Manuka, Inc. - Quarter Report: 2009 June (Form 10-Q)

NOTE 1: - BASIS OF PRESENTATION

     The accompanying condensed unaudited interim consolidated financial
statements have been prepared by INKSURE TECHNOLOGIES INC. (the "Company") in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. These financial statements reflect all
adjustments, consisting of normal recurring adjustments and accruals, which are,
in the opinion of management, necessary for a fair presentation of the financial
position of the Company as of June 30, 2009 and the results of operations and
cash flows for the interim periods indicated in conformity with generally
accepted accounting principles applicable to interim periods. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the audited financial statements and notes thereto of
the Company for the year ended December 31, 2008 that are included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 2009, as amended (the "2008 10-K"). The results of operations presented are
not necessarily indicative of the results to be expected for future quarters or
for the year ending December 31, 2009.

NOTE 2: - GOING CONCERN

     As reflected in the accompanying financial statements, the Company's
operations for the three months ended June 30, 2009, resulted in a net loss of
$395,000, and the Company's balance sheet reflects a net stockholders'
deficiency of $6,847,000. The Company's ability to continue operating as a
"going concern" is dependent on several factors, among them its ability to raise
sufficient additional working capital and the note holders not electing to
redeem their approximately $9 million principal notes on or after September 30,
2009. Management's plans in this regard include, among other things, raising
additional cash from current and potential stockholders or lenders and
negotiating the repayment terms of the existing Notes, but there is no assurance
that the management will be successful in these endeavors.

NOTE 3: - LEGAL PROCEEDINGS

     On December 12, 1999, Secu-Systems filed a lawsuit with the District Court
in Tel Aviv-Jaffa against Supercom Ltd. (the former owner of the company's
business) and InkSure Ltd. seeking a permanent injunction and damages. The
plaintiff asserted in its suit that the printing method applied to certain
products that have been developed by InkSure Ltd. constitutes, inter alia: (a)
breach of a confidentiality agreement between the plaintiff and Supercom; (b)
unjust enrichment of Supercom (by virtue of the sale of our shares) and InkSure
Ltd.; (c) a breach of fiduciary duties owed to the plaintiff by Supercom and
InkSure Ltd.; and (d) a tort of misappropriation of trade secret and damage to
plaintiff's property. As part of its complaint, Secu-Systems sought, among other
things, an injunction and a 50% share of profits from the printing method at
issue.

     On March 15, 2006, the court rendered a decision (i) denying the claim for
breach of contract; (ii) finding that there was a misappropriation of trade
secret, but not assessing any damages with respect thereto; (iii) requiring the
defendants to cease all activities involving the use of any confidential
information; and (iv) awarding the plaintiff reimbursement of the costs of the
litigation in the amount of NIS 130,000 (about $33,000 at the exchange rate as
of June 30, 2009), plus interest and VAT, which the defendants intend to split
equally. InkSure recorded in its 2006 financial statements a provision of NIS
65,000 (about $16,500 at the exchange rate as of June 30, 2009).

     Both the plaintiff and the defendants appealed the court's decision.

     On November 1, 2007, the Supreme Court ruled in favor of Secu-Systems'
appeal. This ruling accepts that InkSure and Supercom have breached the
confidentiality agreement. Consequently, the appeal that had been filed by
InkSure and Supercom was dismissed. The Supreme Court instructed that the case
will be returned to the District Court for determining the remedies to which
Secu-Systems is entitled.

     On February 18, 2008, Secu-Systems filed a petition with the district court
to amend the amount for which it has sued to NIS 25,000,000 (Approximately $
6,379,000 at the exchange rate as of June 30, 2009).

