement, dated March 3, 1999, between MasterCard International
Incorporated and American Bank Note Holographics, Inc., further the
Production Agreement dated as of February 1, 1996. (7)                                      
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 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. (8)
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.12 |  |  | Employment Agreement, dated April 20, 1999, between Salvatore F. DAmato
And American Bank Note Holographics, Inc. (7)                                                                                                                  
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.13 |  |  | Employment Agreement, dated February 3, 1999, between Kenneth H. Traub and
American Bank Note Holographics, Inc., as amended on March 20, 2000. (9)                                                                                     
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.14 |  |  | Employment Agreement, dated April 30, 1999, between Alan Goldstein and
American Bank Note Holographics, Inc. (7)                                                                                                                        
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.15 |  |  | Employment Agreement, dated September 15, 1999, between Russell LaCoste
And American Bank Note Holographics, Inc. (7)                                                                                                                   
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.16 |  |  | Standard Form of Loft Lease, dated as of July 23, 1992, by and between Robert
Martin Company and American Bank Holographics, Inc. (9)                                                                                                   
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.17 |  |  | Lease Agreement, dated as of January 19, 2001 by and between Crane & Co.,
Inc.
And American Bank Note Holographics, Inc. (9)                                                                                                            
| |  |  |       |  |  |                                                                                                                                                                                                                                         
| |  |  | 10.18 |  |  | Lease Agreement, dated August 11, 2002, by and between Mark Hankin and
HanMar Associates MLP, tenants-in-common and American Bank Note                                                                                                  

48



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| |  |  |       |  |  |                                                                                                                                                
| |  |  | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |       |  |  | Holographics, Inc. with Addenda thereto.                                                                                                       
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 10.19 |  |  | Settlement Agreement, dated July 1, 2002, by and between American Bank Note
Holgraphics, Inc. and Leonhard Kurz GmbH & Co. KG (10)             
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 10.20 |  |  | Patent License Agreement, dated July 1, 2002, by and between American Bank
Note Holographics, Inc. and Leonhard Kurz GmbH & Co. KG (10)(+)     
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 10.21 |  |  | Substitute Cross License Agreement, dated July 1, 2002, by and between
American Bank Note Holographics, Inc. and Leonhard Kurz & Co. KG (10)   
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 10.22 |  |  | Hologram Agreement, dated February 28, 2003, by and between MasterCard
International Incorporated and American Bank Note Holographics, Inc. (+)
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 23.1  |  |  | Consent of Ernst & Young LLP                                                                                                                   
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 23.2  |  |  | Consent of Arthur Andersen LLP                                                                                                                 
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 99.1  |  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002.                      
| |  |  |       |  |  |                                                                                                                                                
| |  |  | 99.2  |  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002.                      



---

|(1)  |  | Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-
51845).
|---- |  | ----------------------------------------------------------------------------------------------------
|    
|(2)  |  | Incorporated by reference from the Proxy Statement on Schedule 14A filed
on July 3, 2001.           
|    
|(3)  |  | Incorporated by reference from the Quarterly Report on Form 10-Q filed on
August 14, 2000.          
|    
|(4)  |  | Incorporated by reference from the Annual Report on Form 10-K for 2000.                             
|    
|(5)  |  | Incorporated by reference from the Registration Statement on Form S-8
(Registration No. 333-
61602).
|    
|(6)  |  | Incorporated by reference from the Proxy Statement on Schedule 14A filed
on August 11, 2000.        
|    
|(7)  |  | Incorporated by reference from the Annual Report on Form 10-K for 1998.                             
|    
|(8)  |  | Incorporated by reference from the Annual Report on Form 10-K for 1999.                             
|    
|(9)  |  | Incorporated by reference from the Annual Report on Form 10-K for 2001.                             
|    
|(10) |  | Incorporated by reference from the Quarterly Report on Form 10-Q filed on
August 13, 2002.          
|    
|(+)  |  | Portions have been omitted pursuant to a request for confidential
treatment.                        
|    
|(d)  |  | Financial Statement Schedules                                                                       

See (a)(2) above.

49



---



##### 



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 31, 2003

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

|                                               |  |                                                                               |  |               
|---------------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                         |  | Date          
|                                               |  |                                                                               |  |               
|                                               |  |                                                                               |  |               
|/s/ Kenneth H. Traub

Kenneth H. Traub         |  | President, Chief Executive Officer and
Director (Principal Executive Officer) |  | March 31, 2003
|                                               |  |                                                                               |  |               
|/s/ Alan Goldstein
Alan Goldstein              |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)          |  | March 31, 2003
|                                               |  |                                                                               |  |               
|/s/ Salvatore F. DAmato

Salvatore F. DAmato |  | Chairman of the Board                                                         |  | March 31, 2003
|                                               |  |                                                                               |  |               
|/s/ Stephen A. Benton

Stephen A. Benton       |  | Director                                                                      |  | March 31, 2003
|                                               |  |                                                                               |  |               
|/s/ Fred J. Levin

Fred J. Levin               |  | Director                                                                      |  | March 31, 2003
|                                               |  |                                                                               |  |               
|/s/ Douglas A. Crane

Douglas A. Crane         |  | Director                                                                      |  | March 31, 2003
|                                               |  |                                                                               |  |               
|/s/ Mark J. Bonney

Mark J. Bonney             |  | Director                                                                      |  | March 31, 2003

50



---



##### 



CERTIFICATIONS

I, Kenneth H. Traub, certify that:

1. I have reviewed this annual report on Form 10-K of American Bank Note
Holographics, Inc.;

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

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

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ Kenneth H. TraubKenneth H. Traub
President and Chief Executive Officer

51



---



##### 



I, Alan Goldstein, certify that:

1. I have reviewed this annual report on Form 10-K of American Bank Note
Holographics, Inc.;

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

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

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ Alan Goldstein
Alan Goldstein
Chief Financial Officer and Chief Accounting Officer

52



---



##### 



AMERICAN BANK NOTE HOLOGRAPHICS, INC.

INDEX TO FINANCIAL STATEMENTS

ITEM 15(a)

|                                         |                                                                                         |  |      |     | 
|---------------------------------------- | --------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                         |                                                                                         |  | Page
|                                         |                                                                                         |  |     
|REPORT OF INDEPENDENT AUDITORS           |                                                                                         |  | F-2  |    
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS |                                                                                         |  | F-3  |    
|FINANCIAL STATEMENTS:                    |                                                                                         |  |      |    
|                                         | Balance Sheets, December 31, 2002 and 2001                                              |  |      | F-4 | 
|                                         | Statements of Operations for the Years Ended December 31,
2002, 2001 and 2000           |  |      | F-5 | 
|                                         | Statements of Stockholders Equity for the Years Ended December 31,
2002, 2001 and 2000 |  |      | F-6 | 
|                                         | Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000           |  |      | F-7 | 
|                                         | Notes to Financial Statements                                                           |  |      | F-8 | 
|                                         | Schedule II - Valuation and Qualifying Accounts                                         |  |      | S-1 | 

F-1



---



##### 



Report of Independent Auditors

To the Board of Directors and Stockholders of
American Bank Note Holographics

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

We conducted our 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 the Company at December 31,
2002 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. Also, in our opinion, the related financial statement schedule for the
year ended December 31, 2002, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed above, the financial statements of the Company as of December 31,
2001 and for each of the two years in the period ended December 31, 2001, were
audited by other auditors who have ceased operations. As described in Note 1,
these financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards
(Statement) No. 142, Goodwill and Other Intangible Assets, which was
adopted by the Company as of January 1, 2002. Our audit procedures with respect
to the disclosures in Note 1 with respect to 2001 and 2000 included (a)
agreeing the previously reported net income (loss) to the previously issued
financial statements and the adjustments to reported net income (loss)
representing amortization expense recognized in those periods related to
goodwill that are no longer being amortized as a result of initially applying
Statement No. 142 to the Companys underlying records obtained from management,
and (b) testing the mathematical accuracy of the reconciliation of adjusted net
income (loss) to reported net income (loss), and the related net (loss) income
per share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 1
are appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 and 2000 financial statements of the Company other than
with respect to such disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 and 2000 financial statements taken
as a whole.

| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

New York, New York
March 7, 2003

F-2



---



##### 



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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

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

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

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

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

| |                        
| | -----------------------
| | /s/ Arthur Andersen LLP

New York, New York
March 1, 2002

F-3



---



##### 



AMERICAN BANK NOTE HOLOGRAPHICS, INC.

BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(In Thousands, Except Share Data)

|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |       |        |        |  | 
|------------------------------------------ | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----- | ------ | ------ | ------ | ----- | ------ | ------ |  | 
|                                           |                                                                                     |                                                                                                                         |                            |       |        | 2002   |        | 2001 
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|ASSETS                                     |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|CURRENT ASSETS:                            |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     | Cash and cash equivalents                                                                                               |                            | $     | 8,659  |        |        | $     | 7,368  |       
|                                           |                                                                                     | Accounts receivable, net of allowance for doubtful
accounts of $210 and $75                                             |                            |       | 3,661  |        |        |       | 3,050  |       
|                                           |                                                                                     | Inventories                                                                                                             |                            |       | 2,541  |        |        |       | 3,267  |       
|                                           |                                                                                     | Deferred income taxes                                                                                                   |                            |       | 1,347  |        |        |       | 1,232  |       
|                                           |                                                                                     | Prepaid expenses                                                                                                        |                            |       | 396    |        |        |       | 702    |       
|                                           |                                                                                     | Other                                                                                                                   |                            |       | 345    |        |        |       | 272    |       
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     |                                                                                                                         | Total current assets       |       |        | 16,949 |        |       |        | 15,891 | 
|MACHINERY, EQUIPMENT AND LEASEHOLD         |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           | IMPROVEMENTS Net of accumulated depreciation
and amortization of $8,505 and $8,458 |                                                                                                                         |                            | 2,782 |        |        |        | 5,112 |       
|DEFERRED INCOME TAXES                      |                                                                                     |                                                                                                                         |                           |       |        |        | 143    |      
|GOODWILL                                   |                                                                                     |                                                                                                                         |                           |       |        |        | 7,408  |      
|OTHER ASSETS                               |                                                                                     |                                                                                                                         | 399                        |       |        |        | 32     |      
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|TOTAL ASSETS                               |                                                                                     | $                                                                                                                       | 20,130                     |       |        | $      | 28,586 |      
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |       |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|CURRENT LIABILITIES:                       |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     | Accounts payable                                                                                                        |                            | $     | 966    |        |        | $     | 1,809  |       
|                                           |                                                                                     | Accrued expenses                                                                                                        |                            |       | 1,803  |        |        |       | 2,098  |       
|                                           |                                                                                     | Customer advances                                                                                                       |                            |       | 89     |        |        |       | 100    |       
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     |                                                                                                                         | Total current liabilities  |       |        | 2,858  |        |       |        | 4,007  | 
|DEFERRED INCOME TAXES                      |                                                                                     |                                                                                                                         | 830                        |       |        |        |       |      
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     | Total liabilities                                                                                                       |                            |       | 3,688  |        |        |       | 4,007  |       
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|COMMITMENTS AND CONTINGENCIES              |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|STOCKHOLDERS EQUITY:                      |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     | Preferred Stock, authorized, 5,000,000 shares; no shares
issued or outstanding                                          |                            |       |       |        |        |       |       |       
|                                           |                                                                                     | Common Stock, par value $0.01 per share, authorized,
40,000,000 shares; shares issued and outstanding 18,483,720 shares |                            |       | 185    |        |        |       | 185    |       
|                                           |                                                                                     | Additional paid-in capital                                                                                              |                            |       | 23,994 |        |        |       | 23,994 |       
|                                           |                                                                                     | Retained (deficit) earnings                                                                                             |                            |       | (7,737 | )      |        |       | 400    |       
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|                                           |                                                                                     |                                                                                                                         | Total stockholders equity |       |        | 16,442 |        |       |        | 24,579 | 
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |      
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                     | $                                                                                                                       | 20,130                     |       |        | $      | 28,586 |      
|                                           |                                                                                     |                                                                                                                         |                            |       |        |        |        |       |        |       

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

F-4



---



##### 



AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands, Except Per Share Data)

|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |        |        |        |  
|-------------------------------------------------------------- | --------------------------------------- | - | ---------------------------- | ------ | ------ | ------ | ----- | ----- | ------ | ------ | ------ | ------ | ------ | ------ | -
|                                                               |                                         |   |                              |        | 2002   |        | 2001  |       | 2000  
|                                                               |                                         |   |                              |        |        |        |       |       |       
|REVENUE:                                                       |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               | Sales                                   |   |                              | $      | 18,665 |        |       | $     | 20,016 |        |        | $      | 19,029 |       
|                                                               | Royalty income                          |   |                              |        | 555    |        |       |       | 466    |        |        |        | 444    |       
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               |                                         |   | Total revenue                |        |        | 19,220 |       |       |        | 20,482 |        |        |        | 19,473 |  
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|COSTS AND EXPENSES:                                            |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               | Cost of goods sold                      |   |                              | 8,926  |        |        |       | 9,962 |        |        |        | 8,876  |       
|                                                               | Selling and administrative              |   |                              | 7,136  |        |        |       | 7,314 |        |        |        | 8,085  |       
|                                                               | Research and development                |   |                              | 1,143  |        |        |       | 1,233 |        |        |        | 928    |       
|                                                               | Depreciation and amortization           |   |                              | 800    |        |        |       | 1,097 |        |        |        | 1,076  |       
|                                                               | Impairment of goodwill and fixed assets |   |                              | 9,298  |        |        |       |      |        |        |        |       |       
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               |                                         |   | Total costs and expenses     |        |        | 27,303 |       |       |        | 19,606 |        |        |        | 18,965 |  
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               | Operating (loss) income                 |   |                              | (8,083 | )      |        |       | 876   |        |        |        | 508    |       
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|OTHER INCOME (EXPENSE):                                        |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               | Interest, net                           |   |                              | 113    |        |        |       | 258   |        |        |        | (512   | )     
|                                                               | Settlement with Former Parent           |   |                              |       |        |        |       |      |        |        |        | 519    |       
|                                                               | Settlement of shareholder litigation    |   |                              |       |        |        |       |      |        |        |        | (3,508 | )     
|                                                               | Patent
and other settlements            |   |                              | 691    |        |        |       |      |        |        |        |       |       
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               |                                         |   | Total other income (expense) |        |        | 804    |       |       |        | 258    |        |        |        | (3,501 | )
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|(LOSS) INCOME BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES |                                         |   | (7,279                       | )      |        |        | 1,134 |       |        |        | (2,993 | )     
|PROVISION FOR (BENEFIT FROM)
INCOME TAXES                      |                                         |   | 858                          |        |        |        | 543   |       |        |        | (1,110 | )     
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |       
|NET (LOSS) INCOME                                              |                                         | $ | (8,137                       | )      |        | $      | 591   |       |        | $      | (1,883 | )     
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |        |        |       
|NET (LOSS) INCOME PER SHARE:                                   |                                         |   |                              |        |        |        |       |       |        |        |        |       
|                                                               | Basic and diluted                       |   | $                            | (0.44  | )      |        | $     | 0.03  |        |        | $      | (0.12  | )     
|                                                               |                                         |   |                              |        |        |        |       |       |        |        |        |        |        |       

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

F-5



---



##### 



AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands)

|                           |                                                              |  |              |       |            |   |          |    |           |   |        |       |  |   |        |        |   |   |        |        |  
|-------------------------- | ------------------------------------------------------------ |  | ------------ | ----- | ---------- | - | -------- | -- | --------- | - | ------ | ----- |  | - | ------ | ------ | - | - | ------ | ------ | -
|                           |                                                              |  | Common Stock |       |            |   |          |    |           |   |       
|                           |                                                              |  |              |       | Additional |   | Retained |    |           |   |       
|                           |                                                              |  | Shares       |       | Amount     |   | Paid-In  |    | (Deficit) |   |        |       | 
|                           |                                                              |  |              |       |            |   | Capital  |    | Earnings  |   | Total 
|                           |                                                              |  |              |       |            |   |          |    |           |   |       
|BALANCE, JANUARY 1, 2000   |                                                              |  | 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 |       
|                           | Net income                                                   |  |              |      |            |   |          |   |           |   |        |      |  |   |        | 591    |   |   |        | 591    |  
|                           |                                                              |  |              |       |            |   |          |    |           |   |        |       |  |   |        |        |   |   |        |       
|BALANCE, DECEMBER 31, 2001 |                                                              |  | 18,484       |       |            |   | 185      |    |           |   | 23,994 |       |  |   | 400    |        |   |   | 24,579 |       
|                           | Net loss                                                     |  |              |      |            |   |          |   |           |   |        |      |  |   |        | (8,137 | ) |   |        | (8,137 | )
|                           |                                                              |  |              |       |            |   |          |    |           |   |        |       |  |   |        |        |   |   |        |       
|BALANCE, DECEMBER 31, 2002 |                                                              |  | 18,484       |       |            | $ | 185      |    |           | $ | 23,994 |       |  | $ | (7,737 | )      |   | $ | 16,442 |       
|                           |                                                              |  |              |       |            |   |          |    |           |   |        |       |  |   |        |        |   |   |        |       

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

F-6



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##### 



AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In Thousands)

