SECURITIES AND EXCHANGE COMMISSION

(Mark One)



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



For the fiscal year ended December 31, 2000



OR



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

For the transition period from __________ to __________



Commission file number :_0-30467___



|INTACTA TECHNOLOGIES INC.                                        
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|                                                                 
|(Exact name of registrant as specified in
its charter)           
|                                                                 
|Nevada                                                           
|                                                                 
|(State or other jurisdiction
of incorporation or organization    
|                                                                 
|945 East Paces Ferry Road NE
Suite 1445
Atlanta, Georgia         
|                                                                 
|(Address of principal executive
offices)                         
|                                                                 
|Registrant's telephone number, including area
code:  404-880-9919
|                                                                 
|Securities registered pursuant to Section 12(b) of
the Act:      
|                                                                 
|Title of each class                                              
|                                                                 
|(None)                                                           
|                                                                 
|Securities registered pursuant to Section 12(g) of the
Act:      
|                                                                 
|Title of Class                                                   
|                                                                 
|Common Stock, $.0001 par value                                   

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 as
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.    YES X
    NO___.



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



The aggregate market value
of the voting stock held by non-affiliates of the registrant, based upon
the closing price for the registrant's Common Stock on March 15, 2001 was
$8,211,302.



As of
March 15, 2001, the registrant had 20,345,924 shares of Common Stock
outstanding.



Documents incorporated by
reference:  Portions of the registrant's definitive Proxy Statement to
filed with the Securities and Exchange Commission by April 30, 2001 are
incorporated by reference into Part III.

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TABLE OF CONTENTS

|         |                                                                                       | PAGE
|-------- | ------------------------------------------------------------------------------------- | ----
|         |                                                                                       |     
|         | PART I                                                                                |     
|         |                                                                                       |     
|Item 1.  | Business                                                                              | 3   
|Item 2.  | Facilities                                                                            | 10  
|Item 3.  | Legal Proceedings                                                                     | 10  
|Item 4.  | Submission of Matters to a Vote of Security Holders                                   | 11  
|         |                                                                                       |     
|         | PART II                                                                               |     
|         |                                                                                       |     
|Item 5.  | Market for Registrant's Common Stock and Related
Stockholder Matters                  | 11  
|Item 6.  | Selected Financial Data                                                               | 12  
|Item 7.  | Management's Discussion and Analysis of Financial Condition
and Results of Operations | 13  
|Item 7A. | Quantitative and Qualitative Disclosures About Market
Risk                            | 16  
|Item 8.  | Financial Statements and Supplementary Data                                           | 16  
|Item 9.  | Changes in and Disagreements with Accounting and Financial
Disclosures                | 16  
|         |                                                                                       |     
|         | PART III                                                                              |     
|         |                                                                                       |     
|Item 10. | Directors and Executive Officers of the Registrant                                    | 17  
|Item 11. | Executive Compensation                                                                | 17  
|Item 12. | Security Ownership of Certain Beneficial Owners and
Management                        | 17  
|Item 13. | Certain Relationships and Related Transactions                                        | 17  
|         |                                                                                       |     
|         | PART IV                                                                               |     
|         |                                                                                       |     
|Item 14. | Exhibits, Financial Statement Schedules, and Reports on
Form 8-K                      | 18  
|         |                                                                                       |     
|         | Signatures                                                                            | 19  

2

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PART I

Item 1.   Business

The Private Securities Litigation Reform Act of 1995 provides a
"safe-harbor" for forward-looking statements.  Certain statements
contained in this report which are not historical fact, including, but not
limited to, those concerning our expectations of future sales revenues,
gross profits, research and development, sales and marketing, and
administrative expenses, product introductions and cash requirements are
"forward-looking" statements. These "forward-looking" statements are
subject to risks and uncertainties that may cause our actual results to
differ from expectations including variations in the level of orders,
general economic conditions in the markets served by our customers,
international economic and political climates, timing of future product
releases, difficulties or delays in product functionality of performance,
our failure to respond adequately to changes in technology or customer
preferences, or changes in our pricing or that of our competitors and our
inability to manage growth. All of the above factors constitute significant
risks to our operations. There can be no assurance that our results
of operations will not be adversely affected by one or more of these
factors. As a result, our actual results may vary materially from our
expectations.  The words "believe", "anticipate",
"intend", and "plan" and similar expressions identify
forward-looking statements.  Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only as of the
date the statement was made.

General

We are a
developer and marketer of software
products based on our patented technology that, through its unique
combination of compression, encoding and error correction processes,
transforms any data format ranging from text, graphic, audio or video from
a binary file into INTACTA.CODETM which is language transparent and
platform independent.  We believe that our technology provides solutions
and applications that enable enterprises to bridge their communications and
management information systems across digital and non-digital media, by
providing the secure bi-directional transmission and subsequent recovery
and storage of data.

Industry

Today's
computer-based business environment
has accelerated the transition from the historical paper-based business
model to a digital model, allowing enterprises to manage, authenticate,
archive and transmit data electronically.  Enterprises are beginning to
recognize the range of applications and cost savings associated with
implementing digital communications and information management systems.

Despite the transition of
business and consumers to a
computer-based environment, paper-based documentation continues to grow.
According to Jeffries and Company Inc., the average amount of paper
generated by corporations continues to grow at 25% annually.  Moreover, the
Journal of Accounting estimates that the costs to businesses for the
distribution, storage and processing of paper-based documents is
approximately $100 billion annually.  Few existing applications enable
enterprises to maintain data accurately and securely in either digital or
paper format.  Moreover, difficulties in exchanging data between digital
and paper formats are leading enterprises to seek solutions that would
allow them to more effectively and efficiently manage the production,
distribution and storage of data.

In addition, the
increasingly widespread use of mobile
and wireless communications, including the Internet, enables enterprises to
collaborate, interact, access information and conduct business transactions
on a broadened basis.  The market for wireless communication services is
rapidly growing.  U.S. Bancorp Piper Jaffray estimates that the wireless
data application segment of this industry is expected to grow to $54
billion in revenues by 2004.  According to the Yankee Group, the
"corporate extension" segment of the wireless communication market is
expected to account for approximately 30% of the total market share of the
wireless data application industry by 2003.  New mobile computing devices
such as personal digital assistants, including Palm OS and Windows CE based
handheld devices, Internet appliances, and smart phones extend traditional
enterprise tiers for maintaining and communicating data from centrally
located mainframe computers and servers to remote devices via wireless
systems.  However, extending intra-enterprise applications utilizing
wireless technologies increases network complexity and exposes enterprises
to potential loss of or unauthorized access to confidential or sensitive
information.  Consequently, enterprises are expected to become increasingly
reliant on cross platform solutions and applications that enable them to
manage and distribute information in a cost-effective, secure manner over
wireless networks to any mobile or wireless device.

Software application
developers are currently in the
process of developing a broad range of horizontal software applications
within the enterprise mobile computing framework, including:

- database applications which provide software
solutions for data and content on an enterprise's server database;
- client/server applications which provide
software solutions for mobile computing applications with mobile computing
devices; and

- Intranet/Internet and e-commerce applications
that provide software solutions requiring secure data transmissions.

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We believe that the
flexibility and scalability of our
technology provides the building blocks for creating a range of solutions
to address enterprise communication and information management problems in
the digital communications environment.

Products

We currently
have available on our website
an application of our technology called

- INTACTA.CODE Reader is capable of
decoding color images, text and hyperlinks (in HTML format) stored in
INTACTA.CODE in either digital or non-digital formats.  The software
application is offered free of charge as a marketing tool to expand
recognition of our products.

We have recently
released a suite of software products called INTACTA.CODE Software
Developer Kits, or SDK's, which are designed to provide rapid integration
of our technology into existing legacy enterprise systems as well as assist
application developers in creating or extending software and firmware
solutions for requiring the secure compression of data for management and
transmission across any medium regardless of platform, device or
location.

These software products
may be downloaded from our website and certain other participating websites
that have entered into exclusive arrangements with us to provide
for the online purchase and distribution of our products.  Support for
these software products is also provided from our website.

- INTACTA.CODE SDK Trial Version is
currently only available for Windows platforms and allows application
developers to experience the INTACTA.CODE process by facilitating testing,
benchmarking and prototyping of 1KB data files for encoding and decoding.
This SDK is free of charge and is used as a promotional tool to educate
software application developers with respect to the benefits of our
technology.
- INTACTA.CODE SDK Developer's Edition
is supportable on platforms such as Windows 9x, 2000 and NT, Windows
CE, Palm OS and MAC and allows application developers to integrate the
INTACTA.CODE encoding and compression engines to process 10KB data files.
The fee for this product is approximately $500.
- INTACTA.CODE SDK Plus Edition is
supportable on the same platforms as the Developer's Edition, plus JAVA and
UNIX platforms and allows developers to integrate the INTACTA.CODE encoding
and compression engines to process 10KB data files.  The fee for this
product is approximately $2,500.
- INTACTA.CODE SDK Enterprise Edition
is a custom development services package, geared directly to the
enterprise, designed to provide custom access to INTACTA.CODE encoding and
decoding engines.  This software supports data and image read and write
capabilities using comparison, authentication and encryption in digital or
print media.  Digital form includes support for all platforms, unlimited
data size and custom encryption.  The initial fee for this product is
approximately $25,000, together with a royalty fee to be negotiated on a
per contract basis, based upon transaction usage measurements such as
amount of data processed, amount of transactions processed, or number of
installed licenses or sites utilizing our software.

In addition, we are in the
process of developing an INTACTA.CODE micro browser SDK, which we
anticipate making available for commercial distribution on our website
and certain participating websites for download by the middle of 2001. We
anticipate that this SDK product will be capable of encoding and decoding
color images, text and hyperlinks (in HTML format) stored as INTACTA.CODE
to facilitate access to applications on mobile computing devices.

We believe that the
marketing of our INTACTA.CODE SDK's will enable us to:

- generate a low maintenance revenue stream;
- introduce our technology into the marketplace for
enterprise-based applications solutions;
- create a reference base of SDK enabled applications
and solutions for further promotion and marketing; and,

- create a reference base of application developers
that have utilized our SDKs for further end-user feedback and assistance
with large custom integration projects.

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INTACTA.CODE Technology

Our patented technology involves two
processes; compression and encoding.  A compression engine utilizing binary
compression technology compresses binary files comprised of text, graphics,
audio, or video.  An encoding engine encodes the compressed file into a
two-dimensional graphical grid, which we call INTACTA.CODE.



The encoding
engine simultaneously embeds a proprietary error correction algorithm in
the INTACTA.CODE to aid in the accurate recovery of the content and format
of the original digital file, as well as security features to protect
against unauthorized access or use of the INTACTA.CODE.  The resulting
INTACTA.CODE is a secure, damage resistant graphical representation of the
original digital file, which may be maintained or transmitted in digital
format or transferred to paper format for storage and/or facsimile
transmission.  The key features of our technology are:

- Compression.  The compression capability of
our technology decreases the amount of bandwidth required to transmit data,
and the amount of space required to store data.  The recipient of a
compressed and encoded file may then restore the data to its original
format for further review and/or editing.
- Security.  The security features of our
technology enable users to protect information contained within
INTACTA.CODE.  The security features include the ability to restrict access
to particular users only, and the ability to verify the sender and content
of an INTACTA.CODE file containing sensitive information. Protection can
also be layered so that a reader would require a separate and distinct
password to access successive layers of information.
- Error Correction. Our technology offers a
robust error correction process, which maintains the integrity of the
content and format of the original compressed data in the event of
degradation to the medium over which the data is being transmitted.  The
user can choose the level of error correction required depending on the
reliability of the medium being used to transmit or store the data.
- Transmission and Restoration of Data In Any
Form. Our technology enables the encoding and transmission of data from
any form, including paper based or digitally stored forms, and across
diverse operating platforms, such as PDA's and other mobile computing
devices, personal computers, mainframes, servers and databases.  With our
technology, the recipient of the transmission can decode the data without
further manipulation, translation or reconfiguration of the content or
format.

5

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Benefits Provided by INTACTA.CODE Technology

We believe that our
technology provides the following benefits with respect to secure and
accurate digital communications and comprehensive information
management:

- improved performance of wireless communications
and utility of mobile computing devices and software such as personal
digital assistants, notebook and palm-size computers and smart cellular
phones by enhancing their ability to receive, store and transmit
data;
- protection of sensitive business documents from
unauthorized access or use through security features, including encoding,
authentication and registration;
- enhanced hardware products and software
applications of an enterprise's existing communication and information
management systems at a cost that is much less than a conversion to a new
system but with similar functionality; and,
- reduction of bandwidth required for storage and
transmission of data allowing enterprises to transmit the information in a
faster, more cost-effective manner, and requires less space in both digital
and paper-based media for the storage and archiving of documents.

Strategy

We intend to
aggressively market our software products and technology directly to
software application developers as well as through strategic relationships
with third party solution providers and distributors, independent software
vendors and original equipment manufacturers with established distribution
channels and with reputations for marketing or integrating value added
technology such as ours.  In order to implement our strategy, we intend
to:

- establish the integration value of our software
products and technology with software developers for integration in various
enterprise based horizontal applications such as mobile computing,
Intranet/Internet and e-commerce, customer relationship management and
supply chain management;
- identify vertical markets such as publishing,
healthcare, telecommunications and financial services which require
applications incorporating our software products and technology or for
which our technology may be adapted or enhanced;
- establish strategic relationships with third
party solution providers; and
- customize our technology as stand-alone modules
or for incorporation into hardware or software applications to provide for
solutions for large enterprises.

