##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For fiscal year ended December 31, 2006
 Commission File Number 001-15069
 
 InPlay Technologies, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Nevada
    
    88-0308867(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 234 South Extension Road
Mesa, Arizona 85210
(480) 586-3300
 (Address, including zip code, and telephone number, including area code, of principal executive offices)
 Securities registered pursuant to Section 12(b) of the Exchange Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $0.001 per share
    
    The NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Exchange Act:   (Title of Class)
 o þ
 þ o
 þ
 o þ
    Documents Incorporated by Reference




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##### 



INPLAY TECHNOLOGIES, INC.
 ANNUAL REPORT ON FORM 10-KSB
Fiscal Year Ended December 31, 2006
 TABLE OF CONTENTS
 PagePART IITEM 1.
    
    DESCRIPTION OF BUSINESS
    
    3ITEM 2.
    
    DESCRIPTION OF PROPERTY
    
    18ITEM 3.
    
    LEGAL PROCEEDINGS
    
    18ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    18PART IIITEM 5.
    
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
    
    19ITEM 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS
    
    20ITEM 7.
    
    FINANCIAL STATEMENTS
    
    28ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    49ITEM 8A.
    
    CONTROLS AND PROCEDURES
    
    49ITEM 8B.
    
    OTHER INFORMATION
    
    49PART IIIITEM 9.
    
    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
    
    50ITEM 10.
    
    EXECUTIVE COMPENSATION
    
    50ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    50ITEM 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
    
    50ITEM 13.
    
    EXHIBITS
    
    50ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    52SIGNATURES
    
    
    
    53EX-3.2EX-21EX-23.1EX-23.2EX-31EX-32
  Statements Regarding Forward-Looking Statements
 The statements contained in this report on Form 10-KSB that are not purely historical are
forward-looking statements within the meaning of applicable securities laws. Forward-looking
statements include statements regarding our expectations, anticipations, intentions,
beliefs, or strategies regarding the future. Forward-looking statements also include
statements regarding revenue, margins, and expenses for fiscal year 2007 and thereafter; statements
regarding our licensees and customers ability to successfully market and manufacture products
using our technologies; the potential for our patented technologies in key markets; our estimation
of potential revenue from and timing of production using our technologies; our ability to
successfully execute on our corporate goal of leveraging our business model with additional
technologies; our ability to protect our intellectual property; and liquidity and anticipated cash
needs and availability. All forward-looking statements included in this report are based on
information available to us as of the filing date of this report, and we assume no liability to
update any such forward-looking statements. Our actual results could differ materially from the
forward-looking statements. Among the factors that could cause actual results to differ materially
are the factors discussed in Item 1, Risk Factors.
 2




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##### Table of Contents



PART I
 
 Item 1. Description of Business
 Overview
   Strategy
    Electronic Switch Industry
   Electronic Switch Industry Analysis
 3




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##### Table of Contents



History of Electronic Switches.
   Duraswitch Electronic Switch Competitive Advantages
  Significantly Greater Durability and Reliability.
 Inherent Feedback Response.
 Ease of Integration in Slim Profile, Environmentally Sealed Design.
 Value Engineering Alternative.
 4




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##### Table of Contents



Increased Design Capabilities.
 Duraswitch Electronic Switch Technology Strategies
 Maintain and Further Our Patented Technologies Competitive Advantages.
 Increase Market Awareness of Our Patented Technological Advantages.
 License Switch Manufacturers and OEMs.
 Provide Training, Design Engineering, and Marketing Support.
 Target Key Industries with Potential for High-Volume Applications.
 Duraswitch Electronic Switch Technologies
 ® ®
 5




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The
Duraswitch PushGate ®.
   
    
    PushGate Island construction which reduces the number of material layers and
allows for the switching element of the PushGate to be fabricated as a freestanding
subassembly that can be easily inserted into a foam layer, thereby simplifying the
manufacturing process and reduces cost;
    
    Unique constructions that provide distinct advantages in certain applications
including the Large-Key PushGate, High-Impact PushGate, Tact Switch, Extreme
Temperature/Altitude PushGate, Peel-and-Place PushGate, and Normally
Closed-Normally Open design incorporating PushGate technology.
 The
Duraswitch thiNcoder .
  The Duraswitch MagnaMouse.
 The Duraswitch PushFlex.
 6




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##### Table of Contents



Customers
    Competition
    Digital Computing Pen Industry
   7




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##### Table of Contents



Computing Pen and Digitizer Industry Analysis.
 History of Digitizer Technology.
  
    
    A pen, stylus, or human finger to generate input data;
    
    A sensor device to generate x, y analog coordinates from the input data;
    
    A micro controller to convert the x, y coordinates into digital data; or
    
    Driver software
      MagicPoint Competitive Advantages
  Better Accuracy.
 Lower Cost.
 8




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Increased Feature-Enhancement Capability.
 MagicPoint Strategies
 Maintain and Further Our Patented Technologies Competitive Advantages .
 Broaden Pen-Input Capabilities Through Our Digital Roadmap.
 Expand Awareness of Our Technologies Advantages .
 Leverage Relationships with Target Partners.
 MagicPoint Digital Computing Pen Technology
    Customers
  9




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Risk Factors  Our business currently depends on one significant customer.
 Competition
   Intellectual Property
     Research, Development, and Commercial Application Engineering
    10




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##### Table of Contents



Sales and Marketing
  Websites: www.inplaytechnologies.com , www.duraswitch.com , and www.finepointinnovations.com .
 
    
    information about the advantages of our patented technologies;
    
    white papers, press releases, and articles published by third parties about our products;
    
    virtual demonstrations of our technologies and products;
    
    technical data to assist design engineers in designing products using our technologies;
    
    information on products that currently use our technologies; and
    
    benefits and the process for obtaining information to utilize our technologies.
 Duraswitch Licensee Support.
 
    
    Click:an e-newsletter highlighting engineering, manufacturing, and procurement updates;
    
    The Report:an e-newsletter with sales tips, licensee success stories, and technology updates;
    
    web cast training: interactive presentations on Duraswitch technologies given
multiple times to accommodate various time zones, and also archived;
    
    online training manuals: complete design and manufacturing manuals for our
technologies available online to ensure updates and enhancements are available
immediately;
    
    sales presentations, marketing literature, images, and logos available for licensees
to download and integrate with their own branded sales materials; and
    
    strategic technology partner contacts for procurement and support for complementary
products that our licensees often use when manufacturing our technologies.
  MagicPoint Marketing Strategy.
 11




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Public Relations. EE Times, Control Engineering, Appliance Magazine, Electronicstalk, Tablet PC Magazine
and Tablet PC Talk.
 Seminars and Trade Shows.
 Employees
  Executive Officers
  Name
    
    Age
    
    PositionRobert J. Brilon
    
    
    46
    
    
    Chief Executive Officer, President,
Chief Financial Officer, Secretary,
Treasurer, and Director
 Robert J. Brilon
  Risk Factors
 Our business currently depends on one significant customer.
   Our customers may cancel orders, change production quantities, or delay production at any time, any
of which could materially reduce our net sales and operating results.
  12




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We depend on limited suppliers for certain critical raw materials. Our inability to obtain
sufficient raw materials at favorable prices could increase our prices or otherwise harm our
business.
   We may fail to meet expectations because our net sales, gross profit and cash flow will fluctuate
from period to period.
  
    
    our ability to adjust expenses for any particular quarter in response to changes in
net sales because a substantial component of our operating expenses are fixed costs;
    
    any change in the mix of products that we provide will impact our net sales and
gross profit depending on whether the sales are licensed components, which result in
lower sales prices but higher gross profit, or contract-manufactured products, which
result in higher net sales and lower gross profit;
    
    the cyclical nature of some of the markets in which we serve;
    
    the sensitivity of our production costs to declines in manufacturing yields, which
make yield problems both possible and costly when they occur;
    
    expenses associated with acquisitions; or
    
    general economic conditions.
  We have a lengthy sales cycle, which increases the likelihood that our quarterly net sales will
fluctuate and which may, in turn, adversely affect the trading price of our common stock.
  13




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Our failure to detect unknown defects in our products could materially harm our relationship with
customers, our reputation, and our business.
  Our operating results could be seriously harmed if the markets in which we sell our products do not
grow.
  
    
    computers and computer-related products, specifically tablet PC and convertible notebooks;
    
    medical electronics and equipment; and
    
    industrial controls.
  Downturns in the industries in which we operate could reduce the value of our inventories and cause
a reduction in our profits.
  We use manufacturing resources in Asia and Central America, which limits our control of the
manufacturing process.
  
    
    the outsourcing contractors ability to manufacture products that meet our technical
specifications and that have minimal defects;
    
    the outsourcing contractors ability to honor product warranties;
    
    the financial solvency, labor concerns, and general business condition of our
outsourcing contractors;
    
    unexpected changes in and the burdens and costs of compliance with a variety of
foreign laws and regulatory requirements;
    
    increased chances of our intellectual property being infringed as a result of the
failure of foreign governments to enforce the protection of intellectual property
rights;
    
    political and economic instability in overseas locations; and
    
    global health related matters, such as SARS, Avian Flu, and other health concerns.
 If we are unable to retain employees with key technical expertise or we are otherwise unable to
protect our intellectual property, or if we are found to have infringed third party intellectual
property rights, our financial condition and future prospects could be materially harmed.
  14




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Our business depends upon retaining key personnel and attracting new employees.
  If we fail to develop, introduce, and sell new products our operating results could be adversely
affected.
   
    
    we fail to complete and introduce new technology designs in a timely manner;
    
    we are unable to design and manufacture products according to the requirements of our customers;
    
    our customers do not successfully introduce new systems or products incorporating
our technologies;
    
    market demand for our technologies does not develop as anticipated;
    
    we are unable to obtain raw materials in a timely manner or at favorable prices; or
    
    we are unable to maintain pricing to sustain or grow our gross margins.
  Our goodwill may become impaired in the future.
  15




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We have made and may make other acquisitions and cannot assure you that any potential acquisition
will be successful.
  
    
    difficulties integrating the operations and personnel of acquired companies;
    
    exposure to unanticipated liabilities of an acquired company;
    
    the risk of entering into markets or producing products where we have limited or no
experience, including the integration of the purchased technologies and products with
our technologies and products;
    
    the diversion of the attention of our management team from other business concerns;
    
    the recording of goodwill and non-amortizable intangible assets that will be subject
to impairment testing on a regular basis and potential periodic impairment charges;
    
    potential loss of key customers or employees of acquired companies;
    
    significant expenditures to consummate acquisitions and additional resources
required to fund operations of acquired companies;
    
    difficulties in meeting applicable regulatory requirements; and
    
    our ability to assess, integrate, and implement internal controls of an acquired
company in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
  We have a history of operating losses.
  We face risks related to rapidly changing technology.
  Our growing international business activities subject us to risks that could reduce the demand for
our products and increase our operating expenses.
  16




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
    
    different technology standards and design requirements;
    
    longer payment cycles for and greater difficulties collecting accounts receivable;
    
    fluctuations in currency exchange rates;
    
    nationalization, expropriation, and limitations on repatriation of cash;
    
    social, economic, banking, and political risks;
    
    taxation;
    
    changes in U.S. laws and policies affecting trade, foreign investment and loans; and
    
    changes in enforcement of laws protecting intellectual property.
 Our stock price has been volatile .
  
    
    establishment, growth or loss of licensee or customer relationships;
    
    timing of introductions, production, and sales cycles of new products by our
licensees or customers incorporating our technologies in their products, which is at
their discretion;
    
    future announcements concerning our company, our competitors or our principal
customers, such as quarterly operating results, adjustