AMERICAN BANK NOTE HOLOGRAPHICS INC - 10-K Annual Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2004

OR

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

For the transition period of to

Commission File No. 1-14227

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(914) 592-2355

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE PER SHARE

(Title of Class)

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

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

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

The aggregate market value of the common stock, $0.01 par value, held by non-affiliates of the registrant, based upon the closing sale price of the common stock on June 30, 2004, was approximately $32,859,300. Shares of common stock held by each officer and director and by each person who controls 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The aggregate number of shares of common stock, $.01 par value, outstanding on March 15, 2005 was 18,517,907.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

2004 Form 10-K

Table of Contents

Part I

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

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6.	Selected Financial Data.
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.
Item 8.	Financial Statements and Supplementary Data.
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A.	Control Procedures.
Item 9B.	Other Information.

Part III

Item 10.	Directors and Executive Officers of Registrant.
Item 11.	Executive Compensation.
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13.	Certain Relationships and Related Transactions.
Item 14.	Principal Accountant Fees and Services

Part IV

Item 15.	Exhibits and Financial Statement Schedules.

Index to Financial Statements

Part I.

Item 1. BUSINESS.

American Bank Note Holographics, Inc. (“ABNH” or the “Company”) originates, produces and markets holograms. Our holograms are used primarily for security applications such as counterfeiting protection and authentication of transaction cards, identification cards, documents of value and consumer products. Our ability to create distinctive, secure optically variable devices, to reproduce them with high quality and to distribute them securely has enabled us to become a market leader in security holography. Our products are used by over 200 companies worldwide, including MasterCard, VISA, American Express, Discover, Diners Club, Quaker State, Sony, Sears, Exxon Mobil and Eli Lilly, as well as agencies of the United States government and certain foreign governments. We also produce non-secure holograms for design and promotional applications.

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

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

• our expertise in holographic technology and production techniques which enables us to offer effective security solutions for a variety of end use markets and application environments,

• our secure production and distribution processes and capabilities which qualify us to meet the security requirements of security conscious customers,

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

• our ISO 9001:2000 certified manufacturing facilities, which allow us to mass produce our products in accordance with the highest quality standards.

The Holography Industry

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

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

Security

The security sector of the holography industry includes products that protect and authenticate transaction cards, documents of value, consumer and industrial products and identification cards. Using holography, and other techniques, we can develop a unique holographic security device for each customer with which to identify and protect the customer’s products. Holograms provide the following major benefits as security devices:

• difficult to copy - holograms cannot be copied with conventional copying equipment such as color copiers or scanners. The unique properties and high resolution of a security hologram make it extremely difficult to replicate even with specialized equipment and expertise.

• overt features - the unique visual aspects of a hologram are easily recognizable, making authentication of products and documents practical for the general public without special machinery, equipment or training. Overt features that we offer include:

• 3-D Imagery - an image that has three dimensions and gives the illusion of depth or varying distances.

• TrueColor- a holographic image that gives the illusion of color.

• Parallax - - images created on different planes that move in relation to one another when viewed from different angles.

• Secondary Flip Image - an image that appears and disappears when viewed at certain angles.

• Diffractive Mercurial - a bright, sharp, color shifting two-dimensional image.

• Animation - - a two or three-dimensional image that gives the illusion of motion.

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

• Hidden Latent Image - a hidden element within a holographic image that is machine-readable only with a proprietary reader.

• HoloScan™ - - ABNH’s hidden machine readable code within a holographic image that can be read with special readers.

• Micro Imagery - text or a logo within a holographic image that is visible only under magnification.

• Nano Imagery - microscopic text or a logo within a holographic image that is visible only with high-powered magnification.

• physical features - features that can be combined with holographic materials to increase the security of the holographic product. Physical features that we offer include:

• Micro-demetallization - - a feature whereby a designed portion of the vacuum deposited aluminum materials are removed from the holographic film to create additional unique aesthetic features that can be used to differentiate and authenticate the materials. This can be used to create see through screens, additional micro text in the metallization layer, and images that are only visible under magnification.

• Tamper Apparent - an invisible feature used in labels which when combined with the holographic image will act as a self destructive layer and produce a predictable release pattern that indicates that a product has been tampered with or altered. This release pattern can be in the form of a customized or generic design.

• Holomagnetics – an integrated hologram and magnetic stripe that is functionally equivalent to a traditional magnetic stripe, but has the security of an integrated hologram.

• Taggants – unique features which are added during the manufacturing process to the holographic films or coatings that are verifiable by specialized equipment.

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

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

Non-Security

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

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

Markets and Products

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

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

Holographic Hot-Stamp Patch. Our largest source of revenue since our inception has been security holograms embossed into hot-stamp foil, for credit card authentication. Holographic hot-stamp patches can also enhance the design and branding of a card. Our customers for this product include the issuers or printers of MasterCard, Visa, American Express, Discover, Diners Club and various other retail and payment cards. We are the market leader in this segment and have developed a secure, global distribution system for secure holograms to the payment card industry.

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

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

Identification Documents. We provide secure holographic laminates and patches for identity documents such as national ID cards, passports, government credentials, military credentials and drivers’ licenses. We have patents on demetallized holograms which are transparent and used to see printed information under the holograms.

We believe there are significant security advantages for demetallized holograms used on ID cards and other documents. We currently supply demetallized laminates for certain secure U.S. government credentials as well as national identity cards for certain foreign countries. We believe there is a need to improve the security of many identity documents used in the United States and other countries, and we are proposing security holograms as a component of the security enhancements that are being considered by major issuers of identification documents.

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

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

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

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

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

Documents of Value. Concerns over counterfeiting and copying have led to an increased use of holograms produced by international suppliers for international markets for currency, checks, gift certificates, tax stamps and other financial instruments. Holographic products for paper documents of value include:

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

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

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

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

Strategy

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

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

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

Control Costs. We intend to invest in more efficient operations and prudently manage our expenses to strengthen our competitive position and enhance profitability.

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

Production Process

We are one of the most experienced security production companies in the holographic industry. We have ISO certified security production facilities containing a total of nine origination laboratories and twenty-one mass replication lines as well as extensive security and quality control procedures. We will be investing in moving, consolidating, enhancing and expanding these production capabilities in 2005. We also have a distribution network for secure holographic products.

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

Design

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

Origination

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

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

The object beam then interferes with the reference beam, creating an interference pattern, which is recorded on the light sensitive photo-resist glass. After developing the photo-resist glass, the film is re-illuminated approximating the original angle(s) of the reference beam. The resulting interference pattern within the film reflects some of the light, striking it into a re-creation of the pattern of light that originally came from the object beam, due to a property of light called diffraction. The reflected light, now organized and containing all information that the object beam once carried, allows the viewer to see all of the information in three dimensions, true color or with other desired effects. There are less complex methods of creating a hologram origination than the process described above. However, in our opinion, the above process produces the clarity, depth perception, movement and mass replication properties that are essential components of our secure holograms. We believe that our largest competitors in the security sector may use similar processes among others.

Plate Making

Once the origination process is completed, a plate is created in order to permit mass production. The “one-up” image is “step and repeated” to a pre-determined size with multiple identical images recorded on a photo-resist glass. We have designed and built a proprietary step and repeat process to create very precise plates for mass production of tightly registered images. The glass is then converted to a production plate in an electrolytic process where nickel is grown on the surface of the glass. Nickel is used because its molecular nature allows for an exact transfer of the origination to the production plate.

We believe that our plate making process is an important component of our ability to mass-produce our secure holograms with high precision.

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

Mass Production

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

We employ three methods of mass-production of holograms. Hard embossing transfers images to an aluminum foil/polyester substrate through heat and pressure. Heat and pressure on the holographic plate force the holographic image into the foil, which is then converted into the final product. Soft or compliant embossing permits embossing into pre-metallized and other films and allows for embossing on wider-web materials.

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

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

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

Quality

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

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

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

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

In 2005, we intend to move and consolidate our facilities from Elmsford, New York and Huntingdon Valley, Pennsylvania into a new facility in Robbinsville, New Jersey. (See “Manufacturing Facilities” below and “Item 2. Properties”). We will begin the ISO 9001-2000 certification process for this facility during 2005.

Information Technology

We have implemented an integrated enterprise resource planning system that provides information for management decision making. We made improvements to this system in 2004 and we intend to make further improvements in 2005 in connection with the move to the new facility in Robbinsville, New Jersey.

Research and Product Development

We have devoted significant attention to research and product development to continue to enhance our origination, replication and mass production capabilities. Our research and development has enabled us to create new technologies and proprietary production processes and to deliver innovative products to the marketplace. We intend to continue to make on-going investments in research and development in order to:

• Develop better solutions for our customers’ problems.

• Create features which differentiate our products from those of our competitors.

• Develop and improve processing techniques to improve the quality and reduce the costs of our products.

Manufacturing Facilities

On December 14, 2004, we entered into agreements to lease a 134,000 square foot modern manufacturing and office building in Robbinsville, New Jersey, which will be the future site of our primary operations. We will be doing construction within this facility to meet our specialized operational and security requirements through approximately May 2005. The new facility provides substantial room for expansion as we will consolidate our operations that are currently being conducted within a 58,000 square foot facility in Elmsford, New York and a 30,000 square foot facility in Huntingdon Valley, Pennsylvania into the new facility in Robbinsville, New Jersey. We are also acquiring additional equipment and technology to be installed in the new facility in order to broaden our capabilities to serve our target customers, expand capacity and improve efficiency. See “Item 2. Properties.”

Sales and Marketing

In 2004, we provided holographic products to over 200 customers worldwide. We are the exclusive supplier of holograms to MasterCard and we are one of two authorized manufacturers of VISA holograms for sale to approved manufacturers of VISA cards. In addition, we supply holograms to American Express, Diners Club, Discover, Sony, Sears, Eli Lilly, Quaker State, agencies of the United States government, foreign governments and other companies.

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

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

Pricing decisions are generally made centrally by our operating executives. We focus some of our marketing efforts on trade shows such as the Card Tech/SecureTech trade show, Cartes and a number of other security industry conferences.

Competition

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

Trademarks and Patents

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

We cannot assure you that the degree of protection offered by our patents is sufficient, the success of any of our enforcement actions or the likelihood that patents will be issued for pending applications. Competitors in the U.S. and foreign countries may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or interfere with our ability to make and sell some of our products.

Employees

As of March 15, 2005, we employed 106 persons of which 61 are covered by collective bargaining agreements. We consider our relations with our employees to be good. We are party to collective bargaining agreements with Paper, Allied-Industrial, Chemical & Energy Workers International Union Local 1-0318 (“Local 1-0318”) and PACE International Union Local 286 (“Local 286”). The agreement with Local 1-0318 has a three-year term, will expire on December 31, 2006 and covers 21 employees in our Elmsford, New York facility. In connection with our move to Robbinsville, New Jersey, we have entered into a closure agreement with Local 1-0318, dated March 19, 2005, that provides for the termination of the contract with Local 1-0318, which will occur in approximately May 2005. The agreement with Local 286 has a five-year term, will expire on January 28, 2010, currently covers 40 employees and will cover approximately 60 employees in our Robbinsville, New Jersey facility when the facility becomes operational in 2005.

Available Information

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

Risk Factors

Important Factors Regarding Forward-Looking Statements

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

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

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

• timing of customer orders,

• customer business cycles,

• cancellation or expiration of customer contracts or programs,

• card expiration patterns,

• inventory replenishment,

• increased competition,

• changes in our and our competitors’ pricing policies,

• patent expiration and fluctuating amounts of royalty income,

• changes in the cost of materials or labor,

• cost and availability of the services of subcontractors,

• costs of recruiting or relocating personnel,

• increased research and development expenses,

• expenses associated with litigation,

• financing costs,

• market acceptance of our products,

• the time required for customer testing and evaluation,

• costs associated with implementing changes in operations,

• investments in new technology and equipment,

• changes in facility requirements,

• changes in our business strategy, and

• general economic factors.

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

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

Sales to credit card companies accounted for approximately 84% of our total sales in 2004 and 76% of our total sales in 2003. Sales to MasterCard and approved manufacturers of VISA brand credit cards together accounted for approximately 66% of our total sales in 2004 and 63% of our total sales in 2003.

We entered into an agreement with MasterCard dated February 28, 2003, which replaced the agreement dated February 1, 1996, as amended. We entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained us to produce a new hologram for the Debit MasterCard and extended the agreement to February 2011, subject to automatic renewal if not terminated by either party. Currently, we are one of two companies authorized to manufacture and sell VISA Dove holograms to manufacturers of VISA brand credit cards. On March 15, 2005, VISA announced its intention to phase out the Dove hologram that we supply for the front of the VISA card, and to replace it with an integrated holographic magnetic stripe. We expect to supply our holographic magnetic stripe product, HoloMag^TM, for VISA cards, but we cannot assure you that future sales of HoloMag to VISA’s authorized card manufacturers will be as successful or profitable as our historical sales of the VISA Dove hologram. Furthermore, we have limited experience in producing and selling HoloMag. We do not have a contract with VISA that commits them or their authorized card manufacturers to purchase any Dove holograms or HoloMag from us. If we were to lose a substantial portion of our business with either MasterCard or VISA without replacing it with new product sales, our business, operating results and financial condition would be materially and adversely affected. In addition, if we fail to obtain anticipated orders from these customers or if we experience delays or cancellations of orders from these customers, our business and financial performance will be materially and adversely affected.

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

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

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

• price,

• technology,

• product quality, and

• customer service.

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

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

Our business is dependent to some extent upon our proprietary technology. We utilize a combination of patents, trade secrets and confidentiality agreements, as well as restricted access and other forms of intellectual property protection to safeguard certain of our proprietary technology and processes. We also hold certain trademarks with respect to certain products and services. We cannot be certain as to the degree of protection offered by any of our patents or as to the likelihood that patents will be issued for any of our pending applications. Certain of our patents have expired and others have been declared invalid in the past. Other patents will expire over the next several years. The expiration of patents has resulted in our royalty income decreasing materially in 2004 and 2003 from the 2002 amounts. We can not assure you that we will be able to maintain the confidentiality of our trade secrets or that our confidentiality agreements will provide meaningful protection of our trade secrets or other proprietary information. In addition, litigation may be necessary in the future to enforce our intellectual property rights or to

determine the validity and scope of our patents or of the proprietary rights of others. Such litigation might result in substantial costs and diversion of resources and management attention.

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

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

The relocation of our primary operations, including our manufacturing operations may subject us to increased costs and a disruption in our operations.

We intend to relocate and consolidate our primary operations, including our manufacturing operations from our Elmsford, New York and Huntingdon Valley, Pennsylvania facilities to a new facility in Robbinsville, New Jersey in approximately May 2005. We expect to incur significant costs in transitioning our operations to this location. These costs shall include costs associated with our existing leases, vacating our current facilities, relocating, terminating and recruiting certain employees, moving equipment and other related expenses. The leases for our current facilities in Elmsford, New York and Huntingdon Valley, Pennsylvania run through December 2007 and July 2007, respectively. Any difficulties in the relocation of our operations may also disrupt our manufacturing activities, which could delay product shipments, increase production costs and could cause our relationships with customers to suffer and materially and adversely affect our financial condition, results of operations and cash flows.

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

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

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

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

• a loss of market makers,

• a lack of readily available bid and ask prices,

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

• a general loss of liquidity compared to established stock exchanges or the NASDAQ National Market.

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

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

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

• management,

• engineering,

• manufacturing,

• research and development,

• sales and marketing, and

• support personnel.

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

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

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

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

Sales derived from customers outside the United States were 21% of our total sales in 2004 and 28% of our total sales in 2003. Our international sales are subject to risks, including:

• U.S. and international regulatory requirements and policy changes,

• exchange rate fluctuations,

• political and economic instability,

• difficulties in accounts receivable collection,

• tariffs and other barriers, and

• difficulty in attracting, retaining and managing international representatives.

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

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

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

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

As of March 15, 2005, we had approximately 18,517,907 shares of our common stock issued and outstanding and 2,729,000 additional shares of common stock reserved for issuance upon exercise of outstanding stock options. If the holders of shares of common stock acquired upon the exercise of outstanding options were to sell a significant amount of their shares into the open market, the market price of our common stock could be adversely affected. The sales might also make it more difficult for us to sell equity or equity-related securities in the future at a price we deem appropriate.

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

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

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

Our executive officers and directors and entities related to them, in the aggregate, beneficially own approximately 24.5% of our common stock as of March 15, 2004, which includes 18.3% owned by Crane & Co., Inc., an investor related to Douglas A. Crane, one of our directors. These stockholders acting together have the ability to exert substantial influence over all matters requiring approval by our stockholders. These matters include the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. Such a concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination.

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

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

• discouraging potential acquisitions proposals,

• delaying or preventing a change in control, and

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

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

Item 2. PROPERTIES.

We maintain secure hologram manufacturing facilities in Elmsford, New York, Huntingdon Valley, Pennsylvania and Dalton, Massachusetts. On December 14, 2004, we entered into certain agreements to lease a new facility located in Robbinsville, New Jersey, which will be the future site of our primary operations. We expect to cease operations in our Elmsford, New York and Huntingdon Valley, Pennsylvania facilities by approximately May 2005. We believe that following the move of our principal operations to Robbinsville, New Jersey our facilities will be adequate to meet our current requirements and provide the additional space necessary to allow for the acquisition of new equipment to upgrade and expand our production capabilities.

Our 134,000 square foot leased facility at Robbinsville, New Jersey will serve as our headquarters and include substantially all of our principal operations, including our design, engineering, research and development, holographic origination, plate making and manufacturing and quality control for numerous holographic products. We expect this facility to be operational in approximately May 2005. The initial lease term for the new facility is through May 2017 and at the expiration of the lease, we have options to renew the lease for three consecutive five year periods and we also have an option to purchase the building.

Our 57,200 square foot leased facility at Elmsford, New York currently serves as our headquarters and includes our design, engineering, research and development, holographic origination, plate making and manufacturing and quality control for certain of our holographic products. We expect to vacate this facility in approximately May 2005. This lease expires in December 2007 and we are currently searching for a suitable tenant, if any, to sublease the facility for the duration of the lease term following the cessation of our operations in this facility.

Our 30,000 square foot leased facility at Huntingdon Valley, Pennsylvania is currently dedicated to the manufacturing and quality control for certain of our holographic products. We expect to vacate this facility by approximately May 2005. This lease expires in July 2007 and we are currently searching for a suitable tenant, if any, to sublease the facility for the duration of the lease term following the cessation of our operations in this facility.

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

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

Item 3. LEGAL PROCEEDINGS.

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

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

None.

Part II

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

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

The following table sets forth the high and low closing prices of our common stock for each quarter of 2003, 2004 and the period from January 1 through March 18 of 2005.

	High		Low
2003
First Quarter	$	0.98	$	0.71
Second Quarter	1.22		0.79
Third Quarter	1.29		1.05
Fourth Quarter	1.53		1.08

2004
First Quarter	$	2.40	$	1.50
Second Quarter	2.95		1.88
Third Quarter	2.58		1.96
Fourth Quarter	3.98		2.45

2005
First Quarter (through March 18, 2005)	$	3.50	$	2.75

As of March 1, 2005, there were approximately 530 holders of record of our common stock. Because many of our shares of common stock are held of record by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.

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

Item 6. SELECTED FINANCIAL DATA.

	Year Ended December 31,
	2000 (b)			2001		2002			2003		2004
STATEMENT OF INCOME DATA:
Revenue:
Sales (a)	$	19,029		$	20,016	$	18,665		$	18,284	$	21,263
Royalty income	444			466		555			48		13
	19,473			20,482		19,220			18,332		21,276
Costs and expenses:
Cost of goods sold	8,876			9,962		8,926			8,279		9,161
Selling and administrative (a)	8,085			7,314		7,136			6,518		7,070
Research and development	928			1,233		1,143			1,142		1,270
Depreciation and amortization	1,076			1,097		800			739		830
Facility consolidation											242
Impairment of goodwill and fixed assets (c)	—			—		9,298			—		—
	18,965			19,606		27,303			16,678		18,573

Operating income (loss)	508			876		(8,083		)	1,654		2,703

Other income (expense):
Interest, net	(512		)	258		113			97		121
Settlement with Former Parent	519			—		—			—		—
Settlement of shareholder litigation	(3,508		)	—		—			—		—
Patent settlement and other	—			—		691			—		178
	(3,501		)	258		804			97		299

Income (loss) before provision for (benefit from) income taxes	(2,993		)	1,134		(7,279		)	1,751		3,002
Provision for (benefit from) income taxes	(1,110		)	543		858			744		1,201
Net income (loss)	$	(1,883	)	$	591	$	(8,137	)	$	1,007	$	1,801

Net income (loss) per share:
Basic and diluted	$	(0.12	)	$	0.03	$	(0.44	)	$	0.05	$	0.10

Weighted average shares outstanding:
Basic	15,421			18,484		18,484			18,484		18,489
Diluted	15,421			18,484		18,484			18,526		18,907

	December 31,
	2000		2001		2002		2003		2004
BALANCE SHEET DATA:
Working capital	$	10,377	$	11,884	$	14,091	$	16,054	$	17,218
Total assets	29,134		28,586		20,130		21,020		25,211
Total debt	—		—		—		—		—
Total stockholders’ equity	23,988		24,579		16,442		17,449		19,314

(a) Sales have been adjusted for 2000 to reflect the reclassification of shipping charges billed to customers, which were previously netted in selling and administrative expenses.