|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |      |        |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------------------------------------- | ------ | ------ | ----- | ----- | ---- | ------ | ----- | ----- | ------ | ---- | ------ | -
|                                                 |                                                                                          |                                       |                                                                        |        | 2002   |       | 2001  |      | 2000  
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |       
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |       
|                                                 | Net (loss) income                                                                        |                                       | $                                                                      | (8,137 | )      |       | $     | 591  |        |       | $     | (1,883 | )   
|                                                 | Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|                                                 |                                                                                          |                                       | Depreciation and amortization                                          |        |        | 800   |       |      |        | 1,097 |       |        |      | 1,076  |  
|                                                 |                                                                                          |                                       | Deferred income taxes                                                  |        |        | 858   |       |      |        | 543   |       |        |      | (1,110 | )
|                                                 |                                                                                          |                                       | Provisions for doubtful accounts                                       |        |        | 160   |       |      |        | 17    |       |        |      | 81     |  
|                                                 |                                                                                          |                                       | Deferred financing costs                                               |        |        |      |       |      |        |      |       |        |      | 235    |  
|                                                 |                                                                                          |                                       | Impairment of goodwill and fixed assets                                |        |        | 9,298 |       |      |        |      |       |        |      |       |  
|                                                 |                                                                                          |                                       | Non-cash charges relating to the issuance of common
stock and warrants |        |        |      |       |      |        |      |       |        |      | 3,273  |  
|                                                 | Changes in operating assets and liabilities:                                             |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|                                                 |                                                                                          | Accounts receivable                   |                                                                        |        | (771   | )     |       |      | (500   | )     |       |        | (208 | )     
|                                                 |                                                                                          | Inventories                           |                                                                        |        | 726    |       |       |      | (252   | )     |       |        | (100 | )     
|                                                 |                                                                                          | Prepaid expenses and other            |                                                                        |        | (140   | )     |       |      | (171   | )     |       |        | 296  |       
|                                                 |                                                                                          | Accounts payable and accrued expenses |                                                                        |        | (1,138 | )     |       |      | (1,078 | )     |       |        | (775 | )     
|                                                 |                                                                                          | Customer advances                     |                                                                        |        | (11    | )     |       |      | (61    | )     |       |        | (446 | )     
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|                                                 |                                                                                          |                                       | Net cash provided by operating activities                              |        |        | 1,645 |       |      |        | 186   |       |        |      | 439    |  
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |       
|                                                 | Capital expenditures                                                                     |                                       |                                                                        | (354   | )      |       |       | (744 | )      |       |       | (654   | )   
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|                                                 |                                                                                          |                                       | Net cash used in investing activities                                  |        |        | (354  | )     |      |        | (744  | )     |        |      | (654   | )
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|CASH FLOWS FROM FINANCING ACTIVITIES:            |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |       
|                                                 | Revolving credit repayment, net                                                          |                                       |                                                                        |       |        |       |       |     |        |       |       | (74    | )   
|                                                 | Notes payable, net                                                                       |                                       |                                                                        |       |        |       |       |     |        |       |       | (194   | )   
|                                                 | Long-term debt repayment                                                                 |                                       |                                                                        |       |        |       |       |     |        |       |       | (1,000 | )   
|                                                 | Proceeds from equity financing, net of costs                                             |                                       |                                                                        |       |        |       |       |     |        |       |       | 9,143  |     
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|                                                 |                                                                                          |                                       | Net cash provided by financing activities                              |        |        |      |       |      |        |      |       |        |      | 7,875  |  
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS |                                                                                          |                                       | 1,291                                                                  |        |        |       | (558  | )    |        |       | 7,660 |       
|CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR     |                                                                                          |                                       | 7,368                                                                  |        |        |       | 7,926 |      |        |       | 266   |       
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|CASH AND CASH EQUIVALENTS, END OF YEAR           |                                                                                          | $                                     | 8,659                                                                  |        |        | $     | 7,368 |      |        | $     | 7,926 |       
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|SUPPLEMENTAL CASH PAYMENTS:                      |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |       
|                                                 | Taxes                                                                                    |                                       | $                                                                      | 2      |        |       | $     | 5    |        |       | $     | 20     |     
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     
|                                                 | Interest                                                                                 |                                       | $                                                                      |       |        |       | $     |     |        |       | $     | 542    |     
|                                                 |                                                                                          |                                       |                                                                        |        |        |       |       |      |        |       |       |        |     

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

F-7



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##### 



AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Cash and Cash Equivalents  All highly liquid investments (primarily
government bonds) with a maturity of three months or less, when purchased, are
considered to be cash equivalents and are stated at cost, which approximates
market.

Concentrations of Credit Risk  A significant portion of the Companys
accounts receivable are due from credit card issuers and related credit card
manufacturers located throughout the United States and Europe. At December 31,
2002 and for the year then ended one customer accounted for 40% of the
Companys accounts receivable and 41% of its sales and a second customer
accounted for 24% of the Companys accounts receivable and 11% of its sales. At
December 31, 2001 and for the year then ended one customer accounted for 31% of
the Companys accounts receivable and 37% of its sales. 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. The cost of hologram
originations (which represent costs of a unique master hologram that is made to
customer specifications and is an integral part of the production process) are
charged to cost of goods sold in the period incurred.

Revenue Recognition  The Company recognizes revenue in accordance with the
provisions of the Security and Exchange Commissions (SEC) Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition. Specifically, sales and the
related cost of goods sold are generally recognized at the latter of the time
of shipment or when title passes to customers. In some situations, the Company
has shipped product 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, 2002 and 2001, accounts receivable from this
customer approximated $1.6 million and $1.0 million, respectively.

F-8



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##### 



At both December 31, 2002 and 2001, customer advances approximating $0.1
million represent payments received from customers for products which have not
yet been shipped. These customer advances are classified as current liabilities
on the accompanying balance sheets.

Effective October 1, 2000, the Company adopted the Emerging Issues Task Force,
(EITF) 00-10, Accounting for Shipping and Handling Fees and Costs. Under
the provisions of EITF 00-01, 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 $373,000, $370,000, and
$377,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
All comparative prior period financial statements have been reclassified to
reflect this change. The adoption of this EITF has had no impact on the
determination of net income (loss).

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

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

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

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

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

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

F-9



---



##### 



quoted market prices) of the Company was found to be less than its carrying
amount and as a result, the Company recorded a $7.4 million impairment charge for the
year ended December 31, 2002. This charge represents the full impairment of
the goodwill on the Companys balance sheet. This asset arose through purchase
accounting by the Companys Former Parent, as it related to the Company, in
connection with the Former Parents merger in 1990.

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

The 2001 and 2000 historical financial statements do not reflect the provisions
of SFAS No. 142. Had the Company adopted SFAS No. 142 on January 1, 2000, net
income (loss) and basic and diluted net income (loss) per share for the years
ended December 31, 2001 and 2000, would have been as follows (in thousands):

|                                                        |  |      |      |      |  |   |        |  
|------------------------------------------------------- |  | ---- | ---- | ---- |  | - | ------ | -
|                                                        |  | 2001 |      | 2000
|                                                        |  |      |      |     
|Net income (loss) as reported                           |  | $    | 591  |      |  | $ | (1,883 | )
|Add: Goodwill amortization                              |  |      | 345  |      |  |   | 345    |  
|                                                        |  |      |      |      |  |   |        |  
|Adjusted net income                                     |  | $    | 936  |      |  | $ | (1,538 | )
|                                                        |  |      |      |      |  |   |        |  
|Pro forma basic and diluted
net income (loss) per share |  | $    | 0.05 |      |  | $ | (0.10  | )
|                                                        |  |      |      |      |  |   |        |  

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.

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

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

Stock-Based Compensation Plans  In December 2002, FASB issued SFAS No. 148,
Accounting for Stock Based CompensationTransition and Disclosurean amendment
of FASB Statement No. 123. SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation from the intrinsic value-based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. We adopted the disclosure requirements of SFAS No. 148 effective
December 31, 2002. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting prescribed in
APB Opinion No. 25, and accordingly, does not recognize compensation expense
for stock option grants made at an exercise price equal to or in excess of the
fair market value of the stock at the date of grant.

Had compensation cost for the Companys outstanding stock options been
determined based on the fair value at the grant dates for those options
consistent with SFAS No. 123, the Companys 2002, 2001 and 2000 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):

F-10



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##### 



|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  
|---------------------------------------------- | ----------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                               |             |  | 2002 |        | 2001 |  | 2000
|                                               |             |  |      |        |      |  |     
|Net income (loss):                             |             |  |      |        |      |  |      |       |   |  |   |       
|                                               | As reported |  | $    | (8,137 | )    |  | $    | 591   |   |  | $ | (1,883 | )
|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  
|                                               | Pro forma   |  | $    | (8,483 | )    |  | $    | (124  | ) |  | $ | (2,598 | )
|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  
|Stock-based employee compensation:             |             |  |      |        |      |  |      |       |   |  |   |       
|                                               | As reported |  | $    |       |      |  | $    |      |   |  | $ |       |  
|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  
|                                               | Pro forma   |  | $    | 346    |      |  | $    | 715   |   |  | $ | 715    |  
|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  
|Basic and diluted net income (loss) per share: |             |  |      |        |      |  |      |       |   |  |   |       
|                                               | As reported |  | $    | (0.44  | )    |  | $    | 0.03  |   |  | $ | (0.12  | )
|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  
|                                               | Pro forma   |  | $    | (0.46  | )    |  | $    | (0.01 | ) |  | $ | (0.17  | )
|                                               |             |  |      |        |      |  |      |       |   |  |   |        |  

Basic and Diluted Net Income (Loss) per Share  Basic net income (loss) per
share is computed based on the weighted average number of outstanding shares of
common stock. The basic weighted average number of shares outstanding were
18,483,720, 18,483,720, and 15,421,064 for the years ended December 31, 2002,
2001 and 2000, 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. For the years
ended December 31, 2002, 2001 and 2000, the effect of options to purchase
2,318,500 shares, 2,509,500 shares and 2,472,500 shares, respectively, of the
Companys common stock were excluded from the calculation of diluted net income
(loss) per share because the effect of inclusion of such options would have
been antidilutive. For the years ended December 31, 2002 and 2001, the effect
of warrants to purchase 863,647 shares and 215,912 shares, respectively, of the
Companys common stock were excluded from the calculation of diluted net income
(loss) per share because the effect of inclusion of such warrants would have
been antidilutive. For the years ended December 31, 2002, 2001 and 2000, the
diluted weighted average number of shares outstanding were 18,483,720,
18,483,720 and 15,421,064 respectively.

Business Concentration Risks  Sales to MasterCard were approximately 41%, 37%
and 28% of sales for the years ended December 31, 2002, 2001 and 2000,
respectively. At December 31, 2002 and 2001, accounts receivable from
MasterCard approximated $1.6 million and $1.0 million,
respectively. The Company entered
into an agreement with MasterCard dated February 28, 2003, which replaces the
agreement dated February 1, 1996, as amended. The
new agreement expires in February 2008, subject to automatic renewal if not
terminated by either party. Under the terms of the new agreement, MasterCard
is obligated to purchase at least 80% of its holograms from the Company, and has the
right to utilize Crane & Co. to produce up to 20% of MasterCards annual
hologram requirements in coordination with the Company. The new agreement provides that
MasterCard will receive three sequential price reductions of
approximately 3% each, effective at the
beginning of 2003, 2004 and 2006. The Company is currently the
exclusive supplier to MasterCard. The loss of all or a substantial portion of
the sales to MasterCard, however, would have a material adverse effect on the
financial position, results of operations and cash flows of the Company.

Sales to manufacturers of VISA credit cards (approximately 50 customers) were
approximately 26%, 23% and 19% of sales for the years ended December 31, 2002,
2001 and 2000, 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, 2002 and
2001, accounts receivable from these customers approximated $1.5 million and
$1.0 million, respectively.

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

Export Sales  Export sales were 27%, 28% and 31% of sales for the years ended
December 31, 2002,

F-11



---



##### 



2001 and 2000, respectively. All export sales are denominated in United States
dollars. At December 31, 2002 and 2001, accounts receivable from these
customers approximated $0.5 million and $0.6 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, 2002, 2001, 2000, there was no difference between the Companys net income
(loss) and comprehensive income (loss).

Fair Value of Financial Instruments  The Companys financial instruments
consist of cash and cash equivalents, accounts receivables, accounts payable
and accrued expenses. The carrying amounts reported in the balance sheets
approximate their fair value at both December 31, 2002 and 2001.

Reclassifications  Certain prior year amounts have been reclassified to
conform to the current years presentation.

2. INVENTORIES

|                                             |  |                |       |      |  |   |       | 
|-------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                             |  | December 31,  
|                                             |  |               
|                                             |  | 2002           |       | 2001
|                                             |  |                |       |     
|                                             |  | (In Thousands)
|Finished goods                               |  | $              | 1,226 |      |  | $ | 1,197 | 
|Finished goods on consignment with customers |  |                | 377   |      |  |   | 287   | 
|Work in process                              |  |                | 455   |      |  |   | 1,023 | 
|Raw materials                                |  |                | 483   |      |  |   | 760   | 
|                                             |  |                |       |      |  |   |       | 
|Inventories                                  |  | $              | 2,541 |      |  | $ | 3,267 | 
|                                             |  |                |       |      |  |   |       | 

3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

|                                                     |  |                |        |      |  |   |        | 
|---------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                                     |  | December 31,  
|                                                     |  |               
|                                                     |  | 2002           |        | 2001
|                                                     |  |                |        |     
|                                                     |  | (In Thousands)
|Machinery and equipment                              |  | $              | 10,205 |      |  | $ | 12,548 | 
|Leasehold improvements                               |  |                | 1,082  |      |  |   | 1,022  | 
|                                                     |  |                |        |      |  |   |        | 
|                                                     |  |                | 11,287 |      |  |   | 13,570 | 
|Accumulated depreciation and amortization            |  |                | 8,505  |      |  |   | 8,458  | 
|                                                     |  |                |        |      |  |   |        | 
|Machinery, equipment and leasehold improvements, net |  | $              | 2,782  |      |  | $ | 5,112  | 
|                                                     |  |                |        |      |  |   |        | 

Depreciation and amortization of machinery and equipment and leasehold
improvements for the years ended December 31, 2002, 2001 and 2000 were
$794,000, $749,000 and $732,000, respectively.

