Form 10-Q

(Former name, former address and former fiscal year, if changed since last report)

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 for the past 90 days. Yes x No ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate number of shares of common stock, $.01 par value, outstanding on October 25, 2007 was 19,415,638.

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to 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, stock-based compensation, inventories, and taxes. These estimates and assumptions are based on historical results and trends as well as our forecasts as to how these estimates and assumptions might change in the future.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments that are normal and recurring and are considered necessary for a fair statement have been included. Operating results for the nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all disclosures required by accounting principles generally accepted in the United States of America.

For further information, refer to the financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2006, as filed with the United States Securities and Exchange Commission (“SEC”).

Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.”

The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding:

The diluted earnings per share calculations exclude the effect of stock options when the options’ exercise prices exceed the average market price of the common shares during the period. For the three month period ended September 30, 2007 and 2006, the numbers of stock options not included in the computations were 365,000 and 539,000, respectively. For the nine-month period ended September 30, 2007 and 2006, the numbers of stock options not included in the computations were 599,000 and 538,000, respectively. These stock options were outstanding at the end of each of the respective periods.

Sales to MasterCard were approximately 35.5% and 41.2% of sales for the three months ended September 30, 2007 and 2006, respectively and were approximately 35.2% and 35.9% of sales for the nine months ended September 30, 2007 and 2006, respectively. We have an agreement with MasterCard, as amended, pursuant to which we are the exclusive supplier of MasterCard holograms and holographic magnetic stripes, HoloMag™. In the quarter ended September 30, 2005, MasterCard advised its member financial institutions around the world that it will allow them to choose among card designs that incorporate either the traditional hot stamp patch hologram or HoloMag, both of which are supplied by us. There were no sales of HoloMag to MasterCard in 2007. Sales of HoloMag to MasterCard were not significant in the three months ended September 30, 2006 and amounted to approximately $0.7 million in the nine months ended September 30, 2006. On February 9, 2007, MasterCard advised its certified card manufacturers and us that effective immediately they were no longer offering the first generation HoloMag product on newly issued cards.

On October 23, 2007 MasterCard notified us that they are seeking reimbursement from us for certain costs associated with the previously-disclosed suspension by MasterCard of its HoloMag program. MasterCard has stated that those costs “now exceed $1.9 million.” We are reviewing MasterCard’s claim, and are unable to quantify at this time the amount of reimbursements, if any, that might ultimately be paid to MasterCard. At September 30, 2007 and December 31, 2006, accounts receivable from this customer totaled $2.0 million and $1.5 million, respectively.

If we were to lose a substantial portion of our business with MasterCard 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 MasterCard or if we experience delays or cancellations of orders from MasterCard, our business, operating results and financial performance will be materially and adversely affected.

Sales to manufacturers of VISA transaction cards were approximately 19.4% and 27.9% of sales for the three months ended September 30, 2007 and 2006, respectively and were approximately 20.9% and 33.7% of sales for the nine months ended September 30, 2007 and 2006, respectively. Currently we are an authorized supplier of the VISA Dove and Mini Dove hot stamp holograms to manufacturers of VISA brand transaction cards.

We entered into an agreement dated April 8, 2005 with VISA pursuant to which we were authorized to supply holographic magnetic stripe tape (“HMS”) bearing the trade or service marks of VISA (“HMS Agreement”). On March 14, 2006, we were informed by VISA that as a result of a small number of incidents in which certain payment card terminals had been affected by electro-static discharge (“ESD”) carried on cards incorporating HMS, VISA was effectively ceasing the HMS program. At that time, VISA notified us of its position that “a remediation program for impacted stakeholders may be necessary” and that VISA would seek indemnification from us for such costs and/or claims.

We entered into an agreement effective as of July 10, 2007 (the “2007 Agreement”) with VISA to resolve claims of damages by both VISA and us arising from the HMS Agreement and with a view of preserving the business relationship between ABNH and VISA. Pursuant to the 2007 Agreement, ABNH and VISA agreed to a mutual release of all claims arising from or related to the HMS Agreement. Neither party made a payment to the other in connection with the 2007 Agreement.