(b) During the year ended December 31, 2000, we incurred costs of $3.4 million regarding the settlement of the shareholder litigation, and $0.1 million in connection with fines and costs incurred regarding the SEC and U.S. Attorney investigations. In addition, we reversed $0.5 million from accounts payable and accrued expenses resulting from a settlement, which we entered into with our Former

Parent. These costs are included in other income (expense) on the accompanying statement of operations. Additionally in the third quarter of 2000, our insurance carriers agreed to pay us $750,000 as a product liability reimbursement, which we included in cost of sales.

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

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

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

Overview

ABNH was, until July 20, 1998, a wholly-owned subsidiary of American Banknote Corporation (“ABN” or the “Former Parent”). On that date, ABN completed the sale of 13,636,000 shares of our common stock in an initial public offering (the “Offering”), representing ABN’s entire investment in ABNH. We did not receive any proceeds from the Offering.

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

Concerns regarding counterfeiting, piracy and other infractions that can result in lost sales, lost goodwill and product liability claims drive the use of product authentication holograms. Companies in various industries utilize holograms as authentication devices to reduce potential losses.

A significant portion of our business is derived from orders placed by credit card companies, including MasterCard and manufacturers of VISA brand credit cards and variations in the timing of such orders can cause significant fluctuations in our sales. Sales to MasterCard for the years ended December 31, 2004, 2003 and 2002 were approximately 35%, 33%, and 41%, respectively. We entered into an agreement with MasterCard dated February 28, 2003, which replaced the agreement dated February 1, 1996, as amended. We entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained us to produce a new hologram for the Debit MasterCard and extended the agreement to February 2011, subject to automatic renewal if not terminated by either party. The new agreement provides that MasterCard will receive three sequential price reductions of approximately 3% each, effective at the beginning of 2003, 2004 and 2006. We are currently the exclusive supplier to MasterCard. Sales to VISA card manufacturers were approximately 31%, 30%, and 26%, respectively, of sales for the years ended December 31, 2004, 2003 and 2002. Currently we are one of two companies authorized to manufacture and sell VISA Dove holograms to manufacturers of VISA brand credit cards. On March 15, 2005, VISA announced its intention to phase out the Dove hologram that we supply for the front of the VISA card, and to replace it with an integrated holographic magnetic stripe. We expect to supply our holomagnetic stripe product, HoloMag, for VISA cards, but we cannot assure you that future sales of HoloMag to VISA’s authorized card manufacturers will be as successful or profitable as our historical sales of the VISA Dove hologram. We do not have a contract with VISA that commits them or their authorized card manufacturers to purchase any Dove holograms or HoloMag from us. If we were to lose a substantial portion of our business with either MasterCard or VISA without replacing it with new product sales, our business, operating results and financial condition would be materially and adversely affected. In addition, if we fail to obtain anticipated orders from these customers or if we experience delays or cancellations of orders from these customers, our business and financial performance will be materially and adversely affected.

Holograms are sold under purchase orders and contracts with customers. Sales and the related cost of goods sold are generally recognized at the latter of the time of shipment or when title passes to customers. In some situations, we have shipped product where the sale is contingent upon the customers’ use of the product. In these situations, we do not recognize sales upon product shipment, but rather when the buyer of the product informs us that the product has been used. Additionally, pursuant to terms with a certain customer, completed items are stored on behalf of the customer at our on-site secured facility and, in that instance, sales are recognized when all of the following have occurred: the customer has ordered the goods, the manufacturing process is complete, the goods have been transferred to the on-site secured facility and are ready for shipment, the risk of ownership has passed to the customer and the customer has been billed for the order. At December 31, 2004 and 2003, accounts receivable from this customer totaled $1.1 million and $1.0 million, respectively.

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

During 2004, 2003 and 2002, export sales accounted for approximately 21%, 28% and 27%, respectively, of total sales. All of our export sales are presently denominated in U.S. dollars.

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

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

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

Critical Accounting Policies

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

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

Revenue Recognition

We recognize revenue in accordance with the provisions of the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Specifically, sales and the related cost of goods sold are generally recognized at the latter of the time of shipment or when title passes to customers. In some situations, we have shipped product where the sale is contingent upon the customers’ use of the product. In these situations, we do not recognize sales upon product shipment, but rather when the buyer of the product informs us that the product has been used. Additionally, pursuant to terms with a certain customer, completed items are stored on behalf of the customer at our on-site secured facility and, in that instance, sales are recognized when all of the following have occurred: the customer has ordered the goods, the manufacturing process is complete, the goods have been transferred to the on-site secured facility and are ready for shipment, the risk of ownership has passed to the customer and the customer has been billed for the order.

Allowance for Doubtful Accounts

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

Inventory Valuation

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

Impairment of Goodwill and Long-Lived Assets

We account for goodwill and long-lived assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 142, which provides that goodwill should not be amortized but instead tested for impairment on an annual basis, was adopted by us on January 1, 2002. The impairment testing is performed in two steps: (i) the determination of impairment, based on our fair value compared with our carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. We performed the annual test for impairment required by SFAS No. 142 during the year ended December 31, 2002. At that time, our fair value (based on quoted market prices) was found to be less than our carrying amount, and accordingly, we recorded a $7.4 million impairment charge for the year ended December 31, 2002. This charge represents the full impairment of the goodwill that was on our balance sheet prior to December 31, 2002. SFAS No. 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the year ended December 31, 2002, we recorded a charge for the impairment of long-lived assets of $1.9 million to write off fixed assets consisting of master plates which will no longer be used. This charge represents the full impairment of this long-lived asset that was on our balance sheet prior to December 31, 2002. The goodwill and the long-lived assets arose through purchase accounting by our Former Parent, as it related to us, in connection with our Former Parent’s 1990 merger.

Results of Operations

Comparison of the Year Ended December 31, 2004 to the Year Ended December 31, 2003

Sales. Sales increased by $3.0 million, or 16.3%, from $18.3 million in 2003 to $21.3 million in 2004. The increase was due to an increase in sales of holograms for transaction cards to existing customers of $3.0 million, the creation of new programs for transaction cards for $0.9 million in 2004, and the creation of new programs for identification products for $0.4 million in 2004, which was partially offset by sales of $1.3 million of identification products in 2003 that did not recur in 2004. In addition, we commenced new programs in pharmaceutical and other consumer product protection which offset a reduction in other lower margin international label sales.

Royalty Income. Royalty income remained relatively unchanged.

Cost of Goods Sold. Cost of goods sold increased by $0.9 million, or 10.7%, from $8.3 million in 2003 to $9.2 million in 2004. As a percentage of sales, cost of goods sold decreased from 45.3% in 2003 to 43.1% in 2004. The decrease in cost of goods sold as a percentage of sales of 2% was primarily due to greater sales volumes of higher margin products in the current period.

Selling and Administrative Expenses. Selling and administrative expenses increased by $0.6 million, from $6.5 million in 2003 to $7.1 million in 2004. As a percentage of sales, selling and administrative expenses decreased from 35.6% in 2003 to 33.3% in 2004. The increase in selling and administrative expenses is primarily due to an increase in sales salaries of $0.1 million, an increase in other selling expenses of $0.1 million primarily due to higher trade show, travel and sample expenses, an increase in administrative salaries and benefits of $0.3 million and an increase in other administrative expenses of $0.1 million primarily related to higher professional fees and recruitment expenses.

Research and Development. Research and development expenses increased $0.1 million from $1.2 million in 2003 to $1.3 million in 2004. The increase was primarily due to the development and testing of new products.

Depreciation and Amortization. Depreciation and amortization expense increased $0.1 million from $0.7 million in 2003 to $0.8 million in 2004 primarily due to new assets in 2004.

Facility Consolidation Expenses. Facility consolidation expenses of $0.2 million pertain to expenses incurred for our new facility in Robbinsville, New Jersey and consist primarily of legal fees, real estate commissions and employee relocation and severance expenses.

Other Income. Other income increased $0.2 million from $0.1 million in 2003 to $0.3 million in 2004. The increase was primarily due to income from a patent settlement agreement with a competitor in 2004.

Income Taxes. Income tax expense increased $0.5 million from $0.7 million in 2003 to $1.2 million in 2004. The increase was primarily due to an increase in taxable income in 2004.

Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002

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

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

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

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

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

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

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

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

Seasonality

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

Liquidity and Capital Resources

At December 31, 2004, we had $11.4 million of cash and cash equivalents, short-term investments of $2.0 million and working capital of $17.2 million.

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

The Agreement also contains a standstill provision, whereby Crane agreed, that, among other things,

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

Net cash provided by operating activities was $3.4 million for the year ended December 31, 2004, as compared to $3.1 million of cash provided by operating activities for the prior year. For the year ended December 31, 2004, our net income adjusted for non-cash charges provided cash of $2.6 million compared to $2.5 million of cash provided by our net income adjusted for non-cash charges in the prior year. For the year ended December 31, 2004, cash provided by changes in operating assets and liabilities was $0.8 million compared to cash provided by changes in operating assets and liabilities of $0.6 million in the prior year.

Investing activities for the year ended December 31, 2004 provided cash flows of $0.5 million, as compared to $4.4 million of cash used in 2003. These activities primarily reflected a decrease in investments in short-term securities of $2.0 million and capital expenditures of $1.5 million in 2004 and investments in short-term securities of $4.0 million and capital expenditures of $0.4 million in 2003. Capital expenditures in 2004 included $1.0 million for leasehold improvements and equipment to be installed in the new facility in Robbinsville, New Jersey. We anticipate that capital expenditures in 2005 and 2006 will be approximately $6.5 and $3.0 million, respectively. The capital expenditures will be directed at building a high quality, secure manufacturing facility in Robbinsville, New Jersey and enhancing production capabilities, expanding our product line and improving operating efficiencies.

Financing activities for the year ended December 31, 2004 provided cash of $0.1 million primarily due to the issuance of common stock due to the exercise of stock options. There were no financing activities for the year ended December 31, 2003.

Our leases for the Elmsford, New York and Huntingdon Valley, Pennsylvania facilities expire December 2007 and July 2007, respectively. The Company is seeking to identify subtenants for all or a portion of these leases upon vacating the premises.

The base rent on the new lease for the Robbinsville, New Jersey facility is $555,000 per year, increasing by 1.9% per year, and the first seven months of the lease are rent-free. We currently pay a combined base rent of $933,000 per year for our two existing smaller facilities in Elmsford, New York and Huntingdon Valley, Pennsylvania. The term of the new lease is through May 31, 2017, and at the expiration of the term, we have options to renew the lease for three consecutive five year periods and an option to purchase the building.

We currently anticipate investing approximately $7.4 million through 2005, of which approximately $1 million was expended in 2004, in facility upgrades to customize the Robbinsville, New Jersey facility for our operational and security requirements as well as the acquisition of new equipment to upgrade and

expand our production capabilities.

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

We also currently expect to incur expenses totaling approximately $4.2 million, of which we incurred $0.2 million in 2004, associated with our existing leases, vacating our current facilities in Elmsford, New York and Huntingdon Valley, Pennsylvania, relocating and terminating certain employees, moving equipment and other related expenses which we expect to be substantially complete by the third quarter of 2005. These costs will be presented as facility consolidation expense on our financial statements. Approximately $2.9 million of these expenses will be paid in cash ratably through the fourth quarter of 2007 and approximately $1.3 million of these expenses will be paid in cash as incurred through the fourth quarter of 2005.

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

	Total		Less than 1 year		2-3 years		4-5 years		More than 5 years

Lease obligations	$	10,289	$	1,253	$	2,914	$	1,203	$	4,919

Impact of Inflation

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

Unaudited Quarterly Results of Operations for the Years Ended December 31, 2004 and 2003.

	Year Ended December 31, 2004
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In Thousands, Except Per Share Data)
Sales	$	5,034	$	4,907	$	5,808	$	5,514

Cost of goods sold	$	2,270	$	2,260	$	2,413	$	2,218

Net income	$	402	$	344	$	598	$	457

Net income per share-basic and diluted	$	0.02	$	0.02	$	0.03	$	0.02

	Year Ended December 31, 2003
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(In Thousands, Except Per Share Data)
Sales	$	4,538	$	4,275	$	4,629	$	4,842

Cost of goods sold	$	2,016	$	1,988	$	2,090	$	2,185

Net income	$	219	$	120	$	298	$	370

Net income per share-basic and diluted	$	0.01	$	0.01	$	0.02	$	0.02

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

None

Item 9A. CONTROLS AND PROCEDURES

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

Item 9B. OTHER INFORMATION

On March 29, 2005, we entered into an amended and restated employment agreement (the "Employment Agreement") with Kenneth H. Traub for an initial term of one year, which renews automatically for successive one year terms, unless we give at least 60 days written notice prior to the end of the current term. The Employment Agreement provides for an annual base salary of $400,000 in 2005, to be increased by not less than 3% per year upon renewal and further provides that, if we do not renew his Employment Agreement, Mr. Traub will receive severance equal to two times his annual salary and bonus. Additionally, Mr. Traub is eligible to receive annual bonuses based on the Compensation Committee's assessment of Mr. Traub's performance for the prior year based on agreed-upon performance objectives. The target annual bonus is $100,000 although any actual bonus may be more or less than such amount. In the event of Mr. Traub's termination by us for any reason other than for cause, as defined in the Employment Agreement, or his resignation for good reason, as defined in the Employment Agreement, we are generally required to (1) pay him his salary then in effect with any bonus which may have been accrued or which otherwise would have been granted by the board to him for a period of two years following such termination, (2) continue to provide employee benefits to Mr. Traub, and (3) accelerate vesting on any unvested options granted to him. Upon the termination of Mr. Traub's employment by us following a change of control, as defined in the Employment Agreement, or Mr. Traub's resignation for good reason following a change in control, we are required to (1) pay him a severance amount equal to two times his annual salary and bonus then in effect (or, if such termination or resignation for good reason is more than one year after such change of control, an amount equal to three times his salary and annual bonus then in effect), (2) accelerate vesting on any unvested options granted under the Plans (as defined in the Employment Agreement) and any shares of restricted stock purchased by Mr. Traub, and (3) to the extent such amounts are subject to excise taxes under Section 4999 of the Internal Revenue Code, provide a tax gross up to him for any additional amounts due. In connection with his Employment Agreement, Mr. Traub has agreed not to compete with, or solicit from, us during his term of employment and for one year thereafter and has agreed not to disclose or use our confidential information.

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.

The following table sets forth certain information concerning our directors and executive officers. All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified.

Name	Age	Position(s)
Directors, Executive Officers:

Kenneth H. Traub	43	President, Chief Executive Officer and Director

Salvatore F. D’Amato	76	Chairman of the Board

Fred J. Levin*	42	Director

Douglas A. Crane**	44	Director

Mark J. Bonney*	51	Director

Alan Goldstein	58	Vice President, Chief Financial Officer and Secretary

* Member of the audit and compensation committees.

** Member of the compensation committee.

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

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

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

Douglas A. Crane has served as a director since June 2000. Mr. Crane has been the Vice President and General Manager of U.S. Currency Products for Crane & Co., Inc., a manufacturer of paper products, since 2004. Previously, Mr. Crane was Manager of Currency Paper Manufacturing and U.S. Currency Contract for Crane & Co. from 2001 to 2004. Mr. Crane also served with Crane & Co., Inc. as Manager of Corporate Strategic Planning from 1998 to 2001, as Manager of Manufacturing Technology from 1995 to 1998, and as production manager, project engineer from 1990 to 1995. Mr. Crane holds a B.S. in Biomedical Engineering/Materials Science from Brown University, an M.S. in Paper Chemistry from the Institute of Paper Science and Technology and an M.B.A. from the Massachusetts Institute of Technology. Mr. Crane was appointed to the Board of Directors pursuant to the Stock Purchase Agreement, dated June 30, 2000, with Crane & Co., Inc. pursuant to which Crane & Co., Inc. has the right to designate one director to the Board of Directors for so long as it owns at least 51% of the shares of common stock it purchased under the Stock Purchase Agreement.

Mark J. Bonney has served as a director since February 2003. Mr. Bonney has been the Managing Partner of Endeavour Advisors, LLC, a strategic management-consulting firm since April 2004. Previously, Mr. Bonney was the Chief Executive Officer of MJB Consulting, a strategic management-consulting firm, since March 2002. Prior thereto, Mr. Bonney was the President and Chief Operating Officer of Axsys Technologies, a leading supplier of optical components and subsystems from August 1999 through March 2002. Prior thereto, Mr. Bonney held various positions, including Vice President of Operations, Vice President of Finance and Chief Financial Officer of Zygo Corporation, a manufacturer of measurement systems and optical products, from March 1993 through July 1999. Mr. Bonney holds a B.S. in Business Administration and Economics from Central Connecticut State University and an M.B.A. in Finance from the University of Hartford.

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

Audit Committee

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

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

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

common stock. Based upon a review of the copies of the filings with the Securities and Exchange Commission and written representations from our executive officers, directors and persons who beneficially own more than 10% of our common stock, we believe that the Section 16(a) filing requirements applicable to our executive officers, directors and persons who beneficially own more than 10% of our common stock in fiscal 2004 were complied with on a timely basis.

Code of Ethics

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

Item 11. EXECUTIVE COMPENSATION.

The following table provides information concerning compensation paid to or earned during 2002, 2003 and 2004 by each individual who served as our chief executive officer or in a similar capacity during 2004 and our other two executive officers during 2004 (the “Named Executive Officers”).

Summary Compensation Table

Name					Long-Term Compensation Shares of Common Stock Underlying Options (#)	All Other Compensation (2) ($)


	Annual Compensation
	Year	Salary ($)	Bonus ($)	Other Annual Compensation (1) ($)
Kenneth H. Traub	2004	327,818	190,000	10,560	—	6,584
President and Chief	2003	318,270	140,000	9,609	200,000	5,973
Executive Officer	2002	309,000	145,000	9,312	—	5,050

Salvatore F. D’Amato	2004	196,691	85,000	13,788	—	2,226
Chairman of the Board	2003	190,962	70,000	13,788	40,000	2,348
	2002	185,400	70,000	42,502	—	2,449

Alan Goldstein	2004	185,761	55,000	5,820	—	3,538
Vice President, Chief	2003	180,350	45,000	5,820	40,000	3,248
Financial Officer and Secretary	2002	175,100	40,000	6,835	—	3,248

(1) Other Annual Compensation in 2003 and 2004 for Mr. D’Amato and 2002, 2003 and 2004 for Messrs. Traub and Goldstein consisted of the use of automobiles paid for by us. Other Annual Compensation in 2002 for Mr. D’Amato consisted of $12,447 for the use of an automobile paid for by us and $30,055 resulting from our purchase, on his behalf, of the automobile formally leased by us for his benefit.

(2) All other compensation in 2004 includes term life insurance premiums and employer contributions to our 401(k) retirement plan paid by us for Mr. Traub of $4,534 and $2,050, respectively, for Mr. D’Amato of $176 and $2,050, respectively and for Mr. Goldstein of $1,488 and $2,050, respectively.

Option Grants for 2004

We did not grant any options during 2004 to the Named Executive Officers and no options were exercised in 2004 by them.

2004 Year-End Option Values

The following table provides information concerning the number and value of unexercised options held by each of the Named Executive Officers on December 31, 2004. No options were exercised in 2004 by the Named Executive Officers.

	Shares of Common Stock Underlying Unexercised Options (#)		Value of Unexercised In-the-Money Options at December 31, 2004 ($) (1)
Name	Exercisable	Unexercisable	Exercisable		Unexercisable
Kenneth H. Traub	847,917	127,083	$	1,076,949	$	282,958
Salvatore F. D’Amato	365,000	—	$	376,394	—
Alan Goldstein	187,375	25,625	$	182,081	$	56,138

(1) Based on the difference between $3.15, which was the closing price per share on December 31, 2004, and the exercise price per share of the options.