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

F-12



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##### 



4. ACCRUED EXPENSES

|                                      |  |                |       |      |  |   |       | 
|------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                      |  | December 31,  
|                                      |  |               
|                                      |  | 2002           |       | 2001
|                                      |  |                |       |     
|                                      |  | (In Thousands)
|Accrued contract liability            |  | $              | 357   |      |  | $ | 357   | 
|Warranty reserves                     |  |                | 605   |      |  |   | 1,011 | 
|Federal, state and local income taxes |  |                | 66    |      |  |   | 68    | 
|Salaries and wages                    |  |                | 520   |      |  |   | 435   | 
|Accrued professional fees             |  |                | 107   |      |  |   | 181   | 
|Other                                 |  |                | 148   |      |  |   | 46    | 
|                                      |  |                |       |      |  |   |       | 
|                                      |  | $              | 1,803 |      |  | $ | 2,098 | 
|                                      |  |                |       |      |  |   |       | 

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 (see Note 7. Related Party
Transactions). 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. 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:

|          |                 |   |                     |     |      |   |      |     |  |   |        |      |  
|--------- | --------------- | - | ------------------- | --- | ---- | - | ---- | --- |  | - | ------ | ---- | -
|          |                 |   | For the Years Ended
|          |                 |   | December 31,       
|          |                 |   |                    
|          |                 |   | 2002                |     | 2001 |   | 2000
|          |                 |   |                     |     |      |   |     
|          |                 |   | (In Thousands)     
|Current:  |                 |   |                     |     |      |   |      |     |  |   |        |     
|          | Federal         |   | $                   |    |      |   | $    |    |  |   | $      |     |  
|          | State and local |   |                     |    |      |   |      |    |  |   |        |     |  
|          |                 |   |                     |     |      |   |      |     |  |   |        |      |  
|          |                 |   |                    |     |      |   |     |     |  |   |       |     
|          |                 |   |                     |     |      |   |      |     |  |   |        |      |  
|Deferred: |                 |   |                     |     |      |   |      |     |  |   |        |     
|          | Federal         |   |                     | 655 |      |   |      | 423 |  |   |        | (817 | )
|          | State and local |   |                     | 203 |      |   |      | 120 |  |   |        | (293 | )
|          |                 |   |                     |     |      |   |      |     |  |   |        |      |  
|          |                 |   | 858                 |     |      |   | 543  |     |  |   | (1,110 | )   
|          |                 |   |                     |     |      |   |      |     |  |   |        |      |  
|          |                 | $ | 858                 |     |      | $ | 543  |     |  | $ | (1,110 | )   
|          |                 |   |                     |     |      |   |      |     |  |   |        |      |  

A reconciliation of the taxes on income in 2002, 2001 and 2000 is as follows:

F-13



---



##### 



|                                                                            |  |              |        |      |  |                     |     |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ------------------- | --- | - |  | - | ------ | -
|                                                                            |  |              |        |      |  | For the Years Ended |     |   |  |  
|                                                                            |  | December 31,
|                                                                            |  |             
|                                                                            |  | 2002         |        | 2001 |  | 2000               
|                                                                            |  |              |        |      |  |                    
|                                                                            |  |              |        |      |  | (In Thousands)      |     |   |  |  
|Tax at statutory rate                                                       |  | $            | (2,475 | )    |  | $                   | 397 |   |  | $ | (1,048 | )
|Amortization and impairment of nondeductible
Goodwill and long-lived assets |  |              | 3,161  |      |  |                     | 122 |   |  |   | 122    |  
|State and local taxes, net of Federal benefit                               |  |              | 133    |      |  |                     | 89  |   |  |   | (190   | )
|Other                                                                       |  |              | 39     |      |  |                     | (65 | ) |  |   | 6      |  
|                                                                            |  |              |        |      |  |                     |     |   |  |   |        |  
|                                                                            |  | $            | 858    |      |  | $                   | 543 |   |  | $ | (1,110 | )
|                                                                            |  |              |        |      |  |                     |     |   |  |   |        |  

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

|                                      |                                                |  |                |        |      |  |       |        |  
|------------------------------------- | ---------------------------------------------- |  | -------------- | ------ | ---- |  | ----- | ------ | -
|                                      |                                                |  | December 31,  
|                                      |                                                |  |               
|                                      |                                                |  | 2002           |        | 2001
|                                      |                                                |  |                |        |     
|                                      |                                                |  | (In Thousands)
|Current deferred tax assets:          |                                                |  |                |        |      |  |       |       
|                                      | Uniform capitalization of inventory            |  | $              | 228    |      |  | $     | 215    |  
|                                      | Bad debt reserve                               |  |                | 89     |      |  |       | 32     |  
|                                      | Warranty reserve                               |  |                | 254    |      |  |       | 425    |  
|                                      | Inventory obsolescence                         |  |                | 492    |      |  |       | 304    |  
|                                      | Accrued vacation                               |  |                | 79     |      |  |       | 51     |  
|                                      | Other liabilities                              |  |                | 205    |      |  |       | 205    |  
|                                      |                                                |  |                |        |      |  |       |        |  
|                                      | Net current deferred tax asset                 |  | $              | 1,347  |      |  | $     | 1,232  |  
|                                      |                                                |  |                |        |      |  |       |        |  
|Non current deferred tax asset:       |                                                |  |                |        |      |  |       |       
|                                      | Class action settlement reserve                |  | $              |       |      |  | $     | 1,031  |  
|                                      | Net operating loss carryforward                |  |                | 574    |      |  |       | 627    |  
|                                      |                                                |  |                |        |      |  |       |        |  
|                                      |                                                |  | 574            |        |      |  | 1,658 |       
|Non current deferred tax liabilities: |                                                |  |                |        |      |  |       |       
|                                      | Excess tax over book depreciation              |  |                | (1,404 | )    |  |       | (1,515 | )
|                                      |                                                |  |                |        |      |  |       |        |  
|                                      | Net non current deferred tax (liability) asset |  | $              | (830   | )    |  | $     | 143    |  
|                                      |                                                |  |                |        |      |  |       |        |  

At December 31, 2002, the Company has net operating loss carryforwards of
approximately $1.4 million, which expire through 2021, available to offset
future Federal taxable income. Current or future changes in ownership could
limit the availability to use these net operating loss carryforwards.

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), which was entered into on
September 29, 1999. Borrowings under the Foothill Loan bore interest at the
Lenders reference rate, as defined, plus 1.5%.

As a result of terminating the Foothill Loan, in 2000, the Company incurred 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 year ended December 31, 2000, the weighted average interest rate of
outstanding borrowings was approximately 9.8%. The average aggregate borrowings
during 2000 were approximately $0.9 million.

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

F-14



---



##### 



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.

On December 8, 1999, the Former Parent filed a petition and plan of
reorganization under Chapter 11 of the Federal Bankruptcy Code. In connection
with negotiations on the Chapter 11 plan, the Company reached an agreement with
the Former Parent which provided, among other things, for the Former Parent to
be responsible for and 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 indemnify the Company with respect to any such liabilities.
As a result of 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.