Software
developers.  Worldwide there are millions of software application
developers categorized by "developer communities" that develop application
software for operating systems such as Microsoft Windows and Windows CE,
Palm OS, UNIX, Macintosh and JAVA.  Our INTACTA.CODE SDK products are
targeted at developers within these communities. In order to more
effectively reach these developers we have developed e-marketing and
e-commerce capabilities for our website to advertise, promote, launch and
sell our SDK's and related technology.

Third Party Solution
Providers Third party solution providers such as application service
providers and systems integrators as well as independent software vendors
and original equipment manufacturers have the ability to integrate
value-added technology such as ours.  Through strategic relationships with
these entities, we intend to directly market and distribute or bundle our
technology as a value added service with other software or hardware
products to be sold or licensed to end-users.

Large Enterprises.
A number of large enterprises rely upon internal resources for systems
integration and product development with respect to information management
and communications.   We intend to market our software products and
technology as an enhancement to an enterprise's legacy hardware and
software products by more efficient means than conversion to a new
system.

Marketing

Our marketing
efforts are directed at promoting our software products and technology,
creating market awareness and generating leads through print and website
advertising campaigns and promotional activities at industry trade shows,
events and conferences.  Our target markets for marketing and promoting our
software products and technology are:

6

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Mobile Computing

A key component of our
marketing plan is to establish key industry alliances and aggressively
market our software products and technology, as solutions for wireless
communications and e-commerce in the area of mobile computing.  Mobile
computing enables enterprises, application service providers and Internet
service providers to effectively and efficiently distribute data to and
from any mobile computing device, such as personal digital assistants
(PDA's), laptop computers, and smart phones, in any location.  According to
Forester Research, the number of mobile computing device users is expected
to rise to 35% within the next year.  International Data Corp., a market
research company, expects 18.9 million mobile computing devices to be shipped
worldwide in 2003, predicts that by the end of 2002 virtually all wireless
phones, the most popular access devices, will be pre-loaded with mini browsers
and will be Internet enabled, and that by 2004 annual sales of Internet-ready
wireless phones are expected to surpass $1 billion.

We believe that the
following characteristics of our technology make it an important component
in developing applications for this market:

- the ability to unify paper and digital environments
across any medium;
- the compression and security features are ideal for
securing data on wireless devices; and
- the technology's flexibility and scalability is well
suited for the global enterprise.

Security Software

The security software
industry is highly fragmented and rapidly evolving, marked by a substantial
number of companies developing core competencies in their chosen security
segments, and start-ups and small niche companies seeking to introduce
advanced security products.  We believe that the security features of our
technology make it attractive for enhancing existing security products or
for integrating with advanced products in development.  International Data
Corp. predicts that by 2003, revenues from the software security industry
will approach approximately $8.3 billion.

As a result of
technological advances related to the Internet, advertising considerations,
globalized communications and information sources and changing consumer
preferences, newspapers and magazines today face the need to implement
structural changes in content and format.

We believe that our
technology is uniquely positioned to capture significant market share and
revenue in this market because of its ability to bridge online content with
the print medium.  We believe that our technology can enable newspapers and
magazines to:

- transmit data and information from remote sources in
a secure, accurate and efficient manner, improving timeliness of reporting
and reducing operating costs;
- integrate with the Internet through the seamless
conversion of data, using INTACTA.CODE, between digital and paper format;
and
- enhance marketing capabilities for advertisers
through the ability to print, in INTACTA.CODE, audio, graphics, text and
video data to supplement traditional printed advertisements.

Yomiuri Shimbun, a
Japanese newspaper with one of the largest daily circulations in the world,
is the first newspaper to utilize applications incorporating our
technology.  As a result, we have received a number of inquiries worldwide
with respect to additional opportunities in this market.  We intend to
aggressively expand our marketing efforts in this market.  See
"Existing Customers."

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Strategic Relationships

We have established
non-financial relationships with several solution providers and software
developers in an effort to increase awareness of our technology.  While
these relationships do not generate revenues at this time, management
believes that they are critical in establishing recognition of our
technology.   These relationships include:

- IBM Corporation. We are an active member in
IBM's PartnerWorld for Developers, which is a marketing and enablement
program designed to create new market opportunities and provide e-business
solutions encompassing the entire portfolio of IBM products and
technologies.  The purpose of the relationship is to enable the sharing of
information with respect to the development of advanced technologies.
- Compaq Computer Corporation.  We are a member
of Compaq Solutions Alliance, a worldwide partnering program for
independent software vendors, consultants, systems integrators and service
providers to develop applications for all Compaq platforms.  Our technology
is made available to the extent applications utilizing our technology are
being developed.  As part of this arrangement we have secure remote access
to a variety of Compaq systems and to Compaq's solutions development
centers.
- Microsoft Corporation. We are a certified
Microsoft developer under the Microsoft Solution Provider program that
allows independent companies to team with Microsoft to solve business
challenges for organizations of all sizes.  As a certified developer we can
be called upon to provide software based solutions on Microsoft operating
systems such as Windows NT and Windows CE.
- EnPartner, LLC. In December 2000, we entered
into a partnership with EnPartner, an e-services company of Primus Software
Corporation, whereby EnPartner may utilize our technology for building
applications  and solutions for integration  into e-commerce  and  mobile
computing solutions for Fortune 1000 Companies.
- Secureworks, Inc. In February 2001, we
entered into a joint development alliance with Secureworks, Inc., to
combine our INTACTA.CODE technology with Secureworks' SEAL technology to
develop a solution for enabling safe and reliable data transmission for
mobile computing devices across a range of applications.

Licensing

We have
recently released a suite of software products called INTACTA.CODE Software
Developer Kits, or SDKs, which are designed to provide rapid integration of
our technology into existing legacy enterprise systems as well as assist
application developers in creating or extending software and firmware
solutions requiring the secure compression of data for management and
transmission across any medium regardless of platform, device or location.

Our INTACTA.CODE SDK
Developer's and Plus Editions are marketed to application developers
for a one-time, upfront licensing fee.  Our INTACTA.CODE SDK - Enterprise
Edition is marketed directly to large enterprises for an initial fee of
approximately $25,000 together with royalty fees to be negotiated on a per
contract basis, based upon transaction usage measurements.

During 2000, we entered
into licensing arrangements for our technology with two large enterprises,
enabling such enterprises to further license or utilize the compression and
security features of our technology in their communications and information
management operations.

Our goal is to enter into additional licensing
agreements for our technology with large enterprises that utilize internal
resources for systems integration and development, and with third party
solution providers such as application service providers, independent
software vendors and original equipment manufacturers that can market our
technology as a module or incorporate or embed our technology into hardware
and/or software applications for sale to end users.  We anticipate our
licensing arrangements will include an up-front payment by the enterprise
or solution provider for configuration and installation services, as well
as continuing license fees which would entitle the customer to software
updates.

Existing Customers

In July 1999,
we entered into a non-exclusive license agreement with DataLode Inc. to
license a software product based upon INTACTA.CODE.  DataLode provides
warranty registration services to Hewlett Packard and others for products
in Europe and North America and utilizes our product to eliminate manual
data entry and the need for optical character recognition. This is
anticipated to significantly lower DataLode's cost, assure 100% data
accuracy and increase the overall efficiency of its operations.  We began
to generate revenues from this agreement in the fourth quarter of 2000.

8

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In April 2000, we entered
into an agreement with Systems Nakashima Co., Ltd. pursuant to which we
have granted Fujitsu Limited a non-exclusive right to license our
technology to a certain number of newspapers in Japan.  Fujitsu Limited is,
among other things, a developer of advanced technologies for electronics
and telecommunications and is one of the largest providers of electronic
equipment to the print industry in Japan.  Fujitsu licenses applications
incorporating INTACTA.CODE to Yomiuri Shimbun, a daily newspaper published
in Japan with one of the largest daily circulations in the world, which
will allow its readers to receive multimedia content as part of their
paper.  We  first recognized consulting revenues from this
agreement in the second quarter of 2000, which accounted for 46% of our
revenues for fiscal 2000.

Beginning in December
2000, Fujitsu made our technology available on their website to provide
encoding and decoding services to their users, as part of a test program
through the end of March, 2001.

In February 2001, Fujitsu
pre-installed our INTACTA.CODE Reader in approximately 1,000,000 newly
manufactured personal computers.



In September 2000 we
entered into an agreement to license INTACTA.CODE to Intertek Testing
International Ltd., a worldwide products testing inspection and
certification  company, to enable Intertek to create secure electronic
certificates which may be e-mailed or downloaded to a paper based format
and subsequently scanned back into electronic format.  We believe that
these solutions are particularly useful in the import/export industry on
account of the fact that results of inspections or assessments of shipments
may be encoded, filed electronically and added to the certificates.

Our communications
software was selected by NTT Electronics Corporation, a subsidiary of
Nippon Telegraph and Telephone Corporation of Japan, for use with NTT
Electronics Corporation's new mobile communications technology, RZ SSB, a
digitally-enhanced narrow band radio communications system that delivers
transmission of data, telephone, facsimile, and video under mobile
conditions.  While we are currently in negotiations with respect to a
prospective licensing arrangement with NTT Electronics Corporation we are
uncertain as to the timing for completing such negotiations.  We have not
generated revenues to date from this relationship.

During fiscal 2000, we
sold discontinued hardware products to two Israeli companies.  Sales of the
discontinued hardware products to these customers accounted for 30% and 13%
of our revenues, respectively.

Research and Development

Research and
development efforts, which are conducted at our Israel subsidiary, include
demonstrations and feasibility tests of our software products and
technology for prospective customers and customizing or configuring our
technology to a customer's specific application or product.  Our research
and development group works closely with representatives of prospective
customers in order to assure optimal performance of our technology for the
customer's specific application or product.

We intend to engage in
further research efforts to refine and enhance our technology and develop
additional software products based on our technology for commercial
marketing and distribution.  We have established and are in the process of
expanding research and development capabilities at our headquarters in the
United States in order to perform certain feasibility testing of potential
applications and non-complex adaptation of our technology, as well as
to provide a liaison between our existing and prospective clients and our
research and development team in Israel.



Competition

The markets
for digital communication and data management are characterized by intense
competition and rapidly changing business conditions, customer requirements
and technologies.  Our software products and technology compete with
technologies, products and applications developed and marketed by a number
of well established companies that have substantially greater financial,
technical, personnel and other resources than we do and have established
reputations for success in the development, licensing and sale of their
products and technology.  Certain of these competitors are industry leaders
with the financial resources necessary to withstand substantial price
competition or downturns in the market for computing products and
technologies.  To the extent that other companies develop functionally
equivalent or superior products or technologies to INTACTA.CODE, our
technology could become obsolete or less marketable.  Our ability to
compete, therefore, will depend on our ability to successfully market and
continually enhance our software products and technology.

9

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Intellectual Property

Our success
is dependent upon our ability to protect our intellectual property rights.
We rely principally on a combination of patent, copyright and trademark
registrations and trade secrets and non-disclosure agreements to establish
and maintain our intellectual property rights. We hold patents in the
United States, Israel, Europe, Australia and South Africa related to our
technology.

As part of our operating
procedures, we generally enter into confidentiality and nondisclosure
agreements with each of our key employees and consultants and limit access
to and distribution of our technology and related documentation and
information.  Our confidentiality and non-disclosure agreements include
provisions with regard to our maintaining ownership of technological
developments.

Notwithstanding the
precautions we take, third parties may copy or obtain and use information
that we regard as proprietary without our authorization or independently
develop technologies similar or superior to our technology.  Other parties
may breach confidentiality agreements and other protective contracts we
have entered into.  We may not become aware of, or have adequate remedies,
in the event a breach or unauthorized use occurs.  Policing unauthorized
use of our technology is difficult, particularly because the global nature
of the electronic communications market makes it difficult to control the
final destination or security of software or other data transmissions.
Furthermore, the laws of other jurisdictions may afford little or no
protection of our intellectual property rights. Our business, financial
condition and operating results could be adversely affected if we are
unable to protect our intellectual property rights.

Although we are not aware
of any claim made to date, there is a risk that our technology infringes upon
the proprietary rights of third parties.  In addition, whether or not our
technology infringes on proprietary rights of third parties, infringement
or invalidity claims may be asserted or prosecuted against us and we could
incur significant expense in defending them.  If any claims or actions are
asserted against us, we may be required to modify our technology or seek
licenses for these intellectual property rights.  We may not be able to
modify our technology or obtain licenses on commercially reasonable terms,
in a timely manner or at all.  Our failure to do so could adversely affect
our business.

Product Liability

Technology as complex as
ours may contain undetected errors or defects when first introduced or when
new versions are released. Despite our testing efforts and testing by
current and potential customers, our technology and any future enhancements
may not be free from errors after commercial shipments have begun. The
occurrence of errors or defects could result in adverse publicity, delay in
technology introduction, diversion of development resources, loss or delay
in market acceptance, increased service and warranty costs and customer
claims.

We do not maintain any
product liability insurance.  Consequently, a successful claim against us
for product liability could have a material adverse effect.

Segment Information

See Note 12
of Notes to Consolidated Financial Statements included in this report after
Part IV.

Employees

As of March
15, 2001, we employed a total
of 29 employees.  Of such employees, 27 are full-time and two are part-time
employees, including 16 in research and development, five in marketing and
sales and eight in administration.  None of our employees are represented
by a union, or covered by collective bargaining agreements. We believe that
our relations with our employees are good.



Item 2.  Facilities

Our principal
administrative and marketing
facilities are located in Atlanta, Georgia and consist of approximately
4,000 square feet of office space, pursuant to a lease that expires in
February 2006.  Our principal research and development facility is located
in Beer Sheva, Israel and consists of approximately 2,300 square feet,
pursuant to a  lease that expires in July 2005.  We believe that our
current administrative, marketing and research facilities are adequate
for our planned future operations.

Item 3.  Legal Proceedings

We are not
currently a party to any pending legal proceedings



10

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Item 4.  Submission of Matters
to a Vote of Security Holders

There were no matters
submitted to a vote of security holders during the fourth quarter of
2000.

PART II

Item 5.  Market for Registrant's Common Stock and Related
Stockholder Matters

Our common
stock has been quoted on the OTC Bulletin Board under the symbol
"ITAC" since August 19, 1999.  From May 28, 1998 to August 19,
1999, our common stock was quoted on the OTC Bulletin Board under the
symbol "ZFAX."  The following table shows the high and low bid
prices of our common stock as reported by the OTC Bulletin Board for the
years ended December 31, 1999 and 2000:

|               | High Bid |      | Low Bid
|-------------- | -------- | ---- | -------
|1999           |          |      |        
|First Quarter  |          | 4.47 |        
|Second Quarter |          | 4.19 |        
|Third Quarter  |          | 3.80 |        
|Fourth Quarter |          | 3.44 |        
|2000           |          |      |        
|First Quarter  |          | 6.25 |        
|Second Quarter |          | 4.88 |        
|Third Quarter  |          | 4.31 |        
|Fourth Quarter |          | 3.75 |        

The OTC
Bulletin Board is a more limited trading market than the Nasdaq SmallCap or
Nasdaq National Markets, and timely, accurate quotations of the price of
our common stock may not always be available.  You may expect trading
volume to be low in such a market.  Consequently, the activity of only a
few shares may affect the market and may result in wide swings in price and
in volume.  Additionally, the foregoing quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not
necessarily represent actual retail transaction prices.



As of March 15, 2001 there
were 80 record owners of our common stock.  We believe that
there are many beneficial owners of our common stock whose shares are held
in "street name".



We have never declared and
do not anticipate declaring or paying any dividends on our common stock in
the near future.  We intend to retain future earnings, if any, which may be
generated from our operations to finance our future operations and any
possible expansion efforts.  Any decision as to the future payment of
dividends will depend on our results of operations and financial position
and such other factors as our board of directors in its discretion deems
relevant.



Recent Sales of Unregistered
Securities



In May and
June 2000, we issued 25 bridge units for aggregate gross proceeds of
$2,500,000 (the "Bridge Financing").  Each bridge unit was
comprised of (i) a 12% senior promissory note in the principal amount of
$100,000 and (ii) 25,000 warrants, each to purchase one share of our common
stock at a price of $3.50 per share.  In connection with the sale of bridge
units, we issued to Harmonic Research, Inc., the placement agent for such
offering, 250,000 warrants each to purchase one share of our common stock
at $3.50 per share as consideration for its services and for performing
other consulting services for us.  In connection with the Bridge Financing,
an affiliate entity converted an aggregate of $250,000 of debt owed by us
into 2.5 units similar in all respects to the bridge units issued in the
Bridge Financing.



In October 2000, we issued
an aggregate of 2,333,310 private placement units for aggregate gross
proceeds of $7,000,000, ("The Private Placement").  Each private
placement unit was comprised of (i) one share of our common stock, and (ii)
one warrant to purchase one share of our common stock at a price of $3.50
per share.  In connection with the Private Placement we issued an aggregate
of 86,914 units, similar in all respects to the private placement units, to
certain persons and entities as an "In-Kind" commission for their
participation in the placement of the offering.  Approximately $2,500,000
of the gross proceeds received in the private placement represented the
conversion of the principal and accrued interest of outstanding promissory
notes included in the bridge units by certain of the holders thereof.  A
portion of the proceeds of the private placement were used to repay the
principal and accrued interest on outstanding promissory notes included in
the bridge units that were not converted into units in the private
placement.

11

---



In connection with the
foregoing transactions, we relied on the exemption from registration
requirements under the Securities Act of 1933 (the "Securities
Act") provided by Section 4(2) and Regulation D, each as provided by
under the Securities Act.



As of December 31, 1999 we
had granted to our directors, officers, employees and consultants, pursuant
to our 1998 Stock Option Plan, an aggregate of 1,375,000 options to
purchase our common stock at exercise prices ranging from $1.50 to $4.00
per share.  During the year ended December 31, 2000 we granted an aggregate
of 96,800 options, also under our 1998 Stock Option Plan, to an employee
and a consultant at exercise prices ranging from $2.00 to $4.00 per share.
In connection with the foregoing transactions, we relied on the exemption
from registration requirements under the Securities Act provided by Section
2(a)(3) or 4(2) of the Securities Act.

Item 6.  Selected Financial Data

The following
selected financial data are qualified in their entirety by reference to,
and you should read them in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements and notes to such financial statements
included in and made part of this report.  We have derived the balance
sheet data and statement of operations data at and for the years ended
December 31, 1996, 1997, 1998, 1999 and 2000 from our audited
consolidated financial statements.



|Statement of Operations Data: |                         |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------------- | ----------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                              | Year Ended December 31,

---

| |  | 1996 |  |  | 1997 |  |  | 1998 |  |  | 1999 |  |  | 2000 | 
| |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- | 

---

|Revenues            | $                               | 1,019,600 |           | $ | 894,900 |           | $ | 137,800 |           | $ | 137,400 |           | $ | 794,500 |          
|------------------- | ------------------------------- | --------- | --------- | - | ------- | --------- | - | ------- | --------- | - | ------- | --------- | - | ------- | ---------
|Operating expenses: |                                 |           |           |   |         |           |   |         |           |   |         |           |   |         |          
|                    | Cost of products and components |           | 514,300   |   |         | 357,500   |   |         | 336,300   |   |         | 90,500    |   |         | 308,600  
|                    | Research and development        |           | 331,900   |   |         | 343,200   |   |         | 903,500   |   |         | 1,047,400 |   |         | 1,241,900
|                    | Sales and marketing             |           | 526,800   |   |         | 297,000   |   |         | 113,100   |   |         | 113,200   |   |         | 1,182,100
|                    | General and administrative      |           | 1,605,200 |   |         | 1,353,100 |   |         | 1,699,400 |   |         | 2,619,800 |   |         | 2,306,500

---

| | Total operating expenses |  | 2,978,200 |  |  | 2,350,800 |  |  | 3,052,300 |  |  | 3,870,900 |  |  | 5,039,100 | 
| | ------------------------ |  | --------- |  |  | --------- |  |  | --------- |  |  | --------- |  |  | --------- | 

---

|Loss from operations      |  | (1,958,400 | ) |  | (1,455,900 | ) |  | (2,914,500 | ) |  | (3,733,500 | ) |  | (4,244,600 | )
|------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | - |  | ---------- | - |  | ---------- | -
|Interest income (expense) |  | (578,700   | ) |  | (755,300   | ) |  | (210,000   | ) |  | 95,300     |   |  | (298,900   | )
|Taxes and other           |  | 7,300      |   |  | 11,500     |   |  | (21,300)   |   |  | 20,600     |   |  | (7,700     | )

---

|Net loss | $ | (2,529,800 | ) | $ | (2,199,700 | ) | $ | (3,145,800 | ) | $ | (3,617,600 | ) | $ | (4,551,200 | )
|-------- | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ---------- | - | - | ---------- | -

---

|Basic and diluted net loss
  per common share | $ | (.22 | ) | $ | (.19) |  | $ | (.19) |  | $ | (.20) |  | $ | (.25 | )
|--------------------------------------------- | - | ---- | - | - | ----- |  | - | ----- |  | - | ----- |  | - | ---- | -

---

|Basic and diluted weighted 
  average Common Stock
  outstanding |  | 11,486,000 |  |  | 11,486,000 |  |  | 16,701,583 |  |  | 17,791,630 |  |  | 18,483,179 | 
|---------------------------------------------------------------- |  | ---------- |  |  | ---------- |  |  | ---------- |  |  | ---------- |  |  | ---------- | 

---

|                    |              |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|------------------- | ------------ |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|Balance Sheet Data: |              |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|                    | December 31,

---

| |  | 1996 |  |  | 1997 |  |  | 1998 |  |  | 1999 |  |  | 2000 | 
| |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- |  |  | ---- | 

---

|Cash and cash equivalents            | $ | 58,000     |   | $ | 169,100    |   | $ | 3,047,000 |  | $ | 917,400   |  | $ | 3,904,500 | 
|------------------------------------ | - | ---------- | - | - | ---------- | - | - | --------- |  | - | --------- |  | - | --------- | 
|Working capital (deficit)            |   | (5,773,200 | ) |   | (9,693,400 | ) |   | 1,924,200 |  |   | 574,100   |  |   | 3,641,500 | 
|Total assets                         |   | 545,500    |   |   | 1,151,800  |   |   | 3,760,700 |  |   | 1,570,900 |  |   | 4,260,500 | 
|Long-term obligations                |   | 2,015,900  |   |   | 0          |   |   | 0         |  |   | 0         |  |   | 0         | 
|Total stockholders' equity (deficit) |   | (5,677,800 | ) |   | (9,407,800 | ) |   | 2,268,600 |  |   | 841,500   |  |   | 3,865,200 | 

12

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Item 7.  Management's Discussion and Analysis
of Financial Condition and Results Of Operations

The following
discussion and analysis of our financial condition and results of
operations should be read in conjunction with the audited
consolidated financial statements and notes thereto appearing elsewhere in
this report.

General

We are a
developer and marketer of software products based on our patented
technology that, through its unique combination of compression, encoding
and error correction processes, transforms any data format ranging from
text, graphic, audio or video from a binary file into INTACTA.CODETM
which is language transparent and platform independent.  We believe that
our technology provides solutions and applications that enable enterprises
to bridge their communications and management information systems across
digital and non-digital media, by providing the secure bi-directional
transmission and subsequent recovery and storage of data.



We were organized in
October 1997 to acquire two companies that marketed and developed two
related facsimile storage and retrieval products that incorporated an early
version of our technology.  Development and production of the facsimile
products were performed in Israel by Intacta Labs Ltd, and marketing and
distribution were performed in the United States by Intacta Delaware, Inc.
We acquired the companies in May 1998 in exchange for approximately 70% of
our outstanding capital stock immediately after the acquisition.  The
acquisition was treated, for accounting purposes, as a reverse acquisition.
The references to "we" and "us" refer to the operation
of the entities we acquired both before and after the acquisition.



During 1997 and part of
1998 we derived substantially all of our revenues from the sale of
facsimile-based products.  Beginning in the latter part of 1997 and
continuing into 1998 we began to wind down our production and active
marketing of the facsimile-based products due to reduced profit margins and
anticipated further deterioration of profit margins from increased
competition and costs of marketing the products to the retail market.  At
that time, we initiated research and development of advanced products and
software applications based on our technology.  We also began, on a very
limited basis, licensing our the Intacta technology for integration with
applications and solutions to end-users.  As a result, our revenues
declined substantially from $894,900 for 1997 to
$137,800 and $137,400 for each of 1998 and 1999, respectively, and our
research and development expenses increased substantially from
$343,200 in 1997 to $903,500 in 1998 and
$1,047,400 in 1999.



In the middle of 1999, due
to competitive pressures and our re-evaluation of our business model and
revenue/cost projections, we determined, except with respect to certain
products that were at or near completion of development, to forego further
development of early stage products based upon our technology and to focus
on direct marketing of the technology for licensing to large enterprise and
third party solution providers.  Our limited financial and other marketing
resources, however, prevented us from engaging in a full-scale marketing
campaign for these products that were at or nearing completion and based
upon our current business model and operating strategy we do not intend to
devote any significant financial or other resources at this time to the
further development or marketing of these products.



Through the second quarter of
2000, primarily as a result of the limited financial resources and personnel
available for marketing activities, we made limited progress in
establishing licensing arrangements for our technology.  The majority of our
revenues during this time were generated primarily from a consulting arrangement
and the sale of discontinued hardware products.  Beginning in the second
quarter of fiscal 2000, as a result of increased resources and a shift of
personnel to marketing activities, we entered into two licensing
arrangements with third party enterprises for our technology. For the year ended
December 31, 2000, licensing fees accounted for approximately 12% of our
revenues.



In March 2001, we launched
a suite of INTACTA.CODE Software Development Kits, or SDK's, making our
technology available to software developers for integration into both
existing and new applications requiring features that provide for the
secure transmission and storage of compressed data across various platforms
and operating devices. We anticipate that the licensing of SDK's to software
developers will create an additional revenue stream to our technology licensing
arrangements with large enterprises and third-party solution providers such
as systems integrators, independent software vendors and original equipment
manufacturers.



Our independent auditors
have included an explanatory paragraph in their report on our financial
statements for each of the three years in the period ended December 31,
2000, stating that recurring losses from operations and an accumulated
deficit at December 31, 2000 of $22,222,400 raise substantial
doubt about our ability to continue as a going concern.



Results of Operations

Year Ended December 31, 2000 compared to
Year Ended December 31, 1999



Revenues.

13

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Cost of products and
components.  Cost of products and components was $308,600 for the year
ended December 31, 2000, an increase of $218,100 or 241.0% compared to
$90,500 of such costs for the year ended December 31, 1999. The increase in
such costs is attributable to (i) purchase costs of components consumed in
the manufacture of test platforms sold, (ii) sales of surplus
non-proprietary computer processing chips held in inventory and sold in the
first quarter of 2000, and (iii) a write-off of obsolete inventory related
to discontinued hardware technology.



Research and development
expenses.  Research and development expenses increased by $194,500 or
18.6% to $1,241,900 for the year ended December 31, 2000, from $1,047,400
for the year ended December 31, 1999.  The increase was attributable to (i)
an increase in material costs consumed in operations as well as an increase
in personnel and related office and other support facility costs related to
research and development, and (ii) an increase in non-cash charges to $361,600
for fiscal 2000 from $222,400 for 1999, such charges to
account for options previously granted below fair market value as
compensation to employees and consultants.



Sales and marketing
expenses.  Sales and marketing expenses increased by $1,068,900 or
944.3% to $1,182,100 for the year ended December 31, 2000, from $113,200
for the year ended December 31, 1999. The increase in sales and marketing
expenses was primarily attributable to (i) increased salaries and related
costs resulting from the hiring of new personnel in connection with our decision
to renew the focus on marketing our technology, (ii) costs for the
development of marketing materials and related market research, and (iii)
a non-cash charge of $69,600 for fiscal 2000, such charges to account for
options previously granted below fair-market value as compensation to
certain employees and consultants.  No similar charge was required for
fiscal 1999.



General and administrative
expenses.  General and administrative expenses decreased by $313,300 or
$12.0% to $2,306,500 for the year ended December 31, 2000, from $2,619,800
for the year ended December 31, 1999.  The decrease in general and
administrative expenses was attributable to the reduction of the non-cash
stock option charge to $571,500 for fiscal 2000 from $1,016,000 for the
comparable period in  1999, partially offset by administrative costs
associated with our bridge loan financing and private placement during
2000.



Interest income (expense),
net.  Net interest expense was $(298,900) for the year ended December
31, 2000 compared to $95,300 of net interest income for the year ended
December 31, 1999, primarily as a result of the short-term debt incurred in
the second and third quarters of 2000 in connection with our bridge
financing.



Net loss.  As a
result, our net loss increased
by $933,600 or 25.8 % to $4,551,200, or $(0.25) per share, for the year
ended December 31, 2000, as compared to a net loss of $3,617,600, or
$(0.20) per share, for the year ended December 31, 1999.



Year Ended December 31, 1999 compared to Year Ended
December 31, 1998



Revenues.  Our
revenues were relatively unchanged at $137,400 for the year ended
December 31, 1999, compared to $137,800 for the year ended December 31,
1998.  Sales of products and components decreased by 28.3% to $64,000 for
the year ended December 31, 1999 compared to $89,300 for the year ended
December 31, 1998.  The decrease in product and component sales was
primarily attributable to our discontinuing sales and marketing efforts of
our two facsimile based products in the early part of fiscal 1998.  This
reduction was partially offset by sales of excess non-proprietary computer
processing chips from our inventory.  Revenues from licensing arrangements,
however, increased by 51.3% to $73,400 for the year ended December 31,
1999, compared to $48,500 for the year ended December 31, 1998.  This
increase was attributable to increased royalties from a licensing
arrangement with a software developer for our technology.



Cost of products and
components.  Cost of products and components decreased by $245,800 or
73.1% to $90,500 for the year ended December 31, 1999, compared to $336,300
for the year ended December 31, 1998.  This decrease was primarily
attributable to reduced product costs and certain inventory write-offs
resulting from our discontinuing sales of our facsimile based products in
1998.



Research and development
expenses.  Research and development expenses increased by $143,900 or
15.9% to $1,047,400 for the year ended December 31, 1999, compared to
$903,500 for the year ended December 31, 1998.  The increase in expenses
was primarily attributable to an increase in non-cash charges to $222,400
for fiscal 1999 from $129,700 for fiscal 1998 to account for options previously
granted below fair market value as
compensation to employees and consultants.



Sales and marketing
expenses.  Sales and marketing expenses remained nearly unchanged at
$113,200 for the year ended December 31, 1999, compared to $113,100 for the
year ended December 31, 1998.  We had substantially reduced our sales and
marketing staff in early 1998 in connection with our discontinuing sales
of our facsimile based products and our focusing on development of new
product applications for our technology.  The majority of our sales and
marketing costs for each of 1999 and 1998 were from third party design and
marketing companies we retained to assist us in developing our business
strategy and launching new products.



General and administrative
expenses.  General and administrative expenses increased by $920,400 or
54.2% to $2,619,800 for the year ended December 31, 1999, compared to
$1,699,400 for the year ended December 31, 1998.  This increase was
attributable to (i) additional salaries and costs related to an increased
administrative staff; (ii) third party consulting and professional fees in
connection with business strategy development and management and operation
of our business; and (iii) an increased in non-cash charges to  of
$1,016,000 for fiscal 1999 from $632,100 for fiscal 1998 to
account for stock options previously granted below fair-market value as
compensation to several employees.

14

---



Interest income (expense),
net.  We had net interest income of $95,300 for the year ended December
31, 1999 primarily from interest on funds received in connection with a
private placement of our securities in December 1998.  We had net interest
expense of $(210,000) for the year ended December 31, 1998, primarily from
advances by the prior parent company to the subsidiaries we acquired in
May 1998, which advances were extinguished prior to our acquisition of
these subsidiaries in May 1998.



Net loss.  As a result, our
net loss increased by 15.0% to $3,617,600 or $(0.20) per share for the year
ended December 31, 1999, compared to a net loss of $3,145,800 or $(0.19)
per share for the year ended December 31, 1998.



Liquidity and Capital Resources

Since
inception, we have financed our capital requirements primarily through the
private sale of our capital stock to various parties and from non
interest-bearing loans from Valor Invest Limited, ("Valor"), an
affiliate of our President and Chief Executive Officer, a portion of which
was subsequently converted into equity, and from cash acquired in
connection with the acquisition of our subsidiaries.

At December 31, 2000 we
had $3,904,500 in cash and cash
equivalents compared to $917,500 at December 31, 1999.  This increase is
principally as a result of our private placement in October 2000 in which
we received net proceeds of approximately $3,522,000.  At December 31,
2000, we had working capital of $3,641,500 as compared to working capital
of $574,100 at December 31, 1999.



Cash used in operating
activities for the year ended December 31, 2000 was $3,158,600, primarily
consisting of our net loss and a decrease of approximately $411,000 in accounts
payable, partially offset by $1,002,700 of non-cash
compensation expense, and  the interest accretion of common stock warrants
related to our bridge financing of $276,200, and the write-off of obsolete
inventory related to facsimile-based products of $222,900. Cash used in
investing activities was $61,300.  Cash provided by financing activities was
$6,207,000 primarily as a result of net proceeds received in our Bridge
Financing in May and June 2000 and our Private Placement in
October 2000.  As a result, we had a net increase of $2,987,100 in cash and
cash equivalents during the year ended December 31, 2000.



Cash used in operating
activities for the year ended December 31, 1999 was $1,816,000, primarily
consisting of our net loss, which was partially offset by $1,238,400 of
non-cash compensation expense and an increase of approximately $468,800 in
accounts payable.  Cash used in investing activities was $33,800 and cash
used in financing activities was $279,900.  As a result, we had a net
decrease in cash and cash equivalents of $2,129,700 during the year ended
December 31, 1999.



Cash used in operating
activities for the year ended December 31, 1998 was $2,324,700 primarily
consisting of our net loss, which was partially offset by non-cash
compensation expense of $668,800 and the write-off of
inventory and other assets related to our discontinuing sales of our
facsimile-based products of $289,100.  Cash provided by investing
activities was $1,224,800 resulting from cash acquired in connection with
the acquisition of our subsidiaries in May 1998.  Cash provided by
financing activities was $3,977,900 primarily as a result of net proceeds
received in our private placement of securities in December 1998.  As a
result, we had a net increase of $2,878,000 in cash and cash equivalents
during the year ended December 31, 1998.



In April and May 1998, we
sold, in two private placements, an aggregate of 150,000 shares of our
Common Stock at a price of $3.00 per share, for aggregate gross proceeds of
$450,000.



In December 1998, we sold,
in a private placement, 1,000,000 shares of our Common Stock at a price per
share of $4.00 for gross proceeds of $4,000,000.



From December 1997 through
December 31, 1998, Valor made several non-interest bearing loans to us in
the aggregate amount of $2,172,000.  During the first six months of 1999,
we repaid $1,131,000 of these loans.  In June 1999, $952,000 of such loans
was converted into 238,000 shares of our Common Stock at the rate of $4.00
per share.  At December 31, 1999, a balance of $89,000 of loans from Valor
remained outstanding.



During the first half of
2000, Valor loaned an additional $704,500 to us on a non interest-bearing
basis, of which $312,000 was repaid.   In May 2000, Valor converted
$250,000 of the unpaid balance of these loans into 2.5 units identical to
the units offered by us in our Bridge Financing described immediately
below.  Valor also subordinated the balance of such loans to the repayment
of the bridge notes.  As discussed below, Valor converted the principal
amount of the notes included in the units it acquired in May 2000 as well
as a substantial portion of its subordinated loans
into units offered in our October Private Placement.



In May and June 2000, we
completed a Bridge Financing, in which we issued 25 units, each unit
consisting of a $100,000 principal amount bridge note and bridge warrants
to purchase 25,000 shares of common stock at an exercise price of $3.50 per
share, for aggregate gross proceeds of $2,500,000.



15

---

In October 2000, we
completed a Private Placement in which we issued an aggregate of
2,333,310 units consisting of one share of our common stock and one warrant
to purchase one share of our common stock at an exercise price of $3.50,
for aggregate gross proceeds of $7,000,000.  Approximately $2,267,000 of
the gross proceeds received in the Private Placement represented the
conversion of the principal and accrued interest of
outstanding bridge notes by certain holders thereof into units in the
Private Placement.  A portion of the proceeds of the Private Placement was
used to repay the principal and accrued interest on the balance of
outstanding bridge notes not converted into units in the Private Placement.
After deduction of cash commissions and related expenses as well as the
conversion of the bridge notes, we received approximately $3,522,000 in net
proceeds from the Private Placement.  In connection with the Private
Placement, Valor converted the principal amount of its notes into units in
the Private Placement.  Valor also converted a substantial portion of its
subordinated loans into units in the Private Placement.

Our capital requirements
continue to be significant and we are not currently generating sufficient
revenues from operations to fund our operating activities.  We have
incurred losses to date resulting in an accumulated deficit as of December
31, 2000 of $22,222,400 and anticipate incurring continuing losses in the
future as we expand the development and marketing of our software products
and technology.  Based upon current estimates, we believe that cash from
operations together with cash and cash equivalents will be sufficient to
fund our operating activities and capital requirements for a period of
approximately twelve months.  Unanticipated changes in economic conditions
or other unforeseen circumstances may cause us to expend our cash and cash
equivalents in a shorter period of time, in which case we may be required
to seek additional financing in order to fund our capital and operating
activities.  We do not have any current arrangements with respect to other
potential sources of additional financing and we cannot assure you that
additional financing will be available to us on commercially reasonable
terms or at all.

Inflation

We do not believe that
inflation has had a material impact on revenues or expenses during our last
three fiscal years.

Impact of Recently Issued Accounting Standards

In June 1998,
the Financial Accounting Standards Board issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments imbedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value.  The statement also requires that
changes in the derivative's fair value be recognized in earnings unless
specific hedge accounting criteria are met.  SFAS No. 137 delayed the
effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000.  SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, Amendment of SFAS No. 133,
liberalized the application of SFAS No. 133 in a number of areas.  We
believe that the adoption of  SFAS No. 133 will not have a material
impact on our consolidated financial position or results of operations.

The Financial Accounting
Standards Board issued Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an Interpretation of APB Opinion
No. 25 (the "Interpretation") which is effective July 1, 2000.  The
Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a stock
compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed
stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.  Adoption of the provisions
of the Interpretation did not have a significant impact on the our
financial statements.

We believe that
we are in compliance with Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition, which outlines the basic criteria that must be
met to recognize revenue and provides guidance for presentation of revenue
and for disclosure related to revenue recognition policies in financial
statements filed with the Securities and Exchange Commission.

Item 7A.   Quantitative and Qualitative
Disclosures About Market Risk

We do not engage in
trading market risk sensitive instruments, nor do we purchase for
investment, hedging or for purposes "other than trading", instruments that
are likely to expose us to market risk, whether it be interest rate,
foreign currency exchange, commodity price or equity price risk.
Consequently, we believe that as of December 31, 2000, we do not have
exposure to foreign currency exchange risk.

Item 8.  Financial Statements and Supplementary
Data



Item 9.  Changes in and Disagreements With
Accountants on Accounting and Financial Disclosures

Not
Applicable.

16

---

PART III

Item 10.  Directors and Executive Officers of the
Registrant

The information called for
herein will be presented in the Proxy Statement to be filed with the
Securities and Exchange Commission by April 30, 2001, and is incorporated
herein by reference in response to this item.

Item 11.  Executive Compensation

The information called for
herein will be presented in the Proxy Statement to be filed with the
Securities and Exchange Commission by April 30, 2001, and is incorporated
herein by reference in response to this item.

Item 12.  Security Ownership of Certain
Beneficial Owners and Management

The information called for
herein will be presented in the Proxy Statement to be filed with the
Securities and Exchange Commission by April 30, 2001, and is incorporated
herein by reference in response to this item.

Item 13.  Certain Relationships and Related
Transactions

The information called for
herein will be presented in the Proxy Statement to be filed with the
Securities and Exchange Commission by April 30, 2001, and is incorporated
herein by reference in response to this item.

17

---

PART IV

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

|(a) | 1.  Financial Statements.          |                                                                                                                                                                                                                                                                                
|--- | ---------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                    | Report of Independent Certified Public Accountants                                                                                                                                                                                                                             
|    |                                    | Consolidated Balance Sheets as of December 31, 2000 and
1999                                                                                                                                                                                                                   
|    |                                    | Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998                                                                                                                                                                                     
|    |                                    | Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998                                                                                                                                                                           
|    |                                    | Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998                                                                                                                                                                                     
|    |                                    | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                     
|    |                                    |                                                                                                                                                                                                                                                                                
|    | 2.  Financial Statement Schedules. |                                                                                                                                                                                                                                                                                
|    |                                    | Schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require
submission of the schedules, or because the information required is
included in the consolidated financial statements, including the notes
thereto
|    |                                    |                                                                                                                                                                                                                                                                                
|    | 3.  Index to Exhibits              |                                                                                                                                                                                                                                                                                
|    |                                    | 3.1                                                                                                                                                                                                                                                                            
|    |                                    | 3.2                                                                                                                                                                                                                                                                            
|    |                                    | 4.1                                                                                                                                                                                                                                                                            
|    |                                    | 10.1                                                                                                                                                                                                                                                                           
|    |                                    | 10.2                                                                                                                                                                                                                                                                           
|    |                                    | 10.3                                                                                                                                                                                                                                                                           
|    |                                    | 10.4                                                                                                                                                                                                                                                                           
|    |                                    | 10.5                                                                                                                                                                                                                                                                           
|    |                                    | 10.6                                                                                                                                                                                                                                                                           
|    |                                    | 10.7                                                                                                                                                                                                                                                                           
|    |                                    | 10.8                                                                                                                                                                                                                                                                           
|    |                                    | 10.9                                                                                                                                                                                                                                                                           
|    |                                    | 10.10                                                                                                                                                                                                                                                                          
|    |                                    | 10.11                                                                                                                                                                                                                                                                          
|    |                                    | 21                                                                                                                                                                                                                                                                             
|    |                                    | 23                                                                                                                                                                                                                                                                             

_________________

(1)     Incorporated by
reference to the exhibit filed with the registrant's registration statement
on Form S-1 (SEC File No. 333-30400).

(2)     Incorporated by
reference to the exhibit filed with the registrant's registration statement
on Form S-1 (SEC File No. 333-51210).

+       Filed in
redacted form
pursuant to Rule 406 promulgated under the Securities Act of 1933, as
amended (the "Securities Act").  Copies of the exhibit containing the
redacted portions have been filed separately with the Securities and
Exchange Commission subject to a request for confidential treatment
pursuant to Rule 406 under the Securities Act.

(b) Reports on Form 8-K.

On October 10, 2000 the registrant filed a Current
Report on Form 8-K reporting the signing of a strategic licensing
agreement with Intertek Testing Services.

On October 16, 2000 the registrant filed a Current
Report on Form 8-K reporting the consummation of a private placement.

On December 13, 2000 the registrant filed a Current
Report on Form 8-K reporting the announcement of a partnership with
EnPartner, LLC and the release of a Windows SDK.

On December 27, 2000 the registrant filed a Current
Report on Form 8-K reporting the entering into of a license arrangement
with Fujitsu Limited.

18

---



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.

Dated:  March 29, 2001

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

|SIGNATURE             | TITLE                                                           | DATE          
|--------------------- | --------------------------------------------------------------- | --------------
|                      |                                                                 |               
|                      | Chairman of the Board                                           | March 29, 2001
|Yehoshua Sagi         |                                                                 |               
|                      |                                                                 |               
|/s/ Altaf S. Nazerali | President, Chief Executive Officer and Director                 | March 29, 2001
|Altaf S. Nazerali     |                                                                 |               
|                      |                                                                 |               
|/s/ Noel Bambrough    | Executive Vice President, Chief  Operating Officer and
Director | March 29, 2001
|Noel Bambrough        |                                                                 |               
|                      |                                                                 |               
|/s/ Menachem Tassa    | Vice President, Research and Development and
Director           | March 29, 2001
|Menachem Tassa        |                                                                 |               
|                      |                                                                 |               
|/s/ Ross Wilmot       | Vice President, Finance and Director                            | March 29, 2001
|Ross Wilmot           |                                                                 |               
|                      |                                                                 |               
|                      | Director                                                        | March 29, 2001
|Yechiel S. Sharabi    |                                                                 |               
|                      |                                                                 |               
|                      | Director                                                        | March 29, 2001
|Amnon Shai            |                                                                 |               

19

---

INDEX TO FINANCIAL STATEMENTS

Intacta Technologies Inc. and Subsidiaries
Audited Consolidated Financial Statements



|                                                                                                                                     |     
|------------------------------------------------------------------------------------------------------------------------------------ | ----
|                                                                                                                                     | Page
|Report of Independent Certified Public Accountants                                                                                   | F-2 
|Consolidated Balance Sheets - December 31, 2000 and December 31,
1999                                                                | F-3 
|Consolidated Statements of Operations for the years ended
December
     31, 2000, December 31, 1999 and December 31,
1998            | F-5 
|Consolidated Statements of Stockholders' Equity for the years
ended 
     December 31, 2000, December 31, 1999 and
December 31, 1998 | F-6 
|Consolidated Statements of Cash Flows for the years ended 
     December 31, 2000, December 31, 1999 and
December 31, 1998           | F-7 
|Notes to Consolidated Financial Statements                                                                                           | F-8 

F-1

---

Report of Independent Certified Public
Accountants

To The Board of Directors and Shareholders
of
Intacta Technologies Inc.



We have audited the accompanying consolidated balance sheets
of Intacta Technologies Inc. and subsidiaries as of December 31, 2000 and 1999
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.



We conducted our audits in accordance with auditing standards
generally accepted in the United States. These standards require that we plan
and perform our 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 of the financial statements. We believe our
audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Intacta Technologies Inc. and subsidiaries as of December
31, 2000 and 1999, and the consolidated results of their operations and cash
flows for each of the three years then ended in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.



The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has suffered
recurring losses from operations and, at December 31, 2000, has an accumulated
deficit that raises substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.





F-2

---

Intacta Technologies Inc. and
Subsidiaries

Consolidated Balance Sheets

---

|December 31, |  | 2000 |  |  | 1999 | 
|------------ |  | ---- |  |  | ---- | 

---

|Assets  |                                        |   |           |  |   |        
|------- | -------------------------------------- | - | --------- |  | - | -------
|        |                                        |   |           |  |   |        
|Current |                                        |   |           |  |   |        
|        | Cash and cash equivalents              | $ | 3,904,500 |  | $ | 917,400
|        | Accounts receivable                    |   | 63,500    |  |   | 31,700 
|        | Inventories                            |   | 55,700    |  |   | 278,600
|        | Related party and employee receivables |   | 13,100    |  |   | 45,000 
|        | Other                                  |   | -         |  |   | 30,800 

---

|Total current assets       |  | 4,036,800 |  |  | 1,303,500 | 
|-------------------------- |  | --------- |  |  | --------- | 
|Property and equipment,net |  | 104,800   |  |  | 156,100   | 
|Patents,net                |  | 118,900   |  |  | 111,300   | 

---

| | $ | 4,260,500 |  | $ | 1,570,900 | 
| | - | --------- |  | - | --------- | 

---

F-3

---

Intacta Technologies Inc. and
Subsidiaries

Consolidated Balance Sheets

---

|December 31, |  | 2000 |  |  | 1999 | 
|------------ |  | ---- |  |  | ---- | 

---

|Liabilities and Stockholders' Equity |                                    |   |         |  |   |        
|------------------------------------ | ---------------------------------- | - | ------- |  | - | -------
|                                     |                                    |   |         |  |   |        
|Current liabilities                  |                                    |   |         |  |   |        
|                                     | Accounts payable                   | $ | 61,400  |  | $ | 472,400
|                                     | Accounts payable - related parties |   | 127,400 |  |   | 90,200 
|                                     | Loans from shareholder             |   | -       |  |   | 89,000 
|                                     | Accrued expenses                   |   | 206,500 |  |   | 77,800 

---

|Total current liabilities |  | 395,300 |  |  | 729,400 | 
|------------------------- |  | ------- |  |  | ------- | 

---

|                     |                                                                                                                                                 |  |             |   |  |            
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | - |  | -----------
|Commitments          |                                                                                                                                                 |  |             |   |  |            
|                     |                                                                                                                                                 |  |             |   |  |            
|Stockholders' equity |                                                                                                                                                 |  |             |   |  |            
|                     | Preferred stock, $.0001 par value; 50,000,000 shares 
     authorized; no shares issued or
outstanding                                          |  | -           |   |  | -          
|                     | Common stock, $.0001 par value; 100,000,000 shares 
     authorized; 20,345,924 and 17,909,000 shares
issued
     and outstanding, respectively |  | 2,035       |   |  | 1,791      
|                     | Additional paid-in capital                                                                                                                      |  | 26,336,865  |   |  | 19,710,553 
|                     | Deficit                                                                                                                                         |  | (22,222,400 | ) |  | (17,671,200
|                     | Unamortized stock compensation                                                                                                                  |  | (251,300    | ) |  | (1,199,644 

---

|Total stockholders' equity |  | 3,865,200 |  |  | 841,500 | 
|-------------------------- |  | --------- |  |  | ------- | 

---

| | $ | 4,260,500 |  | $ | 1,570,900 | 
| | - | --------- |  | - | --------- | 

---

See accompanying notes to consolidated
financial statements.

F-4

---

Intacta Technologies Inc. and
Subsidiaries

Consolidated Statements of Operations

---

|Years ended December 31, |  | 2000 |  |  | 1999 |  |  | 1998 | 
|------------------------ |  | ---- |  |  | ---- |  |  | ---- | 

---

|Revenues |                                       |   |         |  |   |        |  |   |       
|-------- | ------------------------------------- | - | ------- |  | - | ------ |  | - | ------
|         | Products and components               | $ | 363,400 |  | $ | 64,000 |  | $ | 89,300
|         | Royalties from licensing arrangements |   | 94,000  |  |   | 73,400 |  |   | 48,500
|         | Consulting fees                       |   | 337,100 |  |   | -      |  |   | -     

---

|Total Revenues |  | 794,500 |  |  | 137,400 |  |  | 137,800 | 
|-------------- |  | ------- |  |  | ------- |  |  | ------- | 

---

|Operating expenses |                                                                                                                                                     |  |           |  |  |           |  |  |          
|------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- |  |  | --------- |  |  | ---------
|                   | Cost of products and components                                                                                                                     |  | 308,600   |  |  | 90,500    |  |  | 336,300  
|                   | Research and development (including non-cash 
  compensation expense of $361,600, $222,400 
  and $129,700 in 2000, 1999 and 1998 respectively)     |  | 1,241,900 |  |  | 1,047,400 |  |  | 903,500  
|                   | Sales and marketing (including non-cash 
  compensation expense of $69,600 in 2000)                                                                 |  | 1,182,100 |  |  | 113,200   |  |  | 113,100  
|                   | General and administrative (including non-cash 
  compensation expense of $571,500, $1,016,000 
  and $632,100 in 2000, 1999 and 1998 respectively) |  | 2,306,500 |  |  | 2,619,800 |  |  | 1,699,400

---

|Total operating expenses |  | 5,039,100 |  |  | 3,870,900 |  |  | 3,052,300 | 
|------------------------ |  | --------- |  |  | --------- |  |  | --------- | 

---

|Loss from operations |  | (4,244,600 | ) |  | (3,733,500 | ) |  | (2,914,500 | )
|-------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -

---

|Other income (expense) |                    |  |          |   |  |         |   |  |         
|---------------------- | ------------------ |  | -------- | - |  | ------- | - |  | --------
|                       | Interest income    |  | 90,600   |   |  | 104,000 |   |  | -       
|                       | Interest (expense) |  | (389,500 | ) |  | (8,700  | ) |  | (210,000
|                       | Other              |  | -        |   |  | 21,400  |   |  | (19,600 

---

|Total other income (expense) |  | (298,900 | ) |  | 116,700 |  |  | (229,600 | )
|---------------------------- |  | -------- | - |  | ------- |  |  | -------- | -

---

|Loss before provision for income taxes |  | (4,543,500 | ) |  | (3,616,800 | ) |  | (3,144,100 | )
|-------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|Provision for income taxes             |  | 7,700      |   |  | 800        |   |  | 1,700      |  

---

|Net loss | $ | (4,551,200 | ) | $ | (3,617,600 | ) | $ | (3,145,800 | )
|-------- | - | ---------- | - | - | ---------- | - | - | ---------- | -

---

|Basic and diluted loss per common share | $ | (0.25 | ) | $ | (0.20 | ) | $ | (0.19 | )
|--------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -

---

|Basic and diluted weighted - average 
  common shares outstanding |  | 18,483,179 |  |  | 17,791,630 |  |  | 16,701,583 | 
|----------------------------------------------------------------- |  | ---------- |  |  | ---------- |  |  | ---------- | 

---

See accompanying notes to consolidated
financial statements.

