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

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

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

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

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

           Through the second quarter of 2000, primarily as a result of the limited financial resources and personnel available for marketing activities, the Company made limited progress in establishing licensing arrangements for its technology. The majority of revenues during this time were generated primarily from a consulting arrangement and the sale of discontinued hardware products. Beginning in the second quarter of fiscal 2000, as a result of increased resources and a shift of personnel to marketing activities, the Company entered into two licensing arrangements with third party

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enterprises for its technology. For the year ended December 31, 2000, licensing revenues accounted for approximately 12% of the Company's revenues.

           In March 2001, the Company launched a suite of INTACTA.CODE Software Development Kits, or SDK's, making its technology available to software developers for integration into both existing and new applications requiring features that provide for the secure transmission and storage of compressed data across various platforms and operating devices. The Company anticipates that the licensing of SDK's to software developers will create an additional revenue stream to its technology licensing arrangements with large enterprises and third-party solution providers, independent software vendors and original equipment manufacturers. This marketing generated increased activity to its web site and initiated downloads of the offered Trial SDK. There is not yet any revenue impact from this product line. In addition to the above, by the end of the third quarter the Company intends to launch a suite of data communications products targeted to the health care industry addressing HIPAA regulations.

           The Company's independent auditors have included an explanatory paragraph in their report on the Company's financial statements for each of the three years in the period ended December 31, 2000, stating that recurring losses from operations and an accumulated deficit at December 31, 2000 of $22,222,400 raise substantial doubt the Company's ability to continue as a going concern. The accumulative deficit as of June 30, 2001 is $24,095,700.

           Revenues. Revenues decreased by $475,000 or 98.9% to $5,200 for the three months ended June 30, 2001, from $480,200 for the three months ended June 30, 2000. This decrease was primarily attributable to the lack of consulting revenue as compared to the prior comparable period, the return of product of $20,000 during the three months ended June 30, 2001, and the more limited sales of products and components from the discontinued facsimile-based business as compared to the prior comparable period.

           Cost of products and components. Cost of products and components was $10,400 for the three months ended June 30, 2001; a decrease of $13,900, or 57.2%, compared to $24,300 of such costs for the three months ended June 30, 2000. The decrease in such costs was primarily attributable to the corresponding reduction in sales of discontinued products and components.

           Research and development expenses. Research and development expenses increased by $2,200 or 0.7% to $310,400 for the three months ended June 30, 2001, from $308,200 for the three months ended June 30, 2000. The increase resulted from increased personnel and related office and other support facility costs related to research and development in the Company's Atlanta headquarters. This increase was offset by a decrease in non-cash charges to $47,300 for the second quarter of fiscal 2001 from $90,400 for the second quarter of fiscal 2000, to account for options previously granted below fair market value as compensation to employees and consultants.

           Sales and marketing expenses. Sales and marketing expenses decreased by $13,700 or 5.1%, to $255,000 for the three months ended June 30, 2001, from $268,700 for the three months ended June 30, 2000. The decrease in sales and marketing expenses was primarily attributable to the reduction in non-cash charges to $2,000 for the second quarter of fiscal 2001 from $23,900 for the second quarter of fiscal 2000, to account for options previously granted below fair market value as compensation to employees and consultants.

           General and administrative expenses. General and administrative expenses decreased by $147,000 or 25.3% to $433,800 for the three months ended June 30, 2001, from $580,800 for the three months ended June 30, 2000. This decrease was primarily attributable to the reduction of the non-cash stock option charges to $5,800 for the second quarter of fiscal 2001 from $165,900 for the second quarter of fiscal 2000.

           Interest income (expense), net. Net interest income was $26,700 for the three months ended June 30, 2001 compared to ($4,800) of net interest expense for the three months ended June 30, 2000. The net increase was primarily the result of earnings on funds received from the Company's private placement in October 2000.

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           Net loss. As a result, net loss increased by $270,300 or 38.3 % to $976,900, or $(0.05) per share, for the three months ended June 30, 2001, as compared to a net loss of $706,600, or $(0.04) per share, for the three months ended June 30, 2000.

           Revenues. Revenues decreased by $536,700 or 84.7% to $97,100 for the six months ended June 30, 2001, from $633,800 for the six months ended June 30, 2000. This decrease was primarily attributable to the lack of consulting revenue as compared to the prior comparable period, along with more limited sales of products and components from the discontinued facsimile-based business as compared to the prior comparable period.