8. STOCKHOLDERS EQUITY

On June 11, 1998, the Company increased its authorized common stock to
30,000,000 shares and its authorized preferred stock to 5,000,000 shares. On
July 20, 1998, the Former Parent completed the sale of 13,636,000 shares of the
Companys common stock in a public offering (the Offering), representing its
entire investment in the Company. During 2001 and 2002 the Company issued and
distributed 1,460,000 shares of its common stock as well as warrants to
purchase 863,647 shares of the Companys common stock, at an exercise price of
$6.00 per share in settlement of the class action lawsuit filed against the
Company. On August 10, 2001, the Companys stockholders approved an amendment
to the Companys Amended and Restated Articles of Incorporation increasing the
number of authorized shares of its common stock to 40,000,000 shares.

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

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

During 2000, the Company entered into additional agreements with Crane under
which the Company rents factory space and leases employees for the Companys
facility in Dalton, MA. For the years ended December 31, 2002, 2001 and 2000,
the Company paid Crane under these agreements, $72,000, $72,000 and $12,000,
respectively, for the rental of factory space and $151,000, $116,000 and
$11,000, respectively, for the leased employees. In addition, the Company paid
Crane $5,700 and $50,000 for leasehold improvements on the rental space for the
years ended December 31, 2001 and 2000, respectively. On February 28, 2003, the Company
entered into a new agreement with MasterCard which entitles MasterCard to
appoint Crane as its second supplier to produce up to 20% of MasterCards
annual hologram requirements in coordination with the Company. In addition, the
agreement allows MasterCard to appoint Crane as its contingent supplier under
certain circumstances.

F-15



---



##### 



9. SETTLEMENT AGREEMENT

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

10. STOCK INCENTIVE PLANS

On August 4, 2000, the Company adopted the American Bank Note Holographics,
Inc. 2000 Stock Incentive Plan (as amended, the 2000 Plan), which was
subsequently approved by the Companys stockholders at the annual meeting on
September 12, 2000. On July 20, 1998, the Company adopted the 1998 Stock
Incentive Plan (as amended, the 1998 Plan, and collectively with the 2000
Plan, the Plans). The Plans were adopted for the purpose of granting various
stock incentives to officers, directors, employees and consultants of the
Company. The Board of Directors (or a committee appointed by the Board of
Directors) has discretionary authority, subject to certain restrictions, to
administer the Plans. The total number of shares reserved for issuance under
the Plans are 3,213,000 shares of common stock. Options to purchase 909,500
shares of common stock are available for future grants at December 31, 2002
under the Plans. Options to purchase 2,303,500 shares of common stock were
outstanding under the Plans at December 31, 2002. Options to purchase an
additional 15,000 shares of common stock were outstanding outside the Plans at
December 31, 2002. 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, 2002, 2001 and 2000 and changes during the years then ended
follows:

|                                                               |           |   |           |          |       |   |          |      |       |   |           |          |          |   |      |      |  |   |           |           |   |   |      |      | 
|-------------------------------------------------------------- | --------- | - | --------- | -------- | ----- | - | -------- | ---- | ----- | - | --------- | -------- | -------- | - | ---- | ---- |  | - | --------- | --------- | - | - | ---- | ---- | 
|                                                               |           |   | 2002      |          | 2001  |   | 2000    
|                                                               |           |   |           |          |       |   |         
|                                                               |           |   |           |          |       |   | Weighted |      |       |   |           |          | Weighted |   |      |      |  |   | Weighted 
|                                                               |           |   |           |          |       |   | Average  |      |       |   |           |          | Average  |   |      |      |  |   | Average  
|                                                               |           |   |           |          |       |   | Exercise |      |       |   |           |          | Exercise |   |      |      |  |   | Exercise 
|                                                               |           |   | Shares    |          | Price |   | Shares   |      | Price |   | Shares    |          | Price   
|                                                               |           |   |           |          |       |   |          |      |       |   |           |          |         
|Outstanding, beginning of year                                 |           |   | 2,509,500 |          |       | $ | 2.58     |      |       |   | 2,472,500 |          |          | $ | 2.64 |      |  |   | 1,420,000 |           |   | $ | 3.22 |     
|                                                               | Granted   |   |           | 23,000   |       |   |          | 1.02 |       |   |           | 188,000  |          |   |      | 1.83 |  |   |           | 1,136,500 |   |   |      | 1.99 | 
|                                                               | Forfeited |   |           | (214,000 | )     |   |          | 2.76 |       |   |           | (151,000 | )        |   |      | 2.69 |  |   |           | (84,000   | ) |   |      | 4.32 | 
|                                                               |           |   |           |          |       |   |          |      |       |   |           |          |          |   |      |      |  |   |           |           |   |   |      |     
|Outstanding, end of year                                       |           |   | 2,318,500 |          |       |   | 2.55     |      |       |   | 2,509,500 |          |          |   | 2.58 |      |  |   | 2,472,500 |           |   |   | 2.64 |     
|                                                               |           |   |           |          |       |   |          |      |       |   |           |          |          |   |      |      |  |   |           |           |   |   |      |     
|Exercisable, end of year                                       |           |   | 1,944,124 |          |       |   | 2.67     |      |       |   | 1,524,069 |          |          |   | 2.91 |      |  |   | 696,666   |           |   |   | 3.38 |     
|                                                               |           |   |           |          |       |   |          |      |       |   |           |          |          |   |      |      |  |   |           |           |   |   |      |     
|Weighted average fair value of
options granted during the year |           | $ | 0.84      |          |       |   |          |      |       | $ | 1.52      |          |          |   |      |      |  | $ | 1.61      |           |   |   |      |     
|                                                               |           |   |           |          |       |   |          |      |       |   |           |          |          |   |      |      |  |   |           |           |   |   |      |     

F-16



---



##### 



The following table summarizes information concerning outstanding and exercisable options
at December 31, 2002:

|                 |  |                     |           |                     |  |           |      |             |  |          |      |  |  |          |           |  |  |   |      | 
|---------------- |  | ------------------- | --------- | ------------------- |  | --------- | ---- | ----------- |  | -------- | ---- |  |  | -------- | --------- |  |  | - | ---- | 
|                 |  | Options Outstanding |           | Options Exercisable
|                 |  |                     |           |                    
|                 |  |                     |           |                     |  | Weighted  |      |             |  |          |      |  |  |          |           |  |  |  
|                 |  |                     |           |                     |  | Average   |      | Weighted    |  |          |      |  |  | Weighted
|                 |  |                     |           |                     |  | Remaining |      | Average     |  |          |      |  |  | Average 
|Range of         |  | Options             |           | Contractual         |  | Exercise  |      | Options     |  | Exercise
|Exercise Prices  |  | Outstanding         |           | Life                |  | Price     |      | Exercisable |  | Price   
|                 |  |                     |           |                     |  |           |      |             |  |         
|$0.68 - $1.07    |  |                     | 23,000    |                     |  |           | 9.64 |             |  | $        | 1.02 |  |  |          | 0         |  |  |   | 0    | 
|$1.67 - $1.9375  |  |                     | 860,500   |                     |  |           | 7.53 |             |  | $        | 1.86 |  |  |          | 644,083   |  |  | $ | 1.85 | 
|$2.03125 - $2.50 |  |                     | 1,277,833 |                     |  |           | 6.84 |             |  | $        | 2.31 |  |  |          | 1,142,874 |  |  | $ | 2.34 | 
|$8.50            |  |                     | 157,167   |                     |  |           | 5.55 |             |  | $        | 8.50 |  |  |          | 157,167   |  |  | $ | 8.50 | 
|                 |  |                     |           |                     |  |           |      |             |  |          |      |  |  |          |           |  |  |   |      | 
|$0.68 - $8.50    |  |                     | 2,318,500 |                     |  |           | 7.04 |             |  | $        | 2.55 |  |  |          | 1,944,124 |  |  | $ | 2.67 | 
|                 |  |                     |           |                     |  |           |      |             |  |          |      |  |  |          |           |  |  |   |      | 

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

|                        |  |                |       |                |  |                |       |   |  |  |       |  
|----------------------- |  | -------------- | ----- | -------------- |  | -------------- | ----- | - |  |  | ----- | -
|                        |  | 2002           |       | 2001           |  | 2000          
|                        |  |                |       |                |  |               
|Expected volatility     |  |                | 63.10 | %              |  |                | 76.84 | % |  |  | 70.10 | %
|Risk-free interest rate |  | 3.63% to 4.02% |       | 4.97% to 5.52% |  | 5.23% to 6.60%
|Dividend yield          |  |                |      |                |  |                |      |   |  |  |      |  
|Expected life           |  | 7.5 years      |       | 7.5 years      |  | 7.5 years     

11. EMPLOYEE BENEFITS PLANS

Retirement Plans  On October 1, 1999, the Company implemented defined
contribution plans for its employees. Aggregate contributions to such plans,
which have been charged to the Companys operations, were approximately
$51,000, $48,000 and $46,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

12. COMMITMENTS AND CONTINGENCIES

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 Deloitte & Touche LLP, had been filed
in the United States District Court for the Southern District of New York (the
Court). The complaint alleged violations of the federal securities laws and
sought 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 sought 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

F-17



---



##### 



approval of the Court on December 15, 2000. Under the settlement, the insurance
carrier for the Company and the Former Parent paid $12,500,000 and Deloitte &
Touche LLP paid $2,350,000. In addition, the Company issued and distributed
1,460,000 shares of its common stock, of which 365,000 shares were issued and
distributed in February 2001 and the remaining 1,095,000 shares were issued and
distributed in May 2002. ABNH also issued and distributed warrants to purchase
863,647 shares of the Companys common stock, at an exercise price of $6.00 per
share. The warrants will expire on June 18, 2003. The Former Parent also
issued and distributed 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.

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

The Company currently and from time to time is involved in litigation (as both
plaintiff and defendant) incidental to the conduct of its business; however,
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,
2002, accruals for litigation matters approximated $10,000. As of December 31,
2001, there were no accruals for litigation matters. The Company believes,
based on information known at December 31, 2002, that anticipated probable
costs of litigation matters as of December 31, 2002 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.

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

F-18



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##### 



be available to cover any such claim or available in amounts sufficient to
cover all potential liabilities. As a result, product liability claims could
have a material adverse effect on the Companys business, financial condition,
results of operations and cash flows.

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

Net rental expense was approximately $1.3 million, $1.3 million and $1.2
million for the years ended December 31, 2002, 2001 and 2000, respectively.

At December 31, 2002, future minimum lease payments under noncancelable
operating leases, expiring through 2007, are as follows: $1.1 million in 2003;
$0.9 million in 2004; $0.9 million in 2005; $0.9 million in 2006; and $0.8
million in 2007.

Employment Agreements  The Company entered into employment agreements with
certain of its current officers, which provide for, among other matters,
minimum compensation of approximately $501,000 in 2003, $318,000 in 2004 and
$80,000 in 2005. The agreements also provide for bonuses. In connection with
these agreements, the Company granted options to acquire 1,273,000 shares of
its common stock at prices ranging from $1.75 to $2.50 per share, representing
the fair market value of the Companys common stock on the dates of grant.

F-19



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##### 



Schedule II

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |     | 
|----------------------------- | ------------------------------------------------------------------- | ----------- | - | -------------- | -- | ---------- | - | ---------- | --- | ------- |  |  |  | -------- | - | ----- | --- | --- | - | ----- | --- | 
|                              |                                                                     |             |   |                |    |            |   | Additions  |     |         |  |  |  |          |   |      
|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |      
|                              |                                                                     |             |   | Balance,       |    | Charged to |   | Charged to |     |         |  |  |  | Balance,
|                              |                                                                     |             |   | Beginning      |    | Costs and  |   | Other      |     |         |  |  |  | End     
|Description                   |                                                                     | of Year     |   | Expenses       |    | Accounts   |   | Deductions |     | of Year
|                              |                                                                     |             |   |                |    |            |   |            |     |        
|                              |                                                                     |             |   | (In Thousands)
|Year ended December 31, 2002: |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |      
|                              | Allowance for doubtful accounts
(deducted from accounts             |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |    
|                              |                                                                     | receivable) |   | $              | 75 |            |   | $          | 160 |         |  |  |  |          |   | $     | 25  | (1) |   | $     | 210 | 
|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |     | 
|                              | Allowance for obsolescence
(deducted from inventory)                |             | $ | 725            |    |            | $ | 710        |     |         |  |  |  |          | $ | 264   |     |     | $ | 1,171 |    
|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |     | 
|Year ended December 31, 2001: |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |      
|                              | Allowance for doubtful accounts
(deducted from accounts
receivable) |             | $ | 75             |    |            | $ | 17         |     |         |  |  |  |          | $ | 17    | (1) |     | $ | 75    |    
|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |     | 
|                              | Allowance for obsolescence
(deducted from inventory)                |             | $ | 678            |    |            | $ | 300        |     |         |  |  |  |          | $ | 253   |     |     | $ | 725   |    
|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |     | 
|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   |    
|                              |                                                                     |             |   |                |    |            |   |            |     |         |  |  |  |          |   |       |     |     |   |       |     | 



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

S-1