F-5

---

Intacta Technologies Inc. and
Subsidiaries

Consolidated Statements of Stockholders'
Equity

---

---

| | Common Stock
         Shares   
    Amount | Additional
Paid-in
Capital |  | Unamortized
Stock
Compensation |  |  | Deficit |  |  | Total | 
| | ------------------------------------------ | -------------------------- |  | ------------------------------ |  |  | ------- |  |  | ----- | 

---

|Balance, December 31, 1997 | 11,486,000                                                                                  | $1,149    | $1,498,851 | $         | - |            | $ | (10,907,800 | )          | $ | (9,407,800 | )         
|-------------------------- | ------------------------------------------------------------------------------------------- | --------- | ---------- | --------- | - | ---------- | - | ----------- | ---------- | - | ---------- | ----------
|                           | Contributed capital                                                                         | -         | -          | 183,600   |   | -          |   |             | -          |   |            | 183,600   
|                           | Contributed capital from 
  principal stockholder for 
  retirement of debt                 | -         | -          | 8,929,800 |   | -          |   |             | -          |   |            | 8,929,800 
|                           | Common stock issued in 
  connection with reverse 
  acquisition                            | 5,185,000 | 518        | 1,439,482 |   | -          |   |             | -          |   |            | 1,440,000 
|                           | Issuance of common
  stock in Private 
  Placement, net of 
  issuance costs of 
  $400,000 | 1,000,000 | 100        | 3,599,900 |   | -          |   |             | -          |   |            | 3,600,000 
|                           | Stock options granted                                                                       | -         | -          | 2,840,566 |   | (2,840,566 | ) |             | -          |   |            | -         
|                           | Amortization of stock 
  options                                                            | -         | -          | -         |   | 668,800    |   |             | -          |   |            | 668,800   
|                           | Net loss                                                                                    | -         | -          | -         |   | -          |   |             | (3,145,800 | ) |            | (3,145,800

---

|Balance,December 31, 1998 | 17,671,000                                   | 1,767   | 18,492,199 |         | (2,171,766 | )         |   | (14,053,600 | )          |   | 2,268,600 |           
|------------------------- | -------------------------------------------- | ------- | ---------- | ------- | ---------- | --------- | - | ----------- | ---------- | - | --------- | ----------
|                          | Conversion of debt to
  equity - Stockholder | 238,000 | 24         | 952,076 |            | -         |   |             | -          |   |           | 952,100   
|                          | Stock options granted                        | -       | -          | 266,278 |            | (266,278  | ) |             | -          |   |           | -         
|                          | Amortization of stock 
  options             | -       | -          | -       |            | 1,238,400 |   |             | -          |   |           | 1,238,400 
|                          | Net loss                                     | -       | -          | -       |            | -         |   |             | (3,617,600 | ) |           | (3,617,600

---

|Balance,December 31, 1999 | 17,909,000                                                                                     | 1,791     | 19,710,553 |           | (1,199,644 | )         |   | (17,671,200 | )          |   | 841,500 |           
|------------------------- | ---------------------------------------------------------------------------------------------- | --------- | ---------- | --------- | ---------- | --------- | - | ----------- | ---------- | - | ------- | ----------
|                          | Conversion of debt to 
  equity - Stockholder                                                  | 160,483   | 16         | 481,484   |            | -         |   |             | -          |   |         | 481,500   
|                          | Conversion of debt to 
  equity                                                                | 755,778   | 76         | 2,267,224 |            | -         |   |             | -          |   |         | 2,267,300 
|                          | Issuance of common 
  stock in Private 
  Placement, net of
   issuance costs of 
  $1,054,000 | 1,503,963 | 150        | 3,522,050 |            | -         |   |             | -          |   |         | 3,522,200 
|                          | Stock options exercised                                                                        | 16,700    | 2          | 24,998    |            | -         |   |             | -          |   |         | 25,000    
|                          | Amortization of 
  stock options                                                               | -         | -          | -         |            | 1,002,700 |   |             | -          |   |         | 1,002,700 
|                          | Stock options granted                                                                          | -         | -          | 46,800    |            | (46,800   | ) |             | -          |   |         | -         
|                          | Other                                                                                          | -         | -          | 7,556     |            | (7,556    | ) |             | -          |   |         | -         
|                          | Discount on debt with 
  convertible warrant 
  feature                                        | -         | -          | 276,200   |            | -         |   |             | -          |   |         | 276,200   
|                          | Net loss                                                                                       | -         | -          | -         |            | -         |   |             | (4,551,200 | ) |         | (4,551,200

---

|Balance,December 31, 2000 | 20,345,924 | $2,035 | $26,336,865 | $ | (251,300 | ) | $ | (22,222,400 | ) | $ | 3,865,200 | 
|------------------------- | ---------- | ------ | ----------- | - | -------- | - | - | ----------- | - | - | --------- | 

---

See accompanying notes to consolidated
financial statements.

F-6

---

Intacta Technologies Inc. and
Subsidiaries

Consolidated Statements of Cash Flows

---

|Years ended December 31, |  | 2000 |  |  | 1999 |  |  | 1998 | 
|------------------------ |  | ---- |  |  | ---- |  |  | ---- | 

---

|Operating activities                                                           |   |            |   |   |            |   |   |            |  
|------------------------------------------------------------------------------ | - | ---------- | - | - | ---------- | - | - | ---------- | -
|Net loss                                                                       | $ | (4,551,200 | ) | $ | (3,617,600 | ) | $ | (3,145,800 | )
|Adjustments to reconcile net loss
to cash
       used in operating
activities: |   |            |   |   |            |   |   |            |  
|Amortization of stock options                                                  |   | 1,002,700  |   |   | 1,238,400  |   |   | 668,800    |  
|Depreciation and amortization                                                  |   | 99,300     |   |   | 110,800    |   |   | 107,400    |  
|Interest accretion on warrants                                                 |   | 276,200    |   |   | -          |   |   | -          |  
|Write-down of inventory                                                        |   | 222,900    |   |   | 46,100     |   |   | 240,100    |  
|Loss on equipment disposals                                                    |   | 5,700      |   |   | -          |   |   | 49,000     |  
|Changes in operating assets and liabilities:                                   |   |            |   |   |            |   |   |            |  
|Accounts receivable                                                            |   | (31,800    | ) |   | (20,300    | ) |   | 184,400    |  
|Inventories                                                                    |   | -          |   |   | (26,000    | ) |   | (64,100    | )
|Accounts receivable - related parties                                          |   | 31,900     |   |   | (600       | ) |   | (35,100    | )
|Other current assets                                                           |   | 30,800     |   |   | (16,100    | ) |   | 2,600      |  
|Accounts payable                                                               |   | (411,000   | ) |   | 468,800    |   |   | (168,000   | )
|Accounts payable - related parties                                             |   | 37,200     |   |   | -          |   |   | -          |  
|Accrued expenses                                                               |   | 128,700    |   |   | 500        |   |   | (112,700   | )
|Deferred revenue                                                               |   | -          |   |   | -          |   |   | (51,300    | )

---

|Cash used in operating activities |  | (3,158,600 | ) |  | (1,816,000 | ) |  | (2,324,700 | )
|--------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -

---

|Investing activities                  |  |         |   |  |         |   |  |           |  
|------------------------------------- |  | ------- | - |  | ------- | - |  | --------- | -
|Cash acquired in purchase
of business |  | -       |   |  | -       |   |  | 1,440,000 |  
|Capital expenditures                  |  | (34,600 | ) |  | (18,600 | ) |  | (191,900  | )
|Patents                               |  | (26,700 | ) |  | (15,200 | ) |  | (23,300   | )

---

|Cash provided by (used in) investing activities |  | (61,300 | ) |  | (33,800 | ) |  | 1,224,800 | 
|----------------------------------------------- |  | ------- | - |  | ------- | - |  | --------- | 

---

|Financing activities                |  |           |   |  |          |   |  |            |  
|----------------------------------- |  | --------- | - |  | -------- | - |  | ---------- | -
|Contributed capital                 |  | -         |   |  | -        |   |  | 183,600    |  
|Exercise of stock
options           |  | 25,000    |   |  | -        |   |  | -          |  
|Net proceeds from private
placement |  | 3,522,200 |   |  | -        |   |  | 3,600,000  |  
|Loans from
shareholder              |  | 704,500   |   |  | -        |   |  | 3,062,000  |  
|Bridge loan financing, net          |  | 2,267,300 |   |  | -        |   |  | -          |  
|Repayment of shareholder
loans      |  | (312,000  | ) |  | (279,900 | ) |  | (2,731,000 | )
|Repayment of notes
payable          |  | -         |   |  | -        |   |  | (136,700   | )

---

|Cash provided by (used in) financing activities |  | 6,207,000 |  |  | (279,900 | ) |  | 3,977,900 | 
|----------------------------------------------- |  | --------- |  |  | -------- | - |  | --------- | 

---

|Net increase (decrease) in cash and cash
  equivalents |  | 2,987,100 |  |  | (2,129,700 | ) |  | 2,878,000 | 
|------------------------------------------------------ |  | --------- |  |  | ---------- | - |  | --------- | 
|Cash and cash equivalents,beginning of year            |  | 917,400   |  |  | 3,047,100  |   |  | 169,100   | 

---

|Cash and cash equivalents,end of year | $ | 3,904,500 |  | $ | 917,400 |  | $ | 3,047,100 | 
|------------------------------------- | - | --------- |  | - | ------- |  | - | --------- | 

---

See accompanying notes to consolidated
financial statements.

F-7

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|1.  Summary of Significant
     Accounting Policies | Nature of Operations
Intacta
 Technologies Inc. (the "Company"), a Nevada corporation, is a
 developer and marketer of software products based on its patented technology
that, through its unique combination of compression, encoding
 and error correction processes, the technology transforms any data format
 ranging from text, graphic, audio or video from a binary file into
 INTACTA.CODE which is language transparent and
 platform independent.  The Company believes that its technology provides
 solutions and applications that
 enable enterprises to bridge their communications and management information
 systems across digital and non-digital media by providing the secure
 bi-directional transmission and subsequent recovery and storage of data.

Intacta Labs Ltd., a wholly owned
subsidiary (Intacta Labs), primarily conducts product research and development
in the high tech area of Beer Sheva, Israel, and is currently conducting new
research projects expected to produce significant time and cost savings through
continued development of a medium for  transmitting and storing data in secure
formats.

From late 1997 and through 1998, the Company ceased
production and marketing of its
facsimile-based products used for transmitting and storing information, as a
result of changes in the fax market, which resulted in reduced demand for its
fax related products.  The Company altered its strategy to emphasize the
licensing of its core technology rather than the development and sale of
consumer products.

The Company

On May 31, 1998, the Company completed the acquisition of
100% of the outstanding common stock of Intacta Delaware Inc. (Intacta), a
Delaware corporation, and Intacta Labs in exchange for 11,486,000 shares of the
Company's $.0001 par value common stock valued at $1.  The value of Intacta and
Intacta Labs at the time of the acquisition approximated the aggregate
accumulated deficits of the two companies to that date. The companies agreed
that the value per common stock share contemplated in the agreement approximated
the market trading value at the time of the initial discussions and the signing
of the letter of intent. For accounting purposes, the acquisition has been
treated as an acquisition of the Company by Intacta and Intacta Labs, with the
combined entity of Intacta and Intacta Labs, companies under common control, as
the acquirer (reverse acquisition). As such, in conjunction with the
acquisition, the historical financial statements of the acquirer replaced the
historical financial statements of the Company.

Since the Company, prior to the reverse acquisition, was a
public shell corporation with no significant operations, pro forma information
giving effect to the acquisition is not presented.  All share and per share
data, prior to the acquisition, have been restated to reflect the stock issuance
as a recapitalization of Intacta.  The shares held by the shareholders of the
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | Company, prior to the acquisition (5,185,000
shares), have been recognized as if they were issued in connection with the
acquisition of the Company by Intacta. Since the former shareholder of Intacta
and Intacta Labs received approximately 69% of the shares in the Company
immediately after the acquisition, the financial statements for periods prior to
the recapitalization are those of Intacta and Intacta Labs.

Principles of Consolidation

The accompanying consolidated financial statements for the
years ended December 31, 2000 and 1999 include the accounts of the Company and
its wholly owned subsidiaries.  All intercompany accounts and transactions have
been eliminated.

Use of Estimates

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

Cash and Cash Equivalents

For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost (first-in,
first-out) or market.

Property and Equipment

Property and equipment is stated at cost, net of accumulated
depreciation and amortization.  Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years.