Stock Incentive Plans

On August 4, 2000, we adopted the American Bank Note Holographics, Inc. 2000 Stock Incentive Plan (as amended, the “2000 Plan”), which was subsequently approved by our stockholders at our annual meeting on September 12, 2000. In August 2001, our stockholders approved an amendment to the 2000 Plan increasing the shares available for issuance thereunder by 600,000 to 1,350,000 shares. On July 20, 1998, we adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”, and collectively with the 2000 Plan, the “Plans”). The Plans were adopted for the purpose of granting various stock incentives to officers, directors, employees and consultants of ABNH. The board of directors (or a committee appointed by the board of directors) has discretionary authority, subject to certain restrictions, to administer the Plans. The total number of shares reserved for issuance under the Plans are 3,213,000 shares of common stock. Options to purchase 2,729,000 shares of common stock were outstanding under the Plans at December 31, 2004. The exercise price of options granted under the Plans may not be less than 100% of the fair market value of the common stock on the date such option was granted. Options granted under the Plans generally become vested and exercisable for up to either 25% or 33 1/3% of the total optioned shares upon each succeeding anniversary of the date of grant. Generally, the unexercised portion of any option automatically terminates upon the termination of the optionee’s employment with us, unless otherwise determined by the board of directors; provided however, that any extension shall not extend beyond the expiration of the option, generally ten years. Upon a change in control, outstanding options will generally become fully vested. On January 7, 2005, we granted options to purchase an aggregate of 95,000 shares of common stock to our executive officers and directors and 110,000 shares of common stock to our employees at an exercise price equal to the fair value of the common stock at the date of the grant.

Retirement Plans

On October 1, 1999, we implemented defined contribution plans for our employees. Aggregate contributions to such plans, which have been charged to our operations, were approximately $59,000, $56,000 and $51,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Director Compensation

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

On January 7, 2005 the board of directors adopted a policy to increase the compensation paid to directors who are not employees of ABNH. Under the new policy, in addition to the compensation described above, each director who is not an employee of ABNH will automatically receive an option to purchase 5,000 shares of our common stock at the first meeting of the board of directors of each calendar year. Such options are exercisable at the fair market value on the date of the grant and will become vested and exercisable over a period of three years. In addition, the chairman of each committee of the Board of Directors will receive an additional annual fee of $6,000.

Employment Agreements

We entered into an amended employment agreement with Kenneth H. Traub in March 2005 for an initial term of one year, which renews automatically for successive one year terms, unless we give at least 60 days written notice prior to the end of the current term. The agreement provides for an annual base salary of $400,000 in 2005, to be increased by not less than 3% per year upon renewal and further provides that, if we do not renew his employment agreement, Mr. Traub will receive severance equal to two times his annual salary and bonus. Additionally, Mr. Traub is eligible to receive annual bonuses based on the Compensation Committee’s assessment of Mr. Traub’s performance for the prior year based on agreed-upon performance objectives. The target annual bonus is $100,000 although any actual bonus may be more or less than such amount. In the event of Mr. Traub’s termination by us for any reason other than for cause, as defined in the agreement, or his resignation for good reason, as defined in the agreement, we are generally required to (1) pay him his salary then in effect with any bonus which may have been accrued or which otherwise would have been granted by the board to him for a period of two years following such termination, (2) continue to provide employee benefits to Mr. Traub, and (3) accelerate vesting on any unvested options granted to him. Upon the termination of Mr. Traub’s employment by us following a change of control, as defined in the agreement, or Mr. Traub’s resignation for good reason following a change in control, we are required to (1) pay him a severance amount equal to two times his annual salary and bonus then in effect (or, if such termination or resignation for good reason is more than one year after such change of control, an amount equal to three times his salary and annual bonus then in effect), (2) accelerate vesting on any unvested options granted under the Plans (as defined in the agreement) and any shares of restricted stock purchased by Mr. Traub, and (3) to the extent such amounts are subject to excise taxes under Section 4999 of the Internal Revenue Code, provide a tax gross up to him for any additional amounts due. In connection with his employment agreement, Mr. Traub has agreed not to compete with, or solicit from, us during his term of employment and for one year thereafter and has agreed not to disclose or use our confidential information.

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

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

Compensation Committee Interlocks and Insider Participation

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

Compensation Committee Report on Executive Compensation

The Compensation Committee of the board of directors advises our board of directors on compensation matters, determines the compensation of the Chief Executive Officer, reviews and takes action on the recommendation of the Chief Executive Officer as to the appropriate compensation of other officers and key personnel and approves the grants of bonuses to officers and key personnel. The Compensation Committee is also responsible for the administration of our Stock Incentive Plans. This report of the Compensation Committee shall not be deemed incorporated by reference by any general statement

incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.

Chief Executive Officer Compensation

The Compensation Committee reviews the compensation arrangements for our Chief Executive Officer at least annually, typically in the fourth and/or first quarter of the fiscal year. In March 2005, we entered into an Amended and Restated Employment Agreement with Mr. Traub, which is described above. In determining whether to enter into the Amended and Restated Employment Agreement with Mr. Traub, and the compensation arrangements thereunder, the Compensation Committee considered the terms of his original employment agreement, as amended, his leadership of the Company, our financial and operational performance during the preceding year, competitive pay practices, and Mr. Traub’s individual performance and contributions to us. The Compensation Committee believes that Mr. Traub provides strong leadership to us and has been instrumental in improving our financial, operating and strategic position.

In making its compensation decisions with respect to Mr. Traub for 2004, the Compensation Committee exercised its discretion and judgment based on the above factors, relying on both qualitative and quantitative criteria and results. As part of its review of executive compensation, the Compensation Committee periodically reviews data on CEO compensation provided by independent compensation consultants. In fiscal 2004, Mr. Traub’s salary was $327,818. Mr. Traub was also paid the $25,000 quarterly bonus contemplated under his employment agreement and an additional year-end discretionary bonus of $90,000 based on the Compensation Committee’s evaluation of his performance for the year. Pursuant to the Amended and Restated Employment Agreement, Mr. Traub’s salary has been increased to $400,000 and the $25,000 quarterly bonus has been eliminated. Mr. Traub is also entitled to an annual bonus based on the Compensation Committee’s assessment of Mr. Traub’s and the Company’s performance against objectives to be reasonably determined by the Compensation Committee.

ABNH’S General Compensation Policy for Executive Officers

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

Factors. The principal factors (together with the factors specified above with respect to Mr. Traub) that the Compensation Committee considered with respect to each executive officer’s compensation for fiscal 2004 are summarized below. The Compensation Committee may, however, in its discretion, apply entirely different factors for executive compensation in future years.

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

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

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

Internal Revenue Code Limits on the Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally denies publicly-held corporations a federal income tax deduction for compensation exceeding $1,000,000 paid to the Chief Executive Officer or any of the four other highest paid executive officers, excluding performance-based compensation. Through December 31, 2003, this provision has not limited our ability to deduct executive compensation, but the Compensation Committee will continue to monitor the potential impact of Section 162(m) on our ability to deduct executive compensation. We believe that our compensation philosophy of paying our executive officers with competitive salaries, cash bonuses and long-term incentives, as described in this report, serves the best interest of ABNH and its stockholders.

THE COMPENSATION COMMITTEE

Fred J. Levin

Douglas A. Crane

Mark J. Bonney

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

The following table sets forth as of March 15, 2005 certain information regarding beneficial ownership of our common stock by (1) each person who is known to us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (2) each director, (3) each of the Named Executive Officers and (4) all directors and executive officers as a group. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated. The address of all persons listed is c/o American Bank Note Holographics, Inc., 399 Executive Boulevard, Elmsford, NY 10523, unless otherwise indicated.

Name and Address	Number (1)	Percentage (1)
Crane & Co., Inc	3,387,720	18.3	%
30 South Street
Dalton, MA 01226

Libra Advisors, LLC (2)	2,156,000	11.7	%
Libra Associates, LLC
Libra Fund, L.P.
Ranjan Tandon
909 Third Avenue, 29th Floor
New York, NY 10022

Levy, Harkins & Co., Inc. (3)	1,803,650	9.7	%
The Gracy Fund, L.P.
Edwin A. Levy
Michael J. Harkins
570 Lexington Avenue
New York, NY 10022

Kenneth H. Traub (4)	847,917	4.4	%

Salvatore F. D’Amato (5)	367,000	1.9	%

Alan Goldstein (6)	187,375	1.0	%

Fred J. Levin (7)	76,200		*

Douglas A. Crane (8)	3,408,520	18.4	%

Mark J. Bonney (9)	10,000		*

All executives officers and directors as a group (6 persons) (10)	4,897,012	24.5	%

* Less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities. At March 15, 2005, we had 18,517,907 shares of common stock outstanding. These percentages were calculated based on the total of shares of common stock outstanding and shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005, which are deemed outstanding for computing the percentage beneficially owned by the person holding such options.

(2) The information provided is based solely on a Schedule 13G, as amended, filed with the SEC on February 14, 2005. Libra Advisors, LLC, the general partner of Libra Fund, LP owns 1,832,516 shares of common stock. Libra Advisors, LLC is also the investment adviser of an offshore fund that owns 323,484 shares of our common stock. Libra Advisors, LLC has the power to vote and to direct the voting of and the power to dispose and direct the disposition of these 2,156,000 shares. Ranjon Tandon is the sole voting member and manager of Libra Advisors, LLC and may be deemed to have the power to vote and to direct the voting of and the power to dispose and direct the disposition of the 2,156,000 shares of common stock beneficially owned by Libra Advisors, LLC.

(3) The information provided is based solely on a Schedule 13G, as amended, filed with the SEC on January 24, 2005. Levy, Harkins & Co., Inc. (“LHC”) is the beneficial owner of 12,500 shares of common stock held in LHC’s pension and profit sharing plans and may be deemed the beneficial owner of 1,379,550 shares of common stock held in individual accounts of investment advisory clients of LHC. The Gracy Fund, L.P., a private investment company, is the beneficial owner of 294,500 of common stock. Edwin A. Levy and Michael J. Harkins are the sole shareholders of LHC and the sole general partners of the Gracy Fund, L.P. and have shared power to vote or direct the vote of, and dispose or to direct the disposition of the 1,686,550 shares beneficially owned or deemed beneficially owned by LHC and beneficially owned by The Gracy Fund, L.P. Mr. Levy, individually is the beneficial owner of 117,100 of common stock.

(4) Consists of 847,917 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005.

(5) Includes 365,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005.

(6) Consists of 187,375 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005.

(7) Includes 25,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005.

(8) Includes 20,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005 and 3,387,720 shares of common stock owned by Crane & Co., Inc., a privately owned corporation that Mr. Crane and his family own. Mr. Crane disclaims beneficial ownership of the shares held by Crane & Co., Inc.

(9) Consists of 10,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005.

(10) Includes 1,455,292 shares of common stock subject to options currently exercisable or exercisable within 60 days of March 15, 2005.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2004 with respect to shares of our common stock which may be issued under our equity compensation plans.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)

Equity compensation plans approved by security holders (1)	1,073,000	$	1.41	274,813

Equity compensation plans not approved by security holders (2)	1,656,000	$	2.63	177,000

Total:	2,729,000			451,813

(1) Represents our 2000 Stock Incentive Plan.

(2) Represents our 1998 Stock Incentive Plan.

Material Terms of the 1998 Plan

On July 20, 1998, we adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”). The 1998 Plan was adopted for the purpose of granting various stock incentives to officers, directors, employees and consultants of ABNH. The board of directors (or a committee appointed by the board of directors) has discretionary authority, subject to certain restrictions, to administer the 1998 Plan. The total number of shares reserved for issuance under the 1998 Plan are 1,863,000 shares of common stock. Options to purchase 1,656,000 shares of common stock were outstanding under the 1998 Plan at December 31, 2004. The exercise price of options granted under the 1998 Plan may not be less than 100% of the fair market value of the common stock on the date such option was granted. Options granted under the 1998 Plan generally become vested and exercisable for up to either 25% or 33 1/3% of the total optioned shares upon each succeeding anniversary of the date of grant. Generally, the unexercised portion of any option automatically terminates upon the termination of the optionee’s employment with us, unless otherwise determined by the board of directors; provided however, that any extension shall not extend beyond the expiration of the option, generally ten years. Upon a change in control, outstanding options will generally become fully vested.

Material Terms of the 2000 Plan

On August 4, 2000, we adopted the American Bank Note Holographics, Inc. 2000 Stock Incentive Plan (as amended, the “2000 Plan”), which was subsequently approved by our stockholders at our annual meeting on September 12, 2000. In August 2001, our stockholders approved an amendment to the 2000 Plan increasing the shares available for issuance thereunder by 600,000 to 1,350,000 shares. The 2000 Plan was adopted for the purpose of granting various stock incentives to officers, directors, employees and consultants of ABNH. The board of directors (or a committee appointed by the board of directors) has discretionary authority, subject to certain restrictions, to administer the 2000 Plan. The total number of shares reserved for issuance under the 2000 Plan is 1,350,000 shares of common stock. Options to purchase 1,073,000 shares of common stock were outstanding under the 2000 Plan at December 31, 2004. The exercise price of options granted under the 2000 Plan may not be less than 100% of the fair market value of the common stock on the date such option was granted. Options granted under the 2000 Plan generally become vested and exercisable for up to either 25% or 33 1/3% of the total optioned shares upon each succeeding anniversary of the date of grant. Generally, the unexercised portion of any option automatically terminates upon the termination of the optionee’s employment with us, unless otherwise determined by the board of directors; provided however, that any extension shall not extend beyond the expiration of the option, generally ten years. Upon a change in control, outstanding options will generally become fully vested.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

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

During 2000, we entered into agreements with Crane under which we rent factory space and lease employees for our facility in Dalton, MA. For the years ended December 31, 2004, 2003 and 2002, we paid Crane under these agreements $72,000 each year, for the rental of the factory space and $169,000, $162,000 and $151,000, respectively, for the leased employees.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Ernst & Young LLP, our independent registered public accounting firm for 2004 and 2003, were paid for audit and other services rendered as set forth below.

Audit Fees

2004 Fiscal Year
Audit Fees	$	245,400
Audit-Related Fees	—
Tax Fees	2,000
All Other Fees	—

Total Fees for the Year Ended December 31, 2004	$	247,400

2003 Fiscal Year
Audit Fees	$	245,700
Audit-Related Fees	—
Tax Fees	1,250
All Other Fees	—

Total Fees for the Year Ended December 31, 2003	$	246,950

Tax fees for 2004 and 2003 pertained to reviews of our federal and state tax returns.

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

Pre-Approval Policies

The Audit Committee pre-approves all audit and non-audit services provided by our independent registered public accounting firm prior to the engagement of the independent registered public accounting firm with respect to such services. With respect to audit services and permissible non-audit services not previously approved, the Audit Committee has authorized the Chairman of the Audit Committee to approve such audit services and permissible non-audit services, provided the Chairman informs the Audit Committee of such approval at its next regularly scheduled meeting. All “Audit Fees” and “Tax Fees” set forth above were pre-approved by the Audit Committee in accordance with its pre-approval policy.

Part IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

(1) Financial Statements

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

(2) Financial Statement Schedules

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

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

(3) Exhibits

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

3.1		Amended and Restated Certificate of Incorporation. (1)

3.2		Amended and Restated By-Laws. (1)

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

4.1		Form of Common Stock Certificate. (1)

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

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

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

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

10.2		Form of License Agreement. (1)

10.3		Form of Transitional Services Agreement. (1)

10.4		Form of Employee Benefits Allocation Agreement. (1)

10.5		Form of 1998 Stock Incentive Plan. (1)

10.6		Form of 2000 Stock Incentive Plan. (6)

10.7		Form of Defined Contribution Plan. (1)

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

10.9		Amended and Restated Employment Agreement, between Kenneth Traub and American Bank Note Holographics, Inc., dated March 29, 2005.

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

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

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

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

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

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

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

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

10.18		Form of Indemnification Agreement between the Company and its directors and officers. (12)

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

10.20		Sublease Agreement by and between APW North America Inc. and American Bank Note Holographics, Inc., dated December 14, 2004. (14)

10.21		Subordination, Non-Disturbance, Attornment, Renewal and Option to Purchase Agreement by and between American Bank Note Holographics, Inc. and More Applied Four (DE) LLC, dated December 14, 2004. (14)

10.22		Subordination, Non-Disturbance and Attornment Agreement by and between American Bank Note Holographics, Inc. and LaSalle Bank National Association, formerly known as LaSalle National Bank, as Trustee for Morgan Stanley Capital I Inc., Commercial Mortgage Securities Inc., Commercial Mortgage Pass-Through Certificates, Series 1999-WF1, dated December 14, 2004. (14)

10.23		Escrow Agreement by and between APW North America Inc., American Bank Note Holographics, Inc. and Chicago Title Insurance Company, dated December 14, 2004. (14)

23.1		Consent of Ernst & Young LLP.

31.1		Certification of Kenneth H. Traub pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Alan Goldstein pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Kenneth H. Traub pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

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

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

(2) Incorporated by reference from the Proxy Statement on Schedule 14A filed on July 3, 2001.

(3) Incorporated by reference from the Quarterly Report on Form 10-Q filed on August 14, 2000.

(4) Incorporated by reference from the Annual Report on Form 10-K for 2000.

(5) Incorporated by reference from the Registration Statement on Form S-8 (Registration No. 333-61602).

(6) Incorporated by reference from the Proxy Statement on Schedule 14A filed on August 11, 2000.

(7) Incorporated by reference from the Annual Report on Form 10-K for 1998.

(8) Incorporated by reference from the Annual Report on Form 10-K for 1999.

(9) Incorporated by reference from the Annual Report on Form 10-K for 2001.

(10) Incorporated by reference from the Quarterly Report on Form 10-Q filed on August 13, 2002.

(11) Incorporated by reference from the Annual Report on Form 10-K for 2002.

(12) Incorporated by reference from the Quarterly Report on Form 10-Q filed on August 12, 2003.

(13) Incorporated by reference from the Quarterly Report on Form 10-Q filed on November 13, 2003.

(14) Incorporated by reference from the Current Report on Form 8-K filed on December 20, 2004.

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

SIGNATURES

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

	AMERICAN BANK NOTE HOLOGRAPHICS, INC.


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

March 31, 2005

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

Signature	Title	Date

/s/ Kenneth H. Traub	President, Chief Executive Officer and	March 31, 2005
Kenneth H. Traub	Director (Principal Executive Officer)


/s/ Alan Goldstein	Chief Financial Officer	March 31, 2005
Alan Goldstein	(Principal Financial and Accounting Officer)


/s/ Salvatore F. D’Amato	Chairman of the Board	March 31, 2005
Salvatore F. D’Amato


/s/ Fred J. Levin	Director	March 31, 2005
Fred J. Levin


/s/ Douglas A. Crane	Director	March 31, 2005
Douglas A. Crane


/s/ Mark J. Bonney	Director	March 31, 2005
Mark J. Bonney

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

INDEX TO FINANCIAL STATEMENTS

ITEM 15(a)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS:
Balance Sheets, December 31, 2004 and 2003
Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002
Statements of Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Notes to Financial Statements
Schedule II - Valuation and Qualifying Accounts

Report of Independent Registered Public Accounting Firm

To the Board of Directors

American Bank Note Holographics, Inc.

We have audited the accompanying balance sheets of American Bank Note Holographics, Inc. (the “Company”) as of December 31, 2004 and 2003 and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2004 and 2003 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

	/s/ Ernst & Young LLP

New York, New York
March 10, 2005

F-2

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In Thousands, Except Share Data)

	2004			2003

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,357		$	7,340
Short-term investments	1,989			4,001
Accounts receivable, net of allowance for doubtful accounts of $180 and $180	3,889			3,174
Inventories	3,394			2,386
Deferred income taxes	983			981
Prepaid expenses	317			385
Other	—			150
Total current assets	21,929			18,417
MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS— Net of accumulated depreciation and amortization of $10,062 and $9,238	3,172			2,490
OTHER ASSETS	110			113
TOTAL ASSETS	$	25,211		$	21,020

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,519		$	687
Accrued expenses	2,065			1,627
Customer advances	69			49
Income taxes payable	1,058			—
Total current liabilities	4,711			2,363
DEFERRED INCOME TAXES	1,186			1,208
Total liabilities	5,897			3,571

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred Stock, authorized, 5,000,000 shares; no shares issued or outstanding	—			—
Common Stock, par value $0.01 per share, authorized, 40,000,000 shares; issued and outstanding, 18,515,907 shares and 18,483,720 shares	185			185
Additional paid-in capital	24,058			23,994
Accumulated deficit	(4,929		)	(6,730		)
Total stockholders’ equity	19,314			17,449
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	25,211		$	21,020

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

F-3

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Per Share Data)

	2004			2003			2002
REVENUE:
Sales	$	21,263		$	18,284		$	18,665
Royalty income	13			48			555
Total revenue	21,276			18,332			19,220

COSTS AND EXPENSES:
Cost of goods sold	9,161			8,279			8,926
Selling and administrative	7,070			6,518			7,136
Research and development	1,270			1,142			1,143
Depreciation and amortization	830			739			800
Facility consolidation	242			—			—
Impairment of goodwill and fixed assets	—			—			9,298
Total costs and expenses	18,573			16,678			27,303

Operating income (loss)	2,703			1,654			(8,083		)

OTHER INCOME:
Interest	121			97			113
Patent and other settlements	178			—			691
Total other income	299			97			804

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES	3,002			1,751			(7,279		)

PROVISION FOR INCOME TAXES	1,201			744			858

NET INCOME (LOSS)	$		1,801	$		1,007	$	(8,137	)

NET INCOME (LOSS) PER SHARE:
Basic and diluted	$		0.10	$		0.05	$	(0.44	)

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

F-4

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)

				Additional		Retained
	Common Stock			Paid-In		(Deficit)
	Shares	Amount		Capital		Earnings			Total
BALANCE, JANUARY 1, 2002	18,484	$	185	$	23,994	$	400		$	24,579
Net loss	—	—		—		(8,137		)	(8,137		)
BALANCE, DECEMBER 31, 2002	18,484	185		23,994		(7,737		)	16,442
Net income	—	—		—		1,007			1,007
BALANCE, DECEMBER 31, 2003	18,484	185		23,994		(6,730		)	17,449
Issuance of shares from exercise of stock options	32			64					64
Net income	—	—		—		1,801			1,801
BALANCE, DECEMBER 31, 2004	18,516	$	185	$	24,058	$	(4,929	)	$	19,314

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

F-5

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)

	2004			2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,801		$	1,007		$	(8,137	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	830			739			800
Deferred income taxes	(24		)	744			858
(Recovery) provision for doubtful accounts	—			(30		)	160
Impairment of goodwill and fixed assets	—			—			9,298
Changes in operating assets and liabilities:
Accounts receivable	(715		)	517			(771		)
Inventories	(1,008		)	155			726
Prepaid expenses and other	215			486			(140		)
Accounts payable and accrued expenses	1,270			(455		)	(1,138		)
Customer advances	20			(40		)	(11		)
Income taxes payable	1,058			—			—
Net cash provided by operating activities	3,447			3,123			1,645

CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments	2,012			(4,001		)	—
Capital expenditures	(1,506		)	(441		)	(354		)
Net cash provided by (used in) investing activities	506			(4,442		)	(354		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	64			—			—
Net cash provided by financing activities	64			—			—

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	4,017			(1,319		)	1,291
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	7,340			8,659			7,368
CASH AND CASH EQUIVALENTS, END OF YEAR	$	11,357		$	7,340		$	8,659

SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid	$	184		$	5		$	2

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

F-6

AMERICAN BANK NOTE HOLOGRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

Short-Term Investments — At December 31, 2004, short-term investments consisted of a U.S. government debt instrument which matured February 22, 2005. At December 31, 2003, short-term investments consisted of U.S. government debt instruments that matured in January and February 2004. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designations as of each balance sheet date. This investment is classified as held to maturity and is carried at its amortized cost.

Concentrations of Credit Risk — A significant portion of the Company’s accounts receivable are due from credit card issuers and related credit card manufacturers located throughout the United States and Europe. At December 31, 2004 each of three customers accounted for 28%, 19% and 11%, respectively, of the Company’s accounts receivable and 35%, 9% and 6%, respectively, of its sales for the year then ended. At December 31, 2003 and for the year then ended one customer accounted for 30% of the Company’s accounts receivable and 33% of its sales and a second customer accounted for 30% of the Company’s accounts receivable and 9% of its sales. The Company establishes its credit policies based on an ongoing evaluation of its customers’ creditworthiness and competitive market conditions and does not require collateral.

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

Revenue Recognition — The Company recognizes revenue in accordance with the provisions of the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” Specifically, sales and the related cost of goods sold are generally recognized at the latter of the time of shipment or when title passes to customers. In some situations, the Company has shipped product where the sale is contingent upon the customers’ use of the product. In these situations, the Company does not recognize sales upon product shipment, but rather when the buyer of the product informs the Company that the product has been used. Additionally, pursuant to terms with a certain

F-7

customer, completed items are stored on behalf of the customer at the Company’s on-site secured facility and, in that instance, sales are recognized when all of the following have occurred: the customer has ordered the goods, the manufacturing process is complete, the goods have been transferred to the on-site secured facility and are ready for shipment, the risk of ownership has passed to the customer and the customer has been billed for the order.

Shipping and handling amounts billed to customers are included in revenues and shipping and handling costs are included in selling and administrative expenses and amounted to $433,000, $358,000, and $373,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

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

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

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

Long-Lived Assets — Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

During the year ended December 31, 2002, the Company recorded a charge for the impairment of long-lived assets of $1.9 million to write off fixed assets consisting of master plates which will no longer be used. The impairment charge represents the full impairment of this long-lived asset. This asset arose through purchase accounting by the Company’s Former Parent, as it related to the Company, in connection with the Former Parent’s merger in 1990. There were no impairments of long-lived assets in 2004 or 2003.

Goodwill — In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which provides that goodwill should not be amortized but instead tested for impairment on an annual basis, and which was adopted by the Company on January 1, 2002. The impairment testing is performed in two steps: (i) the determination of impairment, based on the fair value of the Company compared with its carrying value, and (ii) if there is an indication of impairment, this step measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. In accordance with SFAS No. 142 the Company completed the transitional impairment test during the quarter ended March 31, 2002, which testing indicated that no adjustment was required upon the adoption of the pronouncement. The Company performed the annual test for impairment required by SFAS No. 142 during the year ended December 31, 2002. At that time the fair value (based on quoted market prices) of the Company was found to be less than its carrying amount and as a result, the Company recorded a $7.4 million impairment charge for the year ended December 31, 2002. This charge represents the full impairment of the goodwill that was on the Company’s balance sheet prior to December 31, 2002. This asset arose through purchase accounting by the Company’s Former Parent, as it related to the Company, in connection with the Former Parent’s merger in 1990.

F-8

Warranty Costs — The Company provides for warranty costs in amounts it estimates will be needed to cover future warranty obligations for products sold. Estimates of warranty costs are based on historical experience and are periodically reviewed and adjusted, when necessary. The Company’s product warranty provision is included in accrued expenses in the accompanying balance sheets. Changes in the Company’s warranty provision during the years ended December 31, 2004, 2003 and 2002 are as follows:

	2004			2003			2002
	(In Thousands)
Balance at beginning of year	$	510		$	605		$	1,011
Warranties provided	160			160			410
Settlements made	(160		)	(255		)	(816		)
Balance at end of year	$	510		$	510		$	605

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

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

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

Had compensation cost for the Company’s outstanding stock options been determined based on the fair value at the grant dates for options consistent with SFAS No. 123, the Company’s net income (loss) and basic and diluted net income (loss) per share would have differed as reflected by the pro forma amounts indicated below:

	2004		2003		2002
	(In Thousands, Except Per Share Data)
Net income (loss), as reported	$	1,801	$	1,007	$	(8,137	)

Add: Non-cash employee compensation, as reported	—		—		—
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of taxes	77		81		346
Pro forma, net income (loss)	$	1,724	$	926	$	(8,483	)

Basic and diluted net income (loss) per share, as reported	$	0.10	$	0.05	$	(0.44	)
Basic and diluted net income (loss) per share, pro forma	$	0.09	$	0.05	$	(0.46	)

F-9

Basic and Diluted Net Income (Loss) per Share — Basic net income (loss) per share is computed based on the weighted average number of outstanding shares of common stock. The basic weighted average number of shares outstanding were 18,488,783 for the year ended December 31, 2004 and 18,483,720 for each of the years ended December 31, 2003 and 2002. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding and dilutive potential shares of common stock. For the years ended December 31, 2004 and 2003, the diluted number of weighted shares outstanding was 18,906,897 and 18,525,914, respectively, which includes dilutive stock options of 418,114 and 42,194, respectively. For the year ended December 31, 2002, the diluted weighted average number of shares outstanding were 18,483,720 because the effect of options to purchase 2,318,500 shares of the Company’s common stock were excluded from the calculation of diluted net income (loss) per share because the effect of inclusion of such options would have been antidilutive. For the year ended December 31, 2002, the effect of warrants to purchase 863,647 shares of the Company’s common stock were excluded from the calculation of diluted net income (loss) per share because the effect of inclusion of such warrants would have been antidilutive. The warrants expired on June 18, 2003.

Business Concentration Risks — Sales to MasterCard were approximately 35%, 33% and 41% of sales for the years ended December 31, 2004, 2003 and 2002, respectively. At December 31, 2004 and 2003, accounts receivable from MasterCard approximated $1.1 million and $1.0 million, respectively. The Company entered into an agreement with MasterCard dated February 28, 2003, which replaced the agreement dated February 1, 1996, as amended. The Company and MasterCard entered into an amendment to this agreement on September 29, 2003, in which MasterCard retained the Company to produce a new hologram for the Debit MasterCard and extended the agreement to February 28, 2011, subject to automatic renewal if not terminated by either party. The agreement also provides that MasterCard will receive three sequential price reductions of approximately 3% each, effective at the beginning of 2003, 2004 and 2006. The Company is currently the exclusive supplier to MasterCard. The loss of all or a substantial portion of the sales to MasterCard, however, would have a material adverse effect on the financial position, results of operations and cash flows of the Company.

Sales to manufacturers of VISA credit cards (approximately 60 customers) were approximately 31%, 30% and 26% of sales for the years ended December 31, 2004, 2003 and 2002, respectively. The loss of a substantial portion of the sales to these customers would have a material adverse effect on the financial position, results of operations and cash flows of the Company. At December 31, 2004 and 2003, accounts receivable from these customers approximated $1.2 million and $1.3 million, respectively.

The Company has historically purchased certain key materials used in the manufacture of its holograms from third party suppliers. Any problems that occur with respect to the delivery, quality or cost of any such materials could have a material adverse effect on the financial position, results of operations and cash flows of the Company.

Export Sales — Export sales were 21%, 28% and 27% of sales for the years ended December 31, 2004, 2003 and 2002, respectively. All export sales are denominated in United States dollars. At each of December 31, 2004 and 2003, accounts receivable from these customers approximated $0.5 million.

Fair Value of Financial Instruments – The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivables, accounts payable and accrued expenses. The carrying amounts reported in the balance sheets approximate their fair value at both December 31, 2004 and 2003.

Reclassifications — Certain prior year amounts have been reclassified to conform with the current year’s presentation.

F-10

Impact of Recently Issued Accounting Standards — In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R) (FAS 123R), Share-Based Payment, amending FAS 123 and requiring that all share-based payments to employees be recognized in the financial statements. Generally, the approach to accounting for share-based payments in FAS 123R is similar to the approach described in FAS 123, however, pro forma footnote disclosure will no longer be an alternative to financial statement recognition. This statement becomes effective in the first interim or annual period beginning after June 15, 2005. The Company expects to adopt the new statement effective July 1, 2005, using the modified-prospective transition method described in the statement. Under this method, the Company will be required to recognize compensation expense over the remaining vesting period for all awards that remain unvested as of July 1, 2005. As permitted by FAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. The Company believes based on the level of share-based payments previously granted and unvested, that the adoption of FAS 123R will not have a material effect on its financial position, results of operations or cashflows, however, the level of future equity based compensation grants could have a material effect on amounts recorded in our statement of operations.