     On March 24, 2008, SuperCom (which changed its name to Vuance Ltd.)
provided us with an opinion of an external accounting expert according to which,
the following conclusions can be drawn:

     a.   In light of the costs analysis, SuperCom had no economic profit from
          the sale of Inksure's shares.

     b.   The consideration received from the sale of Inksure's shares in 2002,
          incorporates the value of the cash flow of InkSure following the sale.
          Therefore, a calculation based upon both the sale price and the future
          cash flow of InkSure is not accurate and does not agree with customary
          accountant standards, since it calculates the factor of the future
          cash flow twice.

     c.   The examination of the outcome of InkSure's business activity from
          2002-2007, as reflected in its financial reports, show that InkSure
          had not made any profit, and incurred losses during such period. The
          financial statements also reflect that InkSure had negative cash flow
          during these years, which was financed by bank loans and fund raising.

     In light of the above, provided that the opinion is adopted by the court,
we believe that no material amounts will be awarded to Secu-System in these
proceedings.


                                       6

NOTE 4: - WARRANTS TO ISSUE SHARES

     The Company initially applied the provisions of EITF 07-5 DETERMINING
WHETHER AN INSTRUMENT (OR EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK
in the interim financial statements for the quarter ended March 31, 2009. The
result of the application was that warrants series A, B1 and B2 were determined
to be not solely indexed to the Company's shares and have to be classified as
liability. The reason for the reclassification was an anti-dilution clause
dependent upon future fund raising that may adjust the exercise price of the
warrants. The Company evaluated the fair values of the reclassified warrants as
of the date of initial application (January 1, 2009). The difference between the
fair value and the fair value at issuance of the warrants (classified initially
in equity) was recognized in retained earnings. As of January 1, 2009 these
warrants are carried at fair values with changes recognized in earnings.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     In this section, "Management's Discussion and Analysis or Plan of
Operation," references to "we," "us," "our," and "ours" refer to InkSure
Technologies Inc. and its consolidated subsidiaries.

     This Quarterly Report on Form 10-Q contains statements that may constitute
"forward-looking statements" within the meaning, and made pursuant to the Safe
Harbor provisions, of the Private Securities Litigation Reform Act of 1995.
Generally, forward-looking statements include words or phrases such as
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "could," "may," "might," "should," "will" and words and phrases of
similar import. Such statements are based on management's current expectations
and are subject to a number of risks and uncertainties, including, but not
limited to, the difficulty inherent in operating an early-stage company in a new
and rapidly evolving market, market and economic conditions, the impact of
competitive products, product demand and market acceptance risks, changes in
product mix, costs and availability of raw materials, fluctuations in operating
results, delays in development of highly complex products, risk of customer
contract or sales order cancellations and other risks detailed from time to time
in our filings with the Securities and Exchange Commission. These risks and
uncertainties could cause our actual results to differ materially from those
described in the forward-looking statements. Any forward-looking statement
represents our expectations or forecasts only as of the date it was made and
should not be relied upon as representing its expectations or forecasts as of
any subsequent date. Except as required by law, we undertake no obligation to
correct or update any forward-looking statement, whether as a result of new
information, future events or otherwise, even if our expectations or forecasts
change.

     The following discussion and analysis should be read in conjunction with
the financial statements, related notes and other information included in this
Quarterly Report on Form 10-Q and with the Risk Factors included in the 2008
10-K.

     OVERVIEW

     We specialize in comprehensive security solutions, designed to protect
branded products and documents of value from counterfeiting, fraud, and
diversion. By creating "Smart Protection" systems from proprietary
machine-readable authentication technologies, we help governments, companies and
organizations worldwide regain control over their most valuable assets, their
products, their reputation and their revenues. We employ a team of experts in
the fields of material science, electro-optics and software. We utilize
cross-disciplinary technological innovations to implement customized and cost
efficient security systems for data and asset integrity within the customer's
existing infrastructure and environment.

     Our SmartInkTM solutions enable authentication and tracking of documents
and products by adding special chemical markers to standard inks and coatings.
The combination of markers, inks and materials produce electro-optic
"signatures", unique codes that are seamlessly incorporated into the printed
media used by the customer. Proprietary computerized readers, available in
hand-held, stationary and modular kit configurations, quickly verify these codes
by manual or automatic operation. By focusing on customer driven solutions, we
are able to offer added value through enhanced reader functionality, including
high-speed automatic sorting, one-to-many code matching, first and second level
track and trace, code activation at the point of distribution and detrimental
authentication for debit applications. The inherent flexibility of our
technology also enables overlaying the machine-readable codes onto holograms and
other overt features, resulting in multi-layered security that is both effective
and economical.

     We are currently developing next-generation Radio Frequency Identification
("RFID") technology that is being designed to enable low-cost tagging of items.
This RFID technology is being designed to permit "no line of sight"
identification and to be suitable for a variety of applications, including
authentication, supply chain management, proof of ownership, and life cycle
information.


                                       7

     REVENUES

     We concentrate on developing and implementing large-scale projects. Such
projects involve the use of our generic products or and products developed for
such projects. These potential projects are subject to a long sales cycle and
the timetable is lengthy for entering and implementing such projects. We
anticipate that these projects would involve high volume sales through
multiple-year sales contracts. In the second quarter of 2009, approximately 81%
of our revenues were earned from one customer located in Europe.

     COSTS AND OPERATING EXPENSES

     Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expense and depreciation.

     Our cost of revenues consists primarily of materials including taggants and
electronic and optical parts, payments to sub-contractors and compensation costs
for our operations staff.

     Our research and development expenses consist primarily of costs associated
with development of new generic products and solutions targeted for existing and
new customers and market segments. These expenses may fluctuate as a percentage
of revenue depending on the projects undertaken during the reporting period.
Since our inception, we have expensed all research and development costs in each
of the periods in which they were incurred

     Our selling and marketing expenses consist primarily of costs associated
with our direct sales force that have been incurred to attract potential
business customers, professional advisors and commissions. We anticipate that as
we add new customers we will be able to spread these costs over a larger revenue
base and accordingly improve our operating margins.

     Our general and administrative expenses consist primarily of costs related
to compensation and employees benefits of our management (including the costs of
directors' and officers' insurance), legal and accounting fees, as well as the
expenses associated with being a publicly traded company.

     We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to June 30, 2009. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.

CRITICAL ACCOUNTING POLICIES

     Our financial statements are prepared in accordance with US GAAP. The
significant accounting policies followed in the preparation of the financial
statements, applied on a consistent basis and which have been prepared in
accordance with the historical cost convention, are set forth in Note 2 to the
Consolidated Financial Statements as of and for the year ended December 31, 2008
that are included in the 2008 10-K.

     Of these significant accounting policies, certain policies may be
considered critical because they are most important to the portrayal of our
financial condition and results, and they require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

     REVENUE RECOGNITION. Revenues from product sales are recognized in
accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements" when delivery has occurred, persuasive evidence of an
agreement exists, the vendor's fee is fixed or determinable, no further
obligation exists and collectability is probable. Delivery is considered to have
occurred upon shipment of products. We do not grant a right of return to our
customers. Had we had a right of return we would have deferred revenues until
the right of return expired.

     Revenues from certain arrangements may include multiple elements within a
single contract. Our accounting policy complies with the provisions of Emerging
Issues Task Force Issue 00-21, "Revenue Arrangements with Multiple Deliverables"
relating to the separation of multiple deliverables into individual accounting
units with determinable fair value.

     In cases where we have partial delivery at the cut off dates and no fair
value exist for the undelivered elements revenues are being deferred and
recognized only at the point where the entire arrangement has been delivered.

     CONVERTIBLE NOTES AND WARRANTS TO ISSUE SHARES, Financial Accounting
Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The Company has applied FAS 157 prospectively as
of the beginning of the year. FAS 157 defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. FAS 157 also
establishes a fair value hierarchy that emphasizes use of observable inputs and
minimizes use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:


                                       8

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.

     Estimating fair values require subjective judgments and are approximate.
The Company is required to fair value of it warrants that has been reclassified
from equity due to the initial adoption of EITF 07-5. Valuation of options
requires the use of assumption among which is volatility, interest rate and the
underlying share price. The above estimates of fair value are not necessarily
representative of amounts that could be realized in actual market transactions,
nor of the underlying value of the Company. Changes in the assumptions could
significantly affect the estimated fair value.