Patents

Patents are amortized on a straight-line basis over the
estimated useful life of the patents, generally ten years.  As of December 31,
2000 and 1999, accumulated amortization amounted to approximately $91,200 and
$72,100, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | Long-Lived AssetsLong-lived assets, such as patents and property and
equipment, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows resulting from the use of these
assets. When any such impairment exists, the related assets will be written down
to fair value.

Software Development Costs

In accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed, costs related to the research and
development of new products and enhancements to existing products are expensed
as incurred until technological feasibility of the product has been established,
at which time such costs are capitalized, subject to expected recoverability.
Therefore, the Company has not capitalized any software development costs
related to its products, since the time period between technological feasibility
and the general release of a market accepted product is not significant.

Revenue Recognition

The Company's revenue recognition policies are in
compliance with generally accepted accounting principles including Statement of
Position (SOP) 97-2, Software Revenue Recognition.  As such, the Company
recognizes product revenue upon shipment if persuasive evidence of an
arrangement exists, delivery has occurred, the fees are fixed and determinable
and collectibility is probable.  During 1998, a majority of revenues were
derived from the shipment of product, a portion of which was sold through
resellers and distributors.  Appropriate reserves were considered to effectively
defer revenue recognition when material amounts of inventory had not been sold
through to the end user.  Generally, the right of return of these products was
of short duration (90 days).  No provision for estimated product returns was
necessary based on historical experience.

Maintenance and support arrangements and other post-delivery
obligations are insignificant to the Company's revenues.

License revenues are recognized based on actual sales of
licensed software by a customer/licensee and are not recognized by the company
as revenue until the final sale is reported by the customer/licensee.  This is
the time at which the Company believes that revenue recognition in accordance
with
SOP 97-2, as described above, has occurred.  Support revenue is not integral to
the functionality of the licensed software and is billed and recognized as
incurred.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | The Company recognized consulting fee revenue
during 2000 that was derived from certain software development and programming
projects performed on behalf of customers. These projects were started and
completed within the year.

The Company believes that it is in compliance with Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, which outlines
the basic criteria that must be met to recognize revenue and provides guidance
for presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the SEC.

Advertising Costs

The cost of advertising is expensed as incurred.
Advertising costs for the years ended December 31, 2000, 1999 and 1998 were
approximately $34,900, $0 and $48,100, respectively.

Income Taxes

The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, which requires an asset and liability approach. This approach
results in the recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets and liabilities.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be deductible or taxable
when the assets and liabilities are recovered or settled. Future tax benefits
are subject to a valuation allowance when management believes it is more likely
than not that the deferred tax assets will not be realized.

Loss Per Share

Basic earnings per share is computed by dividing net loss
by the weighted-average number of common shares outstanding during the period.
Shares issued during the year are weighted for the portion of the year that they
were outstanding.  Diluted earnings per share is computed in a manner consistent
with that of basic earnings per share while giving effect to all potentially
dilutive common shares outstanding during the period.

As a result of losses, all stock options and warrants
outstanding at December 31, 2000, 1999 and 1998 were antidilutive and
accordingly, were excluded from the computation of loss per share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value.  The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met.  SFAS No. 137 delayed the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, Amendment of SFAS No. 133, liberalized the
application of SFAS No. 133 in a number of areas.  The Company expects that the
adoption of  SFAS No. 133 will not have a material impact on its consolidated
financial position or results of operations.

The Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25 (the "Interpretation")
which is effective July 1, 2000.  The Interpretation clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a stock compensation plan qualifies as a noncompensatory
plan, (c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination.  Adoption of the
provisions of the Interpretation did not have a significant impact on the
Company's financial statements.

Foreign Currency

The Company has designated the U.S. dollar as its functional
currency for Intacta Labs, a foreign subsidiary.  Financial statements of this
subsidiary are translated into U.S. dollars for consolidation purposes using
current rates of exchange for monetary assets and liabilities and historical
rates of exchange for non-monetary assets and related elements of expense.
Sales and other expenses are translated at rates that approximate the rates in
effect on the translation dates.  Immaterial translation gains and losses are
included in the consolidated statement of operations.

Fair Values of Financial Instruments

Fair values of cash and cash equivalents and short-term
debt approximate cost due to the short period of time to maturity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | Reclassifications
Certain 1998 and 1999 amounts have been reclassified to
conform to the 1999 and 2000 presentations.
| | ---------------------------------------------------------------------------------------------------------------------

|2.  Going Concern | The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the consolidated financial statements, the Company has
a cumulative deficit of $22,222,400 through December 31, 2000, and has incurred
losses of $4,551,200, $3,617,600 and $3,145,800 for the years ended December 31,
2000, 1999 and 1998, respectively.  These losses were primarily the result of
the decision by the Company in late 1997 to curtail further production and
marketing of its facsimile-based products upon realization
that the market potential for such
products was diminished, and by the significant overhead costs required to
support research, development and marketing efforts for the Company's
INTACTA.CODE related technology. These conditions give rise to substantial doubt
about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of assets or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

Through the first half of 2000, the Company's marketing and
sales efforts
were reduced and the Company focused its efforts on design revisions to its core
applications without the benefit of significant cash flow from operations. In
the second half of 2000, primarily as a result of additional resources,
marketing efforts increased and, in addition to marketing its technology for
licensing arrangements, the Company focused on the marketing of its suite of
INTACTA.CODE Software Development Kit (SDK) products, which were subsequently
launched in March 2001.  As a result of the foregoing, the Company has
absorbed significant cash in its day-to-day operations and expects to continue
to absorb cash in its operations during 2001 as it brings this new suite of
products to market.

The Company's continuation as a going concern is dependent
upon its ability to actively market its new suite of products, as well as its
technology, which it believes
will lead to increased revenues, positive cash flows from operations, and
ultimately to profitability. The Company may seek additional financing as may
be required to fund research and development and marketing of its new products.
If this plan materializes as expected, the Company
anticipates viability for the year 2001 and beyond, though there can be no
assurance that the Company will be successful in these efforts.
|----------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|3.  Inventories | Inventories consisted of the following:
|--------------- | ---------------------------------------



|December 31 |  | 2000 |  |  | 1999 | 
|----------- |  | ---- |  |  | ---- | 

---



|Components      | $ | 55,700 |  | $ | 233,600 | 
|--------------- | - | ------ |  | - | ------- | 
|Work in process |   | -      |  |   | 45,000  | 

---



| | $ | 55,700 |  | $ | 278,600 | 
| | - | ------ |  | - | ------- | 

---

| | Inventories at December 31, 2000 and 1999
related substantially to computer chips and boards appropriately capitalized in
accordance with SFAS No. 2, Accounting for Research and Development Costs
which allows for the capitalization of materials if they have alternative future
uses.  The Company believes this to be the case in regards to these
inventories.

During 2000, 1999 and 1998, the Company wrote-off
approximately $222,900, $46,100 and $240,100, respectively, of its inventory due
to reduced sales and obsolescence, which is included in cost of products and
components.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.  Property and Equipment | Property and equipment consisted of the
following:
|-------------------------- | --------------------------------------------------



|December 31 |  | 2000 |  |  | 1999 | 
|----------- |  | ---- |  |  | ---- | 

---



|Equipment              | $ | 287,800 |  | $ | 459,300 | 
|---------------------- | - | ------- |  | - | ------- | 
|Furniture and fixtures |   | 63,400  |  |   | 48,100  | 
|Vehicles               |   | --      |  |   | 14,100  | 

---



|                              |  | 351,200  |   |   | 521,500  |  
|----------------------------- |  | -------- | - | - | -------- | -
|Less accumulated depreciation |  | (246,400 | ) | $ | (365,400 | )

---



| | $ | 104,800 |  | $ | 156,100 | 
| | - | ------- |  | - | ------- | 

---

| | Depreciation expense was $80,200, $94,200,and
$92,100 for the years ended December 31, 2000, 1999 and 1998.
| | -----------------------------------------------------------------------------------------------------------

|5.  Accrued Expenses | Accrued expenses consisted of the
following:
|-------------------- | --------------------------------------------



|December 31 |  | 2000 |  |  | 1999 | 
|----------- |  | ---- |  |  | ---- | 

---



|Salaries and related expenses | $ | 60,300 |  | $ | 32,900 | 
|----------------------------- | - | ------ |  | - | ------ | 
|Severance                     |   | 51,700 |  |   | 27,800 | 
|Vacation                      |   | --     |  |   | 16,900 | 
|Other                         |   | 94,500 |  |   | 200    | 

---



| | $ | 206,500 |  | $ | 77,800 | 
| | - | ------- |  | - | ------ | 

---

F-14

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|6.  Commitment | Leases
The Company leases its facilities and certain equipment under
operating leases, which expire through February 2006.  The facility leases
require the Company to pay certain maintenance and operating expenses, such as
utilities, property taxes, and insurance costs.

At December 31, 2000, aggregate minimum rent commitments
under operating leases with initial or remaining terms of one year or more were
as follows:
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Year | Amount
|---- | ------

---



|2001       | $133,600
|---------- | --------
|2002       | 153,000 
|2003       | 153,300 
|2004       | 144,500 
|2005       | 134,000 
|Thereafter | 17,800  

---



| | $736,200
| | --------

---

| | Rent expense related to these operating leases
was $127,600, $135,709 and $111,400 for the years ended December 31, 2000, 1999
and 1998, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

|7.  Stockholders' Equity | During 2000, the
Company completed a bridge financing in which 25 bridge units were
issued. Each bridge unit consisted of a $100,000 bridge note and warrant to
purchase
25,000 shares of common stock at an exercise price of $3.50 per share. Aggregate
gross proceeds in connection with this issue were $2,500,000.  Additionally, a
related party converted $250,000 of debt into 2.5 units, similar in all respects
to the bridge units.  A discount
of $276,200 for the fair value of detachable warrants was recognized concurrent
with this transaction.

During 2000, the Company issued an
aggregate of 250,000 warrants to a third party and its designees, which are
exercisable at a price of $3.50 per share and were valued and expensed for
services rendered during 2000.

On October 16, 2000, the Company completed a private
placement of 2,333,310 equity units each consisting of one share
of common stock and one warrant to purchase one share of common stock at a price
of $3.50 per share resulting in net proceeds of approximately $3.5 million after
the conversion of the aforementioned bridge units, accrued interest and other
loans into equity units.  All warrants issued in connection with the bridge
financing (687,500) remain outstanding at December 31, 2000.  The Company issued
86,914 units, similar in all respects to the equity units, as a commission in
connection with the private placement
to certain parties.  A related party received 21,600 of these units and
cash commission of approximately $194,000.
|------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|8.  Stock Option Plans | The Company has a 1998 Stock Option Plan and a 2000 Stock Incentive Plan
(collectively the "Plans") that provide for, among other things,
the granting of non-qualified and incentive stock options to employees,
directors, officers, outside consultants and
other third parties. Options vest over a maximum of five years and expire in a
maximum of ten years. The Company has reserved 1,667,100 and 1,400,000 shares,
respectively of its common stock for issuance under the Plans.  As the 2000 Plan
is subject to further approval by the Company's shareholders at its 2001 Annual
Meeting, no shares have been granted from this Plan.
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-16

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | A summary of stock option transactions for the
above plans are as follows:
| | --------------------------------------------------------------------------



| |  | Number of shares |  |  | Weighted average exercise price | 
| |  | ---------------- |  |  | ------------------------------- | 

---



|Outstanding at December 31, 1997 |  | -         |  |  | -     | 
|-------------------------------- |  | --------- |  |  | ----- | 
|Granted                          |  | 1,005,000 |  |  | $1.50 | 

---



|Outstanding at December 31, 1998 |  | 1,005,000 |  |  | 1.50 | 
|-------------------------------- |  | --------- |  |  | ---- | 
|Granted                          |  | 370,000   |  |  | 3.49 | 

---



|Outstanding at December 31, 1999 |  | 1,375,000 |   |  | 2.03 | 
|-------------------------------- |  | --------- | - |  | ---- | 
|Granted                          |  | 96,800    |   |  | 3.03 | 
|Exercised                        |  | (16,700   | ) |  | 1.50 | 
|Forfeited                        |  | (78,300   | ) |  | 1.50 | 

---



|Outstanding at December 31, 2000 |  | 1,376,800 |  |  | $2.14 | 
|-------------------------------- |  | --------- |  |  | ----- | 

---



|                    |  |                  |  |  |                                 | 
|------------------- |  | ---------------- |  |  | ------------------------------- | 
|Options exercisable |  | Number of shares |  |  | Weighted average exercise price | 

---



|December 31, 1999 |  | 410,000 |  |  | $1.50 | 
|----------------- |  | ------- |  |  | ----- | 
|December 31, 2000 |  | 854,000 |  |  | 1.82  | 

---

| | Required disclosures for options outstanding at
December 31, 2000 are as follows:
| | ---------------------------------------------------------------------------------



|Exercise
price | Number outstanding at December 31, 2000 | Weighted average remaining
contractual life | Weighted average exercise price
|-------------- | --------------------------------------- | ------------------------------------------- | -------------------------------

---



|$1.50 | 985,000 | .43  | $1.50
|----- | ------- | ---- | -----
|2.00  | 46,800  | 5.01 | 2.00 
|4.00  | 345,000 | 1.43 | 4.00 

---



| | 1,376,800 | .83 | 2.14
| | --------- | --- | ----

---

| | The weighted average fair value of all options,
calculated using the Black-Scholes Option Pricing Model, granted during 2000,
1999, and 1998 is $1.04, $1.38 and $2.98 per share, respectively.

The Company applies both Accounting Principles Board Opinion
No. 25 (APB No. 25), Accounting for Stock Issued to Employeesand related
interpretations and SFAS No. 123, Accounting for Stock-Based Compensation
in accounting for its stock option plans.  Options granted to employees and
directors are accounted for under APB No. 25 and compensation expense is
recognized for the intrinsic value of the options granted.  Options granted to
all others are accounted for in accordance with SFAS No. 123 and compensation
expense is recognized for the fair value of the options granted.  SFAS No. 123
also requires that the Company provide pro forma information regarding the net
loss as if the compensation cost for the Company's Plans had
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | been determined in accordance with the fair
market value method for all options. The Company estimates the fair value of all
stock options at the grant date using the Black Schole's option pricing model
with the following weighted average assumptions for 2000, 1999 and 1998:
Dividend yield of 0 in all years; expected volatility of 75% in 2000 and 40% in
1999 and 1998; risk-free interest rate of 6.36% in 2000, 5.23% in 1999 and 5.47%
in 1998; and an expected life of 4.00 years in 2000, 2.61 years in 1999 and 2.55
years in 1998.

Under the accounting provisions of SFAS No. 123, the
Company's net loss and basic and diluted loss per common share would have been
adjusted to the pro forma amounts indicated below:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Years ended December 31, |  | 2000 |  |  | 1999 |  |  | 1998 | 
|------------------------ |  | ---- |  |  | ---- |  |  | ---- | 

---



|Net loss, as reported | $ | (4,551,200 | ) | $ | (3,617,600 | ) | $ | (3,145,800 | )
|--------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
|Pro forma             |   | (4,690,885 | ) |   | (3,736,400 | ) |   | (3,183,000 | )

---



|Basic and diluted loss per share, 
  as reported | $ | (0.25 | ) | $ | (0.20 | ) | $ | (0.19 | )
|------------------------------------------------ | - | ----- | - | - | ----- | - | - | ----- | -
|Pro forma                                        |   | (0.25 | ) |   | (0.21 | ) |   | (0.19 | )

---

|9.  Related Party 
     Transactions | During 2000, 1999 and 1998, the Company received
administrative, consulting, management and marketing services from several
organizations that are owned by directors or shareholders of the Company. These
services aggregated approximately $592,100, $346,300 and $294,200 for the years
ended December 31, 2000, 1999 and 1998, respectively of which $472,100, $226,300
and $229,500 have been included in general and administrative expenses and
$120,000, $120,000 and $64,700 have been included in research and development
expenses.
|------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|10.  Income Taxes | Provisions for federal, foreign and state income
taxes (benefits) in the consolidated statements of operations consist of the
following components:
|----------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|Years ended December 31, |  | 2000 |  |  | 1999 |  |  | 1998 | 
|------------------------ |  | ---- |  |  | ---- |  |  | ---- | 

---



|Current: |   |       |  |   |     |  |   |       | 
|-------- | - | ----- |  | - | --- |  | - | ----- | 
|Federal  | $ | -     |  | $ | -   |  | $ | -     | 
|State    |   | 7,700 |  |   | 800 |  |   | 1,700 | 

---



| |  | 7,700 |  |  | 800 |  |  | 1,700 | 
| |  | ----- |  |  | --- |  |  | ----- | 

---



|Deferred: |  |            |   |  |         |  |  |          |  
|--------- |  | ---------- | - |  | ------- |  |  | -------- | -
|Federal   |  | (1,256,272 | ) |  | 150,977 |  |  | (772,006 | )
|State     |  | (186,944   | ) |  | 22,467  |  |  | (114,882 | )

---



| |  | (1,443,216 | ) |  | 173,444 |  |  | (886,888 | )
| |  | ---------- | - |  | ------- |  |  | -------- | -

---



|Change in valuation allowance |  | 1,443,216 |  |  | (173,444 | ) |  | 886,888 | 
|----------------------------- |  | --------- |  |  | -------- | - |  | ------- | 

---



|Total income tax provision | $ | 7,700 |  | $ | 800 |  | $ | 1,700 | 
|-------------------------- | - | ----- |  | - | --- |  | - | ----- | 

---

| | Deferred tax assets (liabilities) were comprised
of the following:
| | ------------------------------------------------------------------



|December 31, |  |  |  |  | 2000 |  |  | 1999 | 
|------------ |  |  |  |  | ---- |  |  | ---- | 

---



|Net operating loss carryforward                       |  |  |  | $ | 4,183,780 |  | $ | 3,322,461 | 
|----------------------------------------------------- |  |  |  | - | --------- |  | - | --------- | 
|Stock option compensation not 
  currently deductible |  |  |  |   | 1,123,227 |  |   | 736,185   | 
|Accumulated depreciation, 
  amortization and other   |  |  |  |   | 10,053    |  |   | 12,661    | 

---



|Total deferred tax assets |  |  |  |  | 5,317,060 |  |  | 4,071,307 | 
|------------------------- |  |  |  |  | --------- |  |  | --------- | 

---



|Reserves not currently 
  deductible |  |  |  |  | - |  |  | (197,463 | )
|------------------------------------ |  |  |  |  | - |  |  | -------- | -

---



|Total deferred tax liabilities |  |  |  |  | - |  |  | (197,463 | )
|------------------------------ |  |  |  |  | - |  |  | -------- | -

---



|Net deferred tax asset |  |  |  |  | 5,317,060  |   |  | 3,873,844  |  
|---------------------- |  |  |  |  | ---------- | - |  | ---------- | -
|Valuation allowance    |  |  |  |  | (5,317,060 | ) |  | (3,873,844 | )

---



| |  |  |  | $ | - |  | $ | - | 
| |  |  |  | - | - |  | - | - | 

---

F-19

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | The effective tax rate on income before taxes
differs from the U.S. statutory rate. The following summary reconciles taxes at
the U.S. statutory rate with the effective rates:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Year Ended December 31, |  |  |  | 2000 |  |  | 1999 |  | 
|----------------------- |  |  |  | ---- |  |  | ---- |  | 

---



|Taxes on income at U.S. statutory rate                         |  |  |  | (34.0 | ) | % | (34.0 | ) | %
|-------------------------------------------------------------- |  |  |  | ----- | - | - | ----- | - | -
|State income taxes, net of federal benefit                     |  |  |  | (2.6  | ) |   | (4.0  | ) |  
|Foreign and U.S. tax effect attributable to foreign
operations |  |  |  | 14.5  |   |   | 21.9  |   |  
|Change in valuation allowance                                  |  |  |  | 21.2  |   |   | 16.0  |   |  
|Other                                                          |  |  |  | 1.1   |   |   | 0.1   |   |  

---



| |  |  |  | 0.2 |  | % | 0.0 |  | %
| |  |  |  | --- |  | - | --- |  | -

---



| | The Company has federal net operating loss
carryforwards available to reduce future taxable income, if any, of
approximately $11,865,000. The benefits from these carryforwards expire through
2020. As of December 31, 2000, management believes it cannot be determined that
it is more likely than not that these carryforwards and its other deferred tax
assets will be realized, and accordingly, fully reserved for these deferred tax
assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11.  Employee Profit 
        Sharing Plan | The Company has a profit sharing plan covering
all eligible employees meeting certain age and length of service requirements.
Under the profit sharing plan, the Board of Directors, at their election, can
authorize contributions up to a maximum of 3% of eligible participants' total
compensation. For the years ended December 31, 2000 and 1999  the Company made
no discretionary contributions.  For the year ended December 31, 1998 the
Company made $2,500 in discretionary contributions.
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.  Segment Information | During 1999, the Company adopted SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information"
which establishes standards for the way that public business enterprises report
information about operating segments in their financial statements.  The
standard defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.  Based on these standards the Company has determined that
it operates in a single operating segment: the development, marketing and
licensing of software and sale of ancillary components.Major CustomersDuring 2000, three customers accounted for approximately
46%, 30% and 13% of net sales.

During 1999, two customers accounted for approximately 53%
and 40% of net sales.
|------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

| | During 1998, four customers accounted for
approximately 27%, 26%, 15% and 12% of net sales.

Geographic Segments

The following table presents revenues and other financial
information for the years ended December 31, 2000, 1999 and 1998:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Years ended December 31, |  | 2000 |  |  | 1999 |  |  | 1998 | 
|------------------------ |  | ---- |  |  | ---- |  |  | ---- | 

---



|Long-lived assets (gross) |   |         |  |   |         |  |   |         | 
|------------------------- | - | ------- |  | - | ------- |  | - | ------- | 
|- United States           | $ | 69,500  |  | $ | 157,800 |  | $ | 177,700 | 
|- Israel                  |   | 281,700 |  |   | 363,700 |  |   | 325,200 | 

---



|Revenues        |   |         |  |   |        |  |   |        | 
|--------------- | - | ------- |  | - | ------ |  | - | ------ | 
|Asia            | $ | 389,089 |  | $ | 68,516 |  | $ | 39,225 | 
|Africa/Mid-East |   | 376,588 |  |   | 54,437 |  |   | -      | 
|North America   |   | 28,823  |  |   | 14,447 |  |   | 98,575 | 

---



| | $ | 794,500 |  | $ | 137,400 |  | $ | 137,800 | 
| | - | ------- |  | - | ------- |  | - | ------- | 

---

| | Revenues attributable to geographic areas are
based on the location of the customer.
| | ------------------------------------------------------------------------------------

|13.  Concentration of 
        Credit Risk | Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of cash and
cash equivalents and trade receivables. The Company places its cash and cash
equivalents with high quality financial institutions and, as a matter of policy,
limits the amounts of credit exposure to any one financial institution.

As of December 31, 2000 the Company's accounts receivable are
limited.  However, the Company believes any risk of accounting loss is
significantly reduced due to provisions for returns recorded  at the date of
sale, and ongoing analysis of its customers' financial condition. The Company
generally does not require cash collateral or other security to support customer
receivables.
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|14.  Quarterly Data and Share 
       Information
(unaudited) | The following table sets forth, for the fiscal
periods indicated, selected consolidated financial data and information
regarding the market price per share of the Company's stock.  The prices
represent the reported high and low closing sale prices.
|------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                              | Year ended December 31, 2000                                                                                                                                                                                                                            

---



| |  | First
Quarter |  |  | Second
Quarter |  |  | Third
Quarter |  |  | Fourth
Quarter | 
| |  | ------------- |  |  | -------------- |  |  | ------------- |  |  | -------------- | 

---



|Revenues              | $ | 153,600  |   | $ | 480,200   |   | $ | 60,900     |   | $ | 99,800     |  
|--------------------- | - | -------- | - | - | --------- | - | - | ---------- | - | - | ---------- | -
|Operating 
  expenses |   | 937,600  |   |   | 1,182,000 |   |   | 1,334,700  |   |   | 1,584,800  |  
|Net loss              |   | (766,700 | ) |   | (706,600  | ) |   | (1,533,100 | ) |   | (1,544,800 | )

---



|Loss per share             |  |       |   |  |       |   |  |       |   |  |       |  
|-------------------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|- Basic and 
      diluted |  | (0.04 | ) |  | (0.04 | ) |  | (0.09 | ) |  | (0.08 | )

---

| | Year ended December 31, 1999
| | ----------------------------

---



| |  | First
Quarter |  |  | Second
Quarter |  |  | Third
Quarter |  |  | Fourth
Quarter | 
| |  | ------------- |  |  | -------------- |  |  | ------------- |  |  | -------------- | 

---



|Revenues              | $ | 59,500   |   | $ | 33,000   |   | $ | 38,500    |   | $ | 6,400      |  
|--------------------- | - | -------- | - | - | -------- | - | - | --------- | - | - | ---------- | -
|Operating 
  expenses |   | 809,000  |   |   | 944,400  |   |   | 1,006,600 |   |   | 1,110,900  |  
|Net loss              |   | (722,100 | ) |   | (885,500 | ) |   | (962,500  | ) |   | (1,047,500 | )

---



|Loss per share      |  |       |   |  |       |   |  |       |   |  |       |  
|------------------- |  | ----- | - |  | ----- | - |  | ----- | - |  | ----- | -
|- Basic and diluted |  | (0.04 | ) |  | (0.05 | ) |  | (0.05 | ) |  | (0.06 | )

---

F-22

---

Intacta Technologies Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

---

|15.  Statement of Cash Flows | Cash paid during the year consists of the
following:
|---------------------------- | ----------------------------------------------------



|Years ended December 31, |  | 2000 |  |  | 1999 |  |  | 1998 | 
|------------------------ |  | ---- |  |  | ---- |  |  | ---- | 

---



|Income taxes | $ | 7,700   |  | $ | 800 |  | $ | 1,700  | 
|------------ | - | ------- |  | - | --- |  | - | ------ | 
|Interest     | $ | 113,300 |  | $ | -   |  | $ | 68,300 | 

---

| | During the years ended December 31, 2000, 1999
and 1998, the Company's non-cash financing activities included increases of
additional paid-in capital in exchange for the retirement of debt in the amount
of approximately $2,748,800, $952,100 and $8,929,800, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23

---