The 2007 Agreement also provides that for as long as VISA continues to permit or require the Dove or Mini Dove on VISA cards, we intend to continue to supply the Dove and the Mini Dove holograms to VISA-approved card manufacturers, and VISA intends to continue to authorize us as a supplier of the Dove and Mini Dove, provided that we continue to meet VISA’s specifications and requirements. The 2007 Agreement further specifies that in the event that VISA decides to replace the Dove or Mini Dove with a different hologram or similar device (“New Device”) for future VISA card designs, if applicable, VISA intends to consider us as a supplier of the New Device.

The decline in sales to VISA in the three and nine months ended September 30, 2007 as compared to the year earlier periods was principally due to the termination of the HMS Agreement. Sales of VISA products to VISA authorized card manufacturers in the three and nine months ended September 30, 2007 and 2006, respectively were as follows:

If we were to lose a substantial portion of our hot stamp hologram business with 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 VISA authorized card manufactures or if we experience delays or cancellations of orders from card manufacturers, our business and financial performance will be materially and adversely affected. Accounts receivable from manufacturers of VISA transaction cards approximated $1.5 million and $2.4 million at September 30, 2007 and December 31, 2006, respectively.

Shipping and handling amounts billed to customers are included in sales and amounted to $0.2 million in each of the three months ended September 30, 2007 and 2006 and $0.5 million and $0.7 million for the nine months ended September 30, 2007 and 2006, respectively. Shipping and handling costs are included in selling and administrative expenses.

We purchase certain key materials used in the manufacture of our products, and subcontract certain production functions or products from third parties some of which are sole suppliers. In some cases, we do not have supply contracts with our suppliers and operate on a purchase order basis. 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. Should we become unable to obtain key product components or to have certain processes performed on our behalf it 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.

Beginning January 2006, we were required to record the expense of share-based payment transactions pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payments (SFAS 123R). Accordingly, in all periods presented herein, we have used the fair value method of valuing stock based compensation awards and computing stock based compensation expense.

Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, was issued in July 2006 and interprets FASB Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. In January 2007, we had $0.6 million of unrecognized tax benefits of which $0.5 million would affect our effective tax rate. At September 30, 2007, we had $0.2 million of unrecognized tax benefits following the reversal of $0.4 million in the three months ended September 30, 2007, as the statute of limitation expired on certain tax matters. At the date of adoption of FIN 48 we had accrued interest and penalties related to uncertain tax positions amounting to $0.2 million. In the three months ended September 30, 2007 we reduced this amount by $0.1 million, net of interest and penalties recorded during 2007, principally as a result of the reduction in the unrecognized tax benefits. Interest and penalties are recorded in income tax expense in our Statement of Operations. As of September 30, 2007 the tax years 2004 through 2006 remain open to examination by the major taxing jurisdictions (United States and the states of New York, New Jersey and Pennsylvania) to which we are subject.

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We expect the adoption of SFAS No. 157 will not have a material impact on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We expect the adoption of SFAS No. 159 will not have a material impact on our financial position and results of operations.

During the period ended September 30, 2007, following the successful introduction of Generation 2 HoloMag, we wrote off all remaining Generation 1 HoloMag inventory reducing finished goods inventory and the inventory reserve by approximately $500,000.

We provide for warranty costs in amounts we estimate 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. Our product warranty provision is included in accrued expenses in the accompanying balance sheets. Changes in our warranty provision are as follows:

During the three month period ended September 30, 2007, as a result of improved returns experience, we reduced the reserve for potential warranty claims by $175,000. Also impacting the nine months ended September 30, 2007 was the reversal of approximately $350,000 of warranty reserves related to a specific sales program as the period of potential claims expired at June 30, 2007.

During the three months ended September 30, 2007 we identified an error in our financial statements for the period ended December 31, 1999. This error related to a reserve in accrued liabilities for a government contract that we concluded prior to 1999. As we reported in our Form 10-Q for the period ended June 30, 2007, we were working towards closing the contract and anticipated reversing the reserve once closed. During the quarter ended September 30,

2007, as we prepared for this process, we subsequently discovered various documents that support the conclusion that all contract related issues were actually resolved in the period prior to recording the reserve in 1999. Accordingly, during the three months ended September 30, 2007 we reversed the reserve totaling $0.4 million from accrued expenses and reduced cost of goods sold. As a result of the reserve reversal we increased operating income and net income by $0.4 million and $0.2 million, respectively in each of the three and nine months ended September 30, 2007. We do not believe that these adjustments are quantitatively or qualitatively material to the results of the three and nine month periods ended September 30, 2007, our projected results for the current year or to any prior years’ earnings, earnings trends or financial statement line items. As a result, we have not adjusted any prior period amounts.

We lease a 134,000 square foot modern manufacturing and office building in Robbinsville, New Jersey. During 2005 and 2006 we consolidated our operations that were 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 Robbinsville facility. During 2006 we closed our 2,500 square foot facility in Dalton, Massachusetts and re-opened the Huntingdon Valley facility for secure storage.

The following table illustrates the liability balance and activity related to the relocation and consolidation in the quarter and nine months ended September 30, 2007 and 2006.

The following table illustrates the costs incurred in the relocation and consolidation of facilities from the beginning of the consolidation program in 2004 through December 31, 2006 and anticipated in 2007 when all cash payments and expenses are expected to be completed.

From time to time we 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 the opinion of our management, could have a material impact on our financial position, results of operations or cash flows.

The following discussion and analysis should be read in conjunction with our unaudited financial statements, including the notes thereto, appearing elsewhere in this report.

American Bank Note Holographics, Inc. (“ABNH” or the “Company”) originates, produces, markets and sells secure holograms and products incorporating secure holograms. Our products are used primarily in security applications including authentication of transaction cards, identity documents, value documents and various consumer products. We operate in one reportable industry segment. 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 sold to over 200 companies worldwide, including MasterCard, VISA, American Express, Discover, Diners Club, Citicorp, Sears, Nordstrom, Janssen-Cilag, Eli Lilly, Genomma, Quaker State, Roshfrans, Sony, Oki Data, Raytheon, Nike, Reebok and Prince as well as the United States government and other governments and companies. We also produce non-secure holograms for design and promotional applications.

A significant portion of our business is derived from orders placed by certain transaction card companies, including MasterCard and manufacturers of VISA brand transaction cards and variations in the timing of such orders can cause significant fluctuations in our sales. Several thousand banks worldwide issue VISA and MasterCard branded cards that incorporate our holograms.

We purchase certain key materials used in the manufacture of our products, and subcontract certain production functions or products from third parties some of which are sole suppliers. In some cases, we do not have supply contracts with our suppliers, and operate on a purchase order basis. 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. Should we become unable to obtain key product components or to have certain processes performed on our behalf it 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 flow.

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 our products 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). Cost of goods sold also includes the cost of certain processes that we outsource to third parties. As a result, costs of goods sold are affected by product mix, manufacturing yields, supplier prices and changes in the cost of raw materials and labor.

Selling and administrative expenses primarily consist of salaries, benefits and commissions for our corporate, sales, customer service, marketing and administrative personnel, marketing and promotion expenses, legal and accounting expenses and expenses associated with being a public company. We also include the cost of shipping and handling product deliveries that are billed to customers in selling and administrative expenses which amounted to $0.2 million for each of the three months ended September 30, 2007 and 2006, respectively and $0.7 million and $0.9 million for the nine months ended September 30, 2007 and 2006, respectively.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2007 TO THREE MONTHS ENDED SEPTEMBER 30, 2006

Sales. Sales in the three months ended September 30, 2007 increased by $1.9 million, or 29%, from $6.6 million in the three months ended September 30, 2006 to $8.5 million in the three month ended September 30, 2007. The increase was primarily due to increased sales to the transaction card market of approximately $1.8 million, including sales of our recently introduced Generation two HoloMag^™, HoloStripe^™ and HoloCard^™. We sell each of these products at substantially higher price points compared to our traditional hot stamp hologram products for the transaction card market. Continued growth in transaction card issuance also contributed to the increase. We also experienced sales growth in the product authentication market with existing customers in pharmaceuticals and a consumer brand licensing program. These increases were partially offset by a slight decrease in sales to the identity documents market primarily due to the timing of orders from international customers.

Cost of Goods Sold, excluding Depreciation and Amortization. Cost of goods sold, excluding depreciation and amortization, remained essentially the same at $3.3 million in each of three months ended September 30, 2006 and 2007, respectively despite the $1.9 million increase in sales in the most recent quarter. Cost of goods sold in the quarter benefited from lower fixed manufacturing overhead due to the effect of cost reductions associated with the consolidation of our facilities in Robbinsville, New Jersey and related post-consolidation improvements in efficiency resulting in a reduced cost structure. During the three months ended September 30, 2007 we identified an error in our financial statements for the period ended December 31, 1999. This error related to a reserve in accrued liabilities for a government contract that we concluded prior to 1999. As we reported in our Form 10-Q for the period ended June 30, 2007 we were working towards closing the contract and anticipated reversing the reserve once closed. During the quarter ended September 30, 2007, as we prepared for this process, we discovered various documents that support the conclusion that all contract related issues were actually resolved in the period prior to recording the reserve in 1999. Accordingly, during the three months ended September 30, 2007 we reversed the reserve totaling $0.4 million from accrued expenses and cost of goods sold. Additionally, as a result of improved returns experience, we reduced our warranty reserve by $0.2 million in the three months ended September 30, 2007. Partially offsetting these reductions were approximately $0.5 million of costs related to the analysis and correction of certain manufacturing process issues resulting from the transition to new materials which we use in our manufacturing process. We believe that costs relating to this transition will be significantly lower in future periods. As a result of these factors, cost of goods sold excluding depreciation and amortization as a percentage of sales, decreased from 50.3% in the three months ended September 30, 2006 to 39.7% in the three months ended September 30, 2007.

Selling and Administrative Expenses. Selling and administrative expenses totaled $2.3 million and $1.9 million in the three months ended September 30, 2007 and 2006, respectively. Expense increases in the current quarter as compared to the year earlier period included additional public company costs incurred for documentation and testing of internal controls for compliance with section 404 of the Sarbanes-Oxley Act of 2002, costs associated with our review of strategic alternatives and higher legal costs. Other increases included higher sales and marketing wage and salary costs and higher sales commissions. Nearly offsetting these increased expenses were decreases in administrative salaries and wages due to lower average headcount and lower accounting fees. Stock based

compensation expense of $0.2 million was substantially the same in the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. As a percentage of sales, selling and administrative expenses decreased from 29.7% in 2006 to 27.0% in 2007. The decrease in expenses as a percentage of sales was due to the relatively small increase in expenses in relation to the significant increase in sales volume in the current period.

Research and Development. Research and development expenses were $0.4 million in three months ended September 30, 2006 and in three months ended September 30, 2007. We recorded approximately $0.1 million of stock-based compensation expense in the three months ended September 30, 2007 and 2006, respectively.

Depreciation and Amortization. Depreciation and amortization expense increased from $0.1 million to $0.2 million in the three months ended September 30, 2006 and 2007. In the three months ended September 30, 2006 we recorded an adjustment to depreciation expense to reflect a negotiated settlement of future liabilities at our Elmsford, New York facility in which we reduced our restoration obligation by $0.1 million.

Facility Consolidation Expenses. Facility consolidation expenses relating to the closure of our Elmsford, New York facility in 2005 totaled ($0.1) million in the three months ended September 30, 2006 as a result of a negotiated reduction in future rental obligations on the Elmsford facility recorded in that quarter. Facility Consolidation costs in the three months ended September 30, 2007 were not material. Expenses relating to the consolidation program will be completed at December 31, 2007.

Operating Income. Operating income in the three months ended September 30, 2007 increased by $1.2 million, or 136%, from $0.9 million (13.8% of sales) in the three months ended September 30, 2006 to $2.2 million (25.1% of sales) in the three months ended September 30, 2007. The significant improvement in operating income in the three months ended September 30, 2007 when compared to the year earlier period primarily resulted from sales growth and our improved cost structure in manufacturing, selling and administration. Also impacting the current period was the reversal of the reserve for a government contract as described above amounting to $0.4 million.