In November 2004, the Financial Accounting Standards Board issued Statement No. 151 (FAS 151), Inventory costs, an amendment of ARB No. 43, Chapter 4. FAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges. In addition, FAS 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company currently believes that the adoption of FAS 151 will not have a material impact on its financial statements.

2. INVENTORIES

	December 31,
	2004		2003
	(In Thousands)
Finished goods	$	1,749	$	800
Finished goods on consignment with customers	231		417
Work in process	1,044		764
Raw materials	370		405
Inventories	$	3,394	$	2,386

3. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

	December 31,
	2004			2003
	(In Thousands)
Machinery and equipment	$	11,834		$	10,583
Leasehold improvements	1,400			1,145
	13,234			11,728
Accumulated depreciation and amortization	10,062			9,238
Machinery, equipment and leasehold improvements, net	$		3,172	$	2,490

Depreciation and amortization of machinery and equipment and leasehold improvements for the years ended December 31, 2004, 2003 and 2002 were $824,000, $733,000 and $794,000, respectively.

F-11

4. ACCRUED EXPENSES

	December 31,
	2004		2003
	(In Thousands)
Accrued contract liability	$	357	$	357
Warranty reserves	510		510
Salaries and wages	642		527
Accrued professional fees	121		63
Facility consolidation	190		—
Other	245		170
	$	2,065	$	1,627

5. INCOME TAXES

Provision for income taxes are as follows:

	For the Years Ended December 31,
	2004			2003		2002
	(In Thousands)
Current:
Federal	$	962		$	—	$	—
State and local	263			—		—
	1,225			—		—
Deferred:
Federal	(19		)	573		655
State and local	(5		)	171		203
	(24		)	744		858
	$	1,201		$	744	$	858

A reconciliation of the taxes on income in 2004, 2003 and 2002 is as follows:

	For the Years Ended December 31,
	2004			2003		2002
	(In Thousands)
Tax at statutory rate	$	1,051		$	613	$	(2,475	)
Amortization and impairment of nondeductible goodwill and long-lived assets	—			—		3,161
State and local taxes, net of Federal benefit	167			111		133
Other	(17		)	20		39
	$	1,201		$	744	$	858

F-12

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

	December 31,
	2004				2003
	(In Thousands)
Current deferred tax assets:
Uniform capitalization of inventory	$		204		$	230
Bad debt reserve	72				76
Warranty reserve	204				214
Inventory obsolescence	221				173
Accrued vacation	87				83
Other liabilities	195				205
Net current deferred tax asset	$		983		$	981
Non current deferred tax asset:
Net operating loss carryforward	$		—		$	108
	—				108
Non current deferred tax liabilities:
Excess tax over book depreciation	(1,186			)	(1,316			)

Net non current deferred tax liability	$	(1,186		)	$		(1,208	)

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

6. STOCKHOLDERS’ EQUITY

On June 11, 1998, the Company increased its authorized common stock to 30,000,000 shares and its authorized preferred stock to 5,000,000 shares. On July 20, 1998, the Former Parent completed the sale of 13,636,000 shares of the Company’s common stock in a public offering (the “Offering”), representing its entire investment in the Company. During 2001 and 2002 the Company issued and distributed 1,460,000 shares of its common stock as well as warrants to purchase 863,647 shares of the Company’s common stock, at an exercise price of $6.00 per share in settlement of the class action lawsuit filed against the Company in 1999. The warrants expired on June 18, 2003. None of the warrants were exercised. On August 10, 2001, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Articles of Incorporation increasing the number of authorized shares of its common stock to 40,000,000 shares.

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

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

During 2000, the Company entered into additional agreements with Crane under which the Company rents factory space and leases employees for the Company’s facility in Dalton, MA. For the years ended December 31, 2004, 2003 and 2002, the Company paid Crane under these agreements, $72,000 each year,

F-13

for the rental of factory space and $169,000, $162,000 and $151,000, respectively, for the leased employees, which are primarily included in cost of goods sold in the accompanying statements of operations.

7. FACILITY CONSOLIDATION

On December 14, 2004, the Company entered into certain agreements to lease a new 134,000 square foot facility located in Robbinsville, New Jersey which will be the future site of the Company’s primary operations. The Company will consolidate its existing office and manufacturing facilities in Elmsford, New York and Huntingdon Valley, Pennsylvania into the new facility. The Company also intends to expand and supplement its manufacturing operations in connection with this consolidation.

The lease is effective as of December 14, 2004 and expires on May 31, 2017. Under the agreements the Company has the right to renew the lease for three consecutive five year terms and also has an option to purchase the building.

The Company currently expects to incur expenses totaling approximately $4.2 million, of which $0.2 million was incurred in 2004, associated with its existing leases, vacating its current facilities, relocating and terminating certain employees, moving equipment and other related expenses which will be substantially complete by the third quarter of 2005. The expenses incurred in 2004 are classified as facility consolidation expenses on the accompanying statement of operations. Approximately $2.9 million of these expenses will be paid in cash ratably through the fourth quarter of 2007 and approximately $1.3 million of these expenses will be paid in cash as incurred through the fourth quarter of 2005.

8. SETTLEMENT AGREEMENT

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

9. STOCK INCENTIVE PLANS

On August 4, 2000, the Company adopted the American Bank Note Holographics, Inc. 2000 Stock Incentive Plan (as amended, the “2000 Plan”), which was subsequently approved by the Company’s stockholders at the annual meeting on September 12, 2000. On July 20, 1998, the Company adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”, and collectively with the 2000 Plan, the “Plans”). The Plans were adopted for the purpose of granting various stock incentives to officers, directors, employees and consultants of the Company. The Board of Directors (or a committee appointed by the Board of Directors) has discretionary authority, subject to certain restrictions, to administer the Plans. The total number of shares reserved for issuance under the Plans are 3,213,000 shares of common stock. Options to purchase 451,813 shares of common stock are available for future grants at December 31, 2004

F-14

under the Plans. The exercise price of options granted under the Plans may not be less than the fair market value of the common stock on the date such options were granted. Options granted under the Plans generally become vested and exercisable for up to 25% or 33 1/3% of the total optioned shares upon each succeeding anniversary of the date of grant. Generally, the unexercised portion of any option automatically terminates upon the termination of the optionee’s employment with the Company, unless otherwise determined by the Board of Directors; provided however, that any extension shall not extend beyond the expiration of the option, generally ten years. Upon a change in control, outstanding options will generally become fully vested.

A summary of the status of the Company’s outstanding stock options as of December 31, 2004, 2003 and 2002 and changes during the years then ended follows:

	2004					2003					2002
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of year	2,838,000			$	2.19	2,318,500			$	2.55	2,509,500			$	2.58
Granted	—			—		586,000			$	0.91	23,000			$	1.02
Exercised	(32,187		)	$	2.01	—			—		—			—
Forfeited	(76,813		)	$	2.10	(66,500		)	$	3.61	(214,000		)	$	2.76
Outstanding, end of year	2,729,000			$	2.15	2,838,000			$	2.19	2,318,500			$	2.55
Exercisable, end of year	2,380,578			$	2.32	2,170,251			$	2.54	1,944,124			$	2.67
Weighted average fair value of options granted during the year	$	—				$	0.78				$	0.84

The following table summarizes information concerning outstanding and exercisable options at December 31, 2004:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Options Exercisable	Weighted Average Exercise Price
$0.68 - $1.18	583,000	8.53	$	0.95	244,578	$	0.95
$1.67 - $1.94	855,000	5.53	$	1.86	855,000	$	1.86
$2.03 - $2.50	1,171,500	4.82	$	2.31	1,161,500	$	2.32
$8.50	119,500	3.55	$	8.50	119,500	$	8.50
$0.68 - $8.50	2,729,000	5.78	$	2.15	2,380,578	$	2.32

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

	2003	2002
Expected volatility	62.30%	63.10%
Risk-free interest rate	3.15% to 4.25%	3.63% to 4.02%
Dividend yield	—	—
Expected life	7.5 years	7.5 years

F-15

10. EMPLOYEE BENEFITS PLANS

Retirement Plans — On October 1, 1999, the Company implemented defined contribution plans for its employees. Aggregate contributions to such plans, which have been charged to the Company’s operations, were approximately $59,000, $56,000 and $51,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

11. COMMITMENTS AND CONTINGENCIES

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

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

Leases — The Company has long-term operating leases for offices, manufacturing facilities and equipment, which expire through 2017. The Company has three five year renewal options on its Robbinsville location, which provides for renewal rents based upon the adjusted fair market rental value, as defined in the lease agreement.

Rental expense was approximately $1.2 million, $1.3 million and $1.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.

At December 31, 2004, future minimum lease payments under noncancelable operating leases, expiring through 2017, are as follows: $1.3 million in 2005; $1.5 million in 2006; $1.4 million in 2007; $0.6 million in 2008; $0.6 million in 2009 and $4.9 million, thereafter.

Employment Agreements — The Company entered into employment agreements with certain of its current officers, which provide for, among other matters, minimum compensation of approximately $0.5 million in 2005 and $0.4 million in 2006. The agreements also provide for bonuses. In connection with these agreements, the Company granted options to acquire 1,553,000 shares of its common stock from February 1999 through December 2003, at prices ranging from $0.85 to $2.50 per share, representing the fair market value of the Company’s common stock on the dates of grants.

F-16

Schedule II

AMERICAN BANK NOTE HOLOGRAPHICS, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

			Additions
Description	Balance, Beginning of Year		Charged to Costs and Expenses			Charged to Other Accounts	Deductions			Balance, End of Year
	(In Thousands)
Year ended December 31, 2004:
Allowance for doubtful accounts (deducted from accounts receivable)	$	180	$	23			$	23	(1)	$	180
Allowance for obsolescence (deducted from inventory)	$	411	$	216			$	75	(2)	$	552

Year ended December 31, 2003:
Allowance for doubtful accounts (deducted from accounts receivable)	$	210	$	(17	)		$	13	(1)	$	180
Allowance for obsolescence (deducted from inventory)	$	1,171	$	124			$	884	(2)	$	411

Year ended December 31, 2002:
Allowance for doubtful accounts (deducted from accounts receivable)	$	75	$	160			$	25	(1)	$	210
Allowance for obsolescence (deducted from inventory)	$	725	$	710			$	264	(2)	$	1,171

(1) Accounts deemed to be uncollectible.

(2) Destruction of obsolete inventory.

S-1