     INVENTORIES. Inventories are stated at the lower of cost or net realizable
value. Cost is determined by calculating raw materials, work in process and
finished products using the "first in, first out" method.

     OTHER ACCRUED EXPENSES. We also maintain other accrued expenses. These
accruals are based on a variety of factors including past experience and various
actuarial assumptions and, in many cases, require estimates of events not yet
reported to us. If future experience differs from these estimates, operating
results in future periods would be impacted.

THREE MONTHS ENDED JUNE 30, 2009 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2008

     REVENUES. Revenues consist of gross sales of products less discounts. We
concentrate on developing and implementing large-scale projects. In the three
months ended June 30, 2009, we had revenue of $584,000, compared to $281,000 in
the three months ended June 30, 2008. The increase in the revenue is mainly due
to new deliveries to customers, primarily for one customer located in Europe.

     COST OF REVENUES. Our cost of revenues consists of materials,
sub-contractors and compensation costs. Cost of revenues was $43,000 in the
three months ended June 30, 2009, compared to $53,000 in the three months ended
June 30, 2008. Cost of revenues as a percentage of sales was 7% in the three
months ended June 30, 2009, compared with 19% in the three months ended June 30,
2008. The decrease in costs of revenue, as a percentage of sales, in the three
months ended June 30, 2009 was mainly due to more profitable sales of certain
SmartInkTM products in 2009.

     RESEARCH AND DEVELOPMENT EXPENSES, NET Research and development expenses
consist primarily of compensation costs attributable to employees engaged in
ongoing research and development activities, development-related raw materials
and sub-contractors, and other related costs. Research and development expenses,
net decreased by $197,000, or 42%, to $271,000 in the three months ended June
30, 2009 from $468,000 in the three months ended June 30, 2008. This decrease in
research and development expenses is primarily related to the receipt of a
governmental R&D grant during the three months ended June 30, 2009
(approximately $130,000) from the Israeli Office of the Chief Scientist of the
Ministry of Industry, Trade and Labor (the "OCS") and reduction in
subcontractors (approximately $70,000).

     Research and Development Expenses included non-cash expenses of $5,000
related to the implementation of SFAS No. 123(R).

     SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of costs relating to compensation attributable to employees engaged in
sales and marketing activities, promotion, advertising, trade shows and
exhibitions, sales support, travel, commissions and related expenses. Selling
and marketing expenses decreased by $134,000, or 55%, to $108,000 in the three
months ended June 30, 2009 from $242,000 in the three months ended June 30,
2008. This decrease in selling and marketing expenses was primarily due to a
decrease in our sales force labor and other related expenses.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of compensation costs for administration, finance and general
management personnel, insurance, legal, accounting and administrative costs.
General and administrative expenses decreased by $117,000, or 48%, to $125,000
in the three months ended June 30, 2009 from $242,000 in the three months ended
June 30, 2008. This decrease in general and administrative expenses is mainly
due to a decrease in the non-cash expenses related to the implementation of SFAS
No. 123(R) and due to a decrease in legal expenses.

     FINANCIAL EXPENSES, NET. Financial expenses, net were $432,000 in the three
months ended June 30, 2009. Financial expenses, net were comprised of: (i)
Interest (financial) expense, net of $137,000 and (ii) non cash financial
expenses of $295,000 related to the convertible notes and warrants. Financial
expenses, net decreased by $410,000 or 49% from $842,000 in the three months
ended June 30, 2008. This decrease in financial expenses, net was primarily due
to a decrease in the non-financial expenses relating to the convertible notes.

     NET LOSS. We had a net loss of $395,000 in the three months ended June 30,
2009, compared with a net loss of $1,566,000 in the three months ended June 30,
2008. The 75% decrease in net loss in the three months ended June 30, 2009
compared to the three months ended June 30, 2008 is attributable to the increase
in our gross profit of $313,000 and decrease in our operating expenses of
$448,000 and decrease of $410,000 in the financial expenses, net.


                                       9

SIX MONTHS ENDED JUNE 30, 2009 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2008

     REVENUES. Revenues consist of gross sales of products less discounts. We
concentrate on developing and implementing large-scale projects. In the six
months ended June 30, 2009, we had revenue of $1,365,000, compared to $499,000
in the six months ended June 30, 2008. The increase in the revenue is mainly due
to new deliveries to customers, primarily for one customer located in Europe.

     COST OF REVENUES. Our costs of revenues consist of materials,
sub-contractors and compensation costs. Cost of revenues was $122,000 in the six
months ended June 30, 2009, compared to $176,000 in the six months ended June
30, 2008. Cost of revenues as a percentage of sales was 9% in the six months
ended June 30, 2009, compared with 35% in the six months ended June 30, 2008.
The decrease in costs of revenue, as a percentage of sales, in the six months
ended June 30, 2009 was mainly due to more profitable sales of certain
SmartInkTM products in 2009.

     RESEARCH AND DEVELOPMENT EXPENSES. NET Research and development expenses
consist primarily of compensation costs attributable to employees engaged in
ongoing research and development activities, development-related raw materials
and sub-contractors, and other related costs. Research and development expenses
decreased by $564,000, or 53%, to $506,000 in the six months ended June 30, 2009
from $1,070,000 in the six months ended June 30, 2008. This decrease in research
and development expenses is primarily related to the receipt of OCS grants and
reduction in subcontractors' expenses.

     Research and Development Expenses included non-cash expenses of $10,000
related to the implementation of SFAS No. 123(R).

     SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of costs relating to compensation attributable to employees engaged in
sales and marketing activities, promotion, advertising, trade shows and
exhibitions, sales support, travel, commissions and related expenses. Selling
and marketing expenses decreased by $328,000, or 54%, to $284,000 in the six
months ended June 30, 2009 from $612,000 in the six months ended June 30, 2008.
This decrease in selling and marketing expenses was primarily due to a decrease
in our sales force labor headcount and costs.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of compensation costs for administration, finance and general
management personnel, insurance, legal, accounting and administrative costs.
General and administrative expenses decreased by $200,000, or 38%, to $321,000
in the six months ended June 30, 2009 from $521,000 in the six months ended June
30, 2008. This decrease in General and Administrative expenses was primarily due
to the decrease in non-cash expenses related to the implementation of SFAS No.
123(R).

     FINANCIAL EXPENSES, NET. Financial expenses, net were $1,428,000 in the six
months ended June 30, 2009. Financial expenses, net was comprised of: (i)
Interest (financial) expense, net of $267,000 and (ii) non cash financial
expenses of $1,161,000 related to the convertible note and the warrants.
Financial expenses, net increased by $660,000 or 86% from $768,000 in the six
months ended June 30, 2008. This increase in financial expenses, net was
primarily due to changes in the fair market value of the outstanding convertible
notes and the implementation of EITF 07-5.

     NET LOSS. We had a net loss of $1,296,000 in the six months ended June 30,
2008, compared with a net loss of $2,648,000 in the six months ended June 30,
2008. The 51% decrease in net loss in the six months ended June 30, 2009
compared to the six months ended June 30, 2008 is attributable to the increase
in our gross profit of $920,000 and decrease in our Operating expenses of
$1,092,000, which were partially offset by the increase in the financial
expenses, net of $660,000.


                                       10

     LIQUIDITY AND CAPITAL RESOURCES

     We have incurred substantial losses since our inception in April 1997. We
had an accumulated deficit of approximately $20,770,000 as of June 30, 2009, and
had a negative working capital (current assets less current liabilities) of
approximately $5,705,000 as of June 30, 2009. Losses are continuing and will
continue in the foreseeable future.

     Capital expenditures were approximately $12,000 in the six months ended
June 30, 2009 and $13,000 in the six months ended June 30, 2008. These
expenditures were principally for computers and research and development
equipment purchases. We do not have any material commitments for capital
expenditures as of June 30, 2009.

     As of June 30, 2009, we had cash, cash equivalents and short-term deposits
of approximately $1,910,000, compared to $1,826,000 as of December 31, 2008.
This increase is primarily due to the cash received from operating activities
during the first half of 2009.

     We had positive cash flow from operating activities of approximately
$96,000 during the six months ended June 30, 2009 compared to negative cash flow
from operating activities of $2,192,000 during the six months ended June 30,
2008. The increase in the cash flow from operating activities is primarily due
to the decrease in the net loss during the first half of 2009.

     We had negative cash flow from investing activities of approximately
$12,000 during the six months ended June 30, 2009 compared to negative cash flow
of $10,000 during the six months ended June 30, 2008. The negative cash flow
from investing activities during the six months ended June 30, 2009 was due to
purchase of fixed assets.

     We believe that our existing cash, together with cash to be collected from
customers and governmental grants, will be sufficient to support our operations
for the next twelve months. However, we do not have the funds necessary to repay
the approximately $9 million principal amount outstanding under our senior
secured convertible notes (the "Convertible Notes") if the holders elect to
redeem them on or after September 30, 2009. Continuing product development and
enhancement, expected new product launches, corporate operations and marketing
expenses will continue to require additional capital. Our current revenues from
operations are insufficient to cover our long term business plans.

     On September 30, 2005, we completed a private placement of convertible
notes, in the aggregate principal amount of $6,000,000. The notes were
interest-only, with interest payments due quarterly at the rate of 4% per annum.
The convertible notes were unsecured and will become due on September 30, 2010;
the investors have the option to cause us to redeem the notes on September 30,
2009. These notes were exchanged for new notes with the terms as per the new
$3,000,000 notes issued on April 9, 2008.

     On April 9, 2008, we completed a private placement of senior secured
convertible notes in an aggregate principal amount of $3,000,000 pursuant to
Amendment, Exchange and Purchase Agreements. The private placement resulted in
gross proceeds of $3,000,000, of which $750,000 was placed in a cash collateral
account to secure interest payments under the notes.

     Pursuant to those Amendments, Exchange and Purchase Agreements, the
investors were issued $3,000,000 principal amount of new notes and exchanged
their $6,000,000 principal amount of existing notes for the same principal
amount of amended and restated senior secured convertible notes (together with
the $3,000,000 principal amount of new notes, referred to as the "new notes")
each of which is convertible into shares of common stock at a conversion price
of $0.60, subject to adjustment. The new notes are secured by our assets and the
assets of our subsidiaries and are guaranteed by each of our subsidiaries. In
addition, all of the shares of each of our subsidiaries are pledged as
collateral to secure our obligations under the new notes, the security
agreements and related documents. The investors may require us to redeem all or
any portion of the outstanding $9,000,000 principal amount of the new notes in
cash plus accrued but unpaid interest on or after September 30, 2009. We may
require the investors to convert all or any portion of the new notes into shares
of common stock upon the occurrence of certain conditions relating to the
trading price of our common stock. Upon any such conversion, the investors will
be entitled to receive a pro rata amount of the cash in the collateral account
which we have established to secure interest payments under the new notes based
on the principal amount of the new notes that we require to be converted. We may
also redeem the new notes at any time by paying the buyers a premium of 5%-25%
of the outstanding principal amount of the notes (based upon the time of
redemption) plus interest and the amounts in the collateral account; at the time
of such redemption we will also issue to the buyers warrants to purchase common
stock, expiring on September 30, 2010, at an exercise price of $0.60. If we sell
or license all or substantially all of the assets in our ink business, we may be
required to redeem the new notes at 100% of their outstanding principal amount
up to the net proceeds of such sale or licensing transaction. If we consummate a
transaction that results in a change of control or other merger or
reorganization or recapitalization, we may be required to redeem the new notes
at 125% of their outstanding principal amount. The new notes are due on
September 30, 2010, unless they are redeemed or converted earlier. In addition,
we issued to the investors warrants to acquire 3,570,337 shares at an exercise
price of $0.60. These warrants have a term of ten years.


                                       11

     RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

     We believe that our future success will depend upon our ability to enhance
our existing products and systems and introduce new commercially viable products
and systems addressing the demands of the evolving markets for brand and
document protection. As part of the product development process, we work closely
with current and potential customers, distribution channels and leaders in
certain industry segments to identify market needs and define appropriate
product specifications. Our employees also participate in industry forums in
order to stay informed about the latest industry developments.

     Our research and development expenses were approximately $506,000 during
the six months ended June 30, 2009, compared to $1,070,000 during the six months
ended June 30, 2008. To date, all research and development expenses have been
charged to operating expense as incurred.

     With respect to the RFID technology we are developing, we have filed five
patent families related to various aspects of the RFID technology. Two of our
patent families have already matured into patents granted in the following
jurisdictions: United States (US6,819,244 and US6,997,388), France, Germany,
Switzerland and United Kingdom (EP1374156 and EP1599831). Our third patent
family has matured into a patent granted in the United States (US6,922,146),
while it is still being examined in Europe. Regarding our fourth patent family,
we have filed an International Patent Application (PCT). In addition, during the
second quarter of 2008, we filed an International Patent Application (PCT)
relating to our fifth patent family.

     With respect to the product-authentication we are developing, we entered
into an assignment agreement by which we have acquired a license for certain of
AuthentiForm Technology LLC's intellectual property portfolio regarding
authentication methods and enhanced product-authentication technology. During
the second quarter of 2009, and due to a change of priorities, the company
decided not to pursue the use and the patent prosecution of this intellectual
property.

     CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     Our contractual obligations and commitments at June 30, 2009 principally
include obligations associated with operating lease obligations and the lease of
several automobiles. Our total future obligation is approximately $171,000 until
September, 2011. We expect to finance these contractual commitments from cash on
hand and cash generated from operations.

     During 2008 and through June 30, 2009, we received a governmental research
and development grant of approximately US$796,000 (of which $484,000 was
received during 2008) from the OCS. This royalties-bearing research and
development grant partially covers our innovative research and development
project expenses. Royalties would become due to OCS only if the RFID research
and development project funded by the grant is successfully commercialized and
results in sales revenues based on the know-how developed during the RFID
project. The royalty rate is 3%-4% of the sales revenues based on the RFID
research and development project funded by the grant, and is capped at the grant
amount actually received from the OCS plus interest. We have no assurance that
the RFID project or commercialization plan will be successful.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are a smaller reporting company, as defined by Rule 12b-2 of the
Exchange Act of 1934, as amended, and are not required to provide information
under this item.

ITEM 4. CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q, have concluded that, based on such evaluation,
our disclosure controls and procedures were adequate and effective to ensure
that material information relating to us, including our consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.

     (b) Changes in Internal Controls. There were no changes in our internal
control over financial reporting, identified in connection with the evaluation
of such internal control that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. EXHIBITS

The following exhibits are being filed with this Report:

   EXHIBIT
    NUMBER          DESCRIPTION
---------------     ----------------

31.1                Certification of Principal Financial Officer Pursuant to
                    Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
                    Sections 1350.

31.2                Certification of Principal Executive Officer Pursuant to
                    Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
                    Section 1350.

32.1                Certification of Principal Executive Officer and Principal
                    Financial Officer Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.


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                                   SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                                  INKSURE TECHNOLOGIES INC.

Dated: August 5, 2009                             By: /s/ Tzlil Peker
                                                  ------------------------
                                                  Tzlil Peker
                                                  Chief Financial Officer,
                                                  Secretary and Treasurer
                                                  (Principal Financial Officer)

Dated: August 5, 2009                             By: /s/ Yaron Meerfeld
                                                  --------------------------
                                                  Yaron Meerfeld
                                                  Acting Chief Executive Officer
                                                  (Principal Executive Officer)



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