Interest Income. Interest income increased $0.1 million in the three months ended September 30, 2006 to $0.2 million in the three months ended September 30, 2007 primarily as a result of higher average cash balances and higher interest rates in effect during 2007.

Income Taxes. The provision for income taxes amounted to $0.3 million in the three months ended September 30, 2006 and 2007, respectively. The provision and the effective tax rate for the three months ended September 30, 2007 benefited from the reversal of $0.6 million of our FIN 48 liability as the statute of limitations expired on the underlying tax issue. This was partially offset by the tax effect of an increase of $1.3 million of pre-tax income in the period. The effective tax rate in the three months ended September 30, 2007 amounted to 12.1% of pre-tax income as compared to the effective tax rate for the three months ended September 30, 2006 which amounted to 29.1% of pre-tax income.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 TO NINE MONTHS ENDED SEPTEMBER 30, 2006

Sales. Sales in the nine months ended September 30, 2007 decreased by $1.2 million, or 5%, from $24.9 million in the nine months ended September 30, 2006 to $23.7 million. The decrease was primarily due to the cessation of sales of VISA and MasterCard HoloMag, partially offset by growth in other programs. There were no sales of VISA or MasterCard HoloMag in the nine months ended September 30, 2007 compared to $5.0 million in the nine months ended September 30, 2006. Nearly offsetting this reduction were sales of recently introduced products, including Generation two HoloMag^™, HoloStripe^™ and HoloCard^™, to the transaction card market, continued growth in transaction card issuance, and expansion of our sales of secure government documents for the national ID programs in Colombia and Pakistan.

Cost of Goods Sold, excluding Depreciation and Amortization. Cost of goods sold, excluding depreciation and amortization decreased by $2.3 million, from $11.9 million in the nine months ended September 30, 2006 to $9.6 million in the nine months ended September 30, 2007. The decrease was primarily the result of approximately $0.4

million of lower fixed manufacturing overhead due to the effect of cost reductions associated with the consolidation of our facilities in Robbinsville, New Jersey and approximately $0.7 million of related post-consolidation efficiency gains and to a lesser extent was impacted by lower sales volume, and the net effect of reserves and other adjustments recorded in the first nine months of 2006 relating to VISA HoloMag costs which did not recur in the first nine months of 2007. Also impacting cost of goods sold in the nine months ended September 30, 2007 was the reversal of approximately $0.6 million of reserves for warranty as the period for potential claims expired and $0.4 million of reserves for a contract with the U.S government as described above. Partially offsetting these reductions were approximately $0.3 million of costs associated with converting certain customer products to new constructions and $0.5 million of costs related to the analysis and correction of certain manufacturing process issues resulting from the transition to new materials. As a result of these factors, cost of goods sold excluding depreciation and amortization as a percentage of sales, decreased from 47.7% in the nine months ended September 30, 2006 to 40.6% in the nine months ended September 30, 2007.

Selling and Administrative Expenses. Selling and administrative expenses decreased $0.4 million from $7.1 million in the nine months ended September 30, 2006 to $6.7 million in the nine months ended September 30, 2007. As a percentage of sales, selling and administrative expenses were approximately 28.3% and 28.4% for the nine months ended September 30, 2007 and 2006, respectively. The decrease in expenses was primarily due to lower salaries, wages and benefit costs due to lower average headcount resulting from improved efficiency, lower legal and accounting fees as the first nine months of 2006 included costs incurred due to the cessation of the VISA HoloMag program which did not recur in 2007 and a reduction in shipping costs due to the reduced volume of shipments. Partially offsetting these decreases were increases in certain selling expenses, professional fees, public company costs and costs relating to the process of pursuing strategic alternatives. Stock based compensation expense for the nine months ended September 30, 2007 and 2006 was $0.6 million and $0.5 million, respectively.

Research and Development. Research and development expenses were approximately $1.3 million in the nine months ended September 30, 2006 and in the nine months ended September 30, 2007. We recorded approximately $0.1 million of stock-based compensation expense in the nine months ended September 30, 2007 and 2006, respectively.