           Cost of products and components. Cost of products and components was $24,100 for the six months ended June 30, 2001; a decrease of $72,300, or 75.0%, compared to $96,400 of such costs for the six months ended June 30, 2000. The decrease in such costs was primarily attributable to the corresponding reduction in sales of discontinued products and components.

           Research and development expenses. Research and development expenses decreased by $6,000 or 1.0% to $602,600 for the six months ended June 30, 2001, from $608,600 for the six months ended June 30, 2000. The decrease was attributable to a decrease in non-cash charges to $94,600 for the first half of fiscal 2001 from $180,800 for the first half of fiscal 2000, to account for options previously granted below fair market value as compensation to employees and consultants. The foregoing decrease was partially offset by an increase in expenses resulting from personnel and related office and other support facility costs related to research and development in the Company's Atlanta headquarters.

           Sales and marketing expenses. Sales and marketing expenses increased by $26,400 or 5.4%, to $511,000 for the six months ended June 30, 2001, from $484,600 for the six months ended June 30, 2000. The increase in sales and marketing expenses was primarily attributable to (i) increased salaries and related costs resulting from the hiring of additional personnel in connection with the Company's focus on marketing its INTACTA.CODE technology, and (ii) costs for the development of marketing materials and related market research. The foregoing increase in expenses were partially offset by the reduction in non-cash charges to $4,000 for the first half of fiscal 2001 from $52,100 for the first half of fiscal 2000, to account for options previously granted below fair market value as compensation to employees and consultants.

           General and administrative expenses. General and administrative expenses decreased by $38,000 or 4.1% to $892,000 for the six months ended June 30, 2001, from $930,000 for the six months ended June 30, 2000. This decrease was attributable to the reduction of the non-cash stock option charges to $11,600 for the first half of fiscal 2001 from $391,300 for the first half of fiscal 2000. The foregoing decrease in expenses was partially offset by (i) additional salaries and costs related to an increased administrative staff, and (ii) third party consulting and professional fees in connection with business strategy development and management and operation of the Company's business.

           Interest income (expense), net. Net interest income was $67,900 for the six months ended June 30, 2001 compared to $13,400 of net interest income for the six months ended June 30, 2000, an increase of 406.7% or $54,500. The increase was primarily the result of earnings on funds received from the Company's private placement in October 2000.

           Net loss. As a result, net loss increased by $400,000 or 27.1 % to $1,873,300, or $(0.09) per share, for the six months ended June 30, 2001, as compared to a net loss of $1,473,300, or $(0.08) per share, for the six months ended June 30, 2000.

           The Company's capital requirements continue to be significant and it is not currently generating revenues from operations to fund its operating activities. The Company has incurred losses to date resulting in an accumulated deficit as

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of June 30, 2001 of $24,095,700 and it anticipates incurring continuing losses in the future as it expands the development and marketing of its software products and technology. Based upon current estimates, management believes that cash and cash equivalents will be sufficient to fund the Company's operating activities and capital requirements through the company's first quarter of 2002. Unanticipated changes in economic conditions or other unforeseen circumstances may cause the Company to expend its cash and cash equivalents in a shorter period of time. At this time, the Company does not have any current arrangements with respect to potential sources of additional financing and cannot assure you that additional financing will be available to it on commercially reasonable terms or at all.

           As a result of the above, the Company's continuation as a going concern is substantially dependent upon its ability to obtain additional financing that will be required to fund research and development and marketing of its new products as well as to fund its current operating activities. If significant revenues materialize and adequate financing is obtained, the Company anticipates viability for the year 2001 and beyond, though there can be no assurance that that the Company will be successful in these efforts. At this time, the Company does not have any current arrangements with respect to other potential sources of additional financing and cannot assure you that additional financing will be available to it on commercially reasonable terms or at all. Given the foregoing, if the Company is then successful in its ability to market its new suite of products, as well as its technology, it believes that it can increase revenues, generate positive cash flows from operations, and result ultimately in profitability.

Pursuant to the solicitation of proxies in connection with a Proxy Statement dated April 27, 2001, the Company held an annual meeting of stockholders during the second quarter of 2001.