Depreciation and Amortization. Depreciation and amortization expense decreased $0.1 million in the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.

Facility Consolidation Expenses. Facility consolidation expenses relating to the closure of our Elmsford, New York facility in 2005 were not material in both the nine months ended September 30, 2007 and 2006.

Operating Income. Operating income in the nine months ended September 30, 2007 increased by $1.3 million, or 31.5%, from $4.0 million (16.2% of sales) in the nine months ended September 30, 2006 to $5.3 million (22.4% of sales) in the nine months ended September 30, 2007. Also for the nine months ended September 30, 2006, as previously reported, we recorded approximately $1.2 million of VISA HoloMag sales with no corresponding cost of goods sold in that nine month period. The significant improvement in operating income in the nine months ended September 30, 2007 when compared to the year earlier period primarily resulted from sales growth to other customers and our improved cost structure in Manufacturing, Selling, Administration and R&D. Also impacting the nine months ended September 30, 2007 was the reversal of $0.6 million of reserves for warranty and the $0.4 million reserve for a government contract, both as described above.

Interest Income. Interest income increased $0.2 million from $0.4 million in the nine months ended September 30, 2006 to $0.6 million in the nine months ended September 30, 2007 primarily as a result of higher average cash balances and higher interest rates in effect during 2007.

Income Taxes. The provision for income taxes amounted to $1.6 million in the nine months ended September 30, 2006 and 2007, respectively. The provision and the effective tax rate for the nine months ended September 30, 2007 benefited by the reversal of $0.6 million of our FIN 48 liability as the statute of limitations expired on the underlying tax issue. This was partially offset by the tax effect of an increase of $1.5 million of pre-tax income in the period. The effective tax rate in the nine months ended September 30, 2007 amounted to 28.1% of pre-tax income as compared to the effective tax rate for the nine months ended September 30, 2006 which amounted to 37.4% of pre-tax income.

At September 30, 2007, we had $19.3 million in cash and cash equivalents and working capital of $24.4 million.

Our operating activities provided cash of $3.8 million for the nine months ended September 30, 2007 resulting primarily from net income of $4.2 million adjusted for non-cash charges of $2.2 million partially offset by the effect of changes in operating assets and liabilities of ($2.6) million.

Changes in operating assets and liabilities that resulted in a use of cash of $2.6 million in the nine months ended September 30, 2007 included an increase of $1.3 million in inventories to support the growth of sales to customers primarily in the transaction card and the secure government documents markets, an increase of $0.6 million in accounts receivable primarily due to sales growth and timing of shipments in the quarter, and a reduction of accrued consolidation costs of $0.7 million due to the payment of rent on the abandoned facility in Elmsford, New York.

Our operating activities provided cash of $4.4 million for the nine months ended September 30, 2006 primarily due to net income of $2.7 million adjusted for non-cash costs of $3.6 million resulting primarily from deferred taxes and costs related to stock-based compensation. Changes in operating assets and liabilities resulted in a use of $1.9 million of cash as a result of a decrease in accounts receivable due to volume and the timing of collections, a decrease and inventories due to volume, a tax receivable as a result of overpaying estimated income taxes in 2005 partially offset by decreased accounts payable due, in part, to the resolution of a dispute with a vendor, and decreased accrued liabilities.

Investing activities for the nine months ended September 30, 2007 used approximately $0.4 million of cash for capital expenditures as compared to net cash used of $0.1 million in the nine months ended September 30, 2006 which resulted from capital expenditures of $0.5 partially offset by the return of a $0.4 million deposit on a machine that was not accepted by us.

Financing activities, primarily related to stock option exercises, provided $0.6 million of cash for nine months ended September 30, 2007 and $0.2 million for the nine months ended September 30, 2006.

We lease a 134,000 square foot modern manufacturing and office building in Robbinsville, New Jersey, which is the site of our primary operations following our relocation and consolidation program (See Note D) and a 30,000 square foot facility in Huntingdon Valley, Pennsylvania for certain secure storage.

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

Certain statements in this Form 10-Q, including without limitation, statements containing the words “believes,” “intends,” “expects,” “anticipates,” and words of similar import, constitute “forward-looking statements” within the meaning of the private securities litigation reform act of 1995. Such forward-looking statements are based on current management expectations. Numerous factors, including those disclosed herein, those related to transaction card industry trends and those detailed in our filings with the Securities and Exchange Commission (as set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006), may cause results to differ materially from those anticipated in the forward-looking statements. Many of the factors that will determine our future results are beyond our capability to control or predict. These statements are subject to risks and uncertainties and therefore actual results may differ materially. Readers should not place undue reliance on such forward-looking statements which reflect management’s view only as of the date hereof. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

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.

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 upon that evaluation, the 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 us required to be included in our periodic Securities and Exchange Commission filings and ensure information required to be included by us in reports we file or submit under the Securities Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management including the principal executive and principal financial officers as appropriate, to allow timely decisions regarding disclosure. 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.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial position and results of operations. Except for the addition of the risk factor set forth below, there are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2006. See also Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report under the heading “Overview.”

We have received a reimbursement request from MasterCard, and are not able at this time to quantify the amount of our liability relating to such request, if any.

On September 7, 2007, we held our annual meeting of stockholders. For more information on the following proposals, refer to our proxy statement dated August 14, 2007 as filed with the SEC.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company 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

By:		/s/ Mark J. Bonney
		Mark J. Bonney
		Executive Vice President, Chief Financial Officer and Chief Accounting Officer


		PAGE NO.
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets – Unaudited As of September 30, 2007 and December 31, 2006		3

Statements of Operations - Unaudited For the three and nine months ended September 30, 2007 and September 30, 2006		4

Statements of Cash Flows - Unaudited For the nine months ended September 30, 2007 and September 30, 2006		5

Condensed Notes to Unaudited Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosures About Market Risk		16

Item 4T. Controls and Procedures		17

PART II - OTHER INFORMATION

Item 1A. Risk Factors		17

Item 4. Submission of Matters to a Vote of Security Holders		17

Item 6. Exhibits		18


	September 30, 2007		December 31, 2006
			(Note A)
ASSETS
Current Assets:
Cash and cash equivalents	$	19,264	$	15,339
Accounts receivable, net of allowance for doubtful accounts of $350 and $350		5,565		5,002
Inventories, net		2,960		1,962
Deferred income taxes		765		1,640
Prepaid expenses and other		462		200
Income tax receivable		93		666

Total current assets		29,109		24,809
Machinery, equipment and leasehold improvements, net of accumulated depreciation and amortization of $10,164 and $9,469		5,737		6,098
Deferred income taxes, net		468		—
Other assets		63		61

Total Assets	$	35,377	$	30,968

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,689	$	2,291
Accrued expenses		1,836		3,244
Customer advances		143		137
Income taxes payable		37		15

Total current liabilities		4,705		5,687
Long-term liabilities		604		1,152

Total Liabilities		5,309		6,839

Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock, authorized 5,000,000 shares; no shares issued or outstanding		—		—
Common Stock, par value $.01 per share, authorized 40,000,000 shares; issued and outstanding 19,415,638 shares and 18,936,638 shares		192		190
Additional paid-in capital		27,564		25,854
Retained earnings (accumulated deficit)		2,312		(1,915	)

Total Stockholders’ Equity		30,068		24,129

Total Liabilities and Stockholders’ Equity	$	35,377	$	30,968


	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007		2006
Revenue:
Sales	$	8,485	$	6,556		$	23,682	$	24,914
Royalty income		—		—			4		—

Total revenue		8,485		6,556			23,686		24,914
Costs and expenses:
Cost of goods sold, excluding depreciation and amortization		3,367		3,297			9,625		11,892
Selling and administrative		2,287		1,949			6,707		7,080
Research and development		440		367			1,283		1,303
Depreciation and amortization		240		142			708		593
Facility consolidation		18		(101	)		58		13

Total costs and expenses		6,352		5,654			18,381		20,881

Operating income		2,133		902			5,305		4,033
Interest income		205		143			570		347

Income before provision for income taxes		2,338		1,045			5,875		4,380
Provision for income taxes		284		304			1,648		1,638

Net income	$	2,054	$	741		$	4,227	$	2,742

Net income per share:
Basic	$	0.11	$	0.04		$	0.22	$	0.15

Diluted	$	0.10	$	0.04		$	0.21	$	0.14

Weighted average number of shares:
Basic		19,011		18,908			18,884		18,877
Diluted		20,034		19,505			19,668		19,591


	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	4,227		$	2,742
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		708			593
Loss on sale of fixed assets		—			254
Deferred income taxes, net		602			1,760
Compensation costs related to share-based payment arrangements		951			793
Recovery for doubtful accounts		—			(100	)
Provision (recovery) for inventories		295			322
Reversal of contract reserve		(357	)		—
Excess tax benefits from share-based payment arrangements		(27	)		(12	)

Changes in operating assets and liabilities:
Accounts receivable		(563	)		2,010
Inventories		(1,293	)		458
Prepaid expenses and other		(264	)		(139	)
Income tax receivable		573			(689	)
Accounts payable		460			(1,871	)
Accrued expenses		(1,051	)		(679	)
Customer advances		6			(93	)
Income taxes payable		22			(359	)
Long-term liabilities		(524	)		(574	)

Net cash provided by operating activities		3,765			4,416

Cash flows from investing activities:
Cancellation of fixed asset purchase agreement		—			376
Capital expenditures		(409	)		(544	)

Net cash (used in) provided by investing activities		(409	)		(168	)

Cash flows from financing activities:
Proceeds from exercise of stock options		542			150
Excess tax benefits from share-based payment arrangements		27			12

Net cash provided by financing activities		569			162

Increase in cash and cash equivalents		3,925			4,410
Cash and cash equivalents, beginning of period		15,339			9,114

Cash and cash equivalents, end of period	$	19,264		$	13,524

Supplemental cash flow information:
Taxes paid	$	988		$	908

Capital expenditures included in accounts payable	$	58		$	70


	Three Months Ended September 30,		Nine Months Ended September 30,
*(Amounts in thousands)*	2007	2006	2007	2006
Basic weighted average shares outstanding	19,011	18,908	18,884	18,877
Dilutive effect of stock options and restricted Shares	1,023	597	784	714

Diluted weighted average shares outstanding	20,034	19,505	19,668	19,591

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	Three Months Ended September 30,				Nine Months Ended September 30,
*(Dollars in millions)*	2007		2006		2007		2006
Product
Hot stamp holograms (Dove and Mini Dove)	$	1.6	$	1.6	$	4.9	$	4.2
HoloMag		—		0.2		—		4.2

Total	$	1.6	$	1.8	$	4.9	$	8.4


*(Dollars in thousands)*	September 30, 2007		December 31, 2006
Finished goods	$	1,627	$	1,831
Finished goods on consignment with customers		336		233
Work in process		765		336
Raw materials		759		540

Subtotal		3,487		2,940
Less: Inventory reserves		527		978

Net inventory	$	2,960	$	1,962


	For the Years Ended December 31,
	Actual							Estimated
*(Dollars in thousands)*	2004		2005		2006			2007
Rent on abandoned facilities, net	$	—	$	1,905	$	(130	)	$	25
Accretion on abandoned facilities rental		—		45		129			75
Employee severance costs		15		107		17			—
Employee relocation costs		56		116		46			—
Moving costs		—		590		5			—
Legal expenses and commissions		171		6		—			—

	$	242	$	2,769	$	67		$	100


Director	For	Withheld
Kenneth H. Traub	16,409,744	1,290,914
Salvatore F. D’Amato	16,398,500	1,302,138
Randall C. Bassett	17,649,617	51,041
Jordan S. Davis	17,668,577	32,081
Eric Haskell	17,657,076	43,582
Fred J. Levin	16,468,020	1,232,638
Richard L. Robbins	16,449,060	1,251,596
Fred Whitridge, Jr.	16,460,560	1,240,098


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

31.2		Certification of Mark J. Bonney pursuant to Exchange Act Rules 13a-14 and 15d-14, 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 Mark J. Bonney pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


For		17,678,876
Against		7,493
Abstain		14,288
Broker Non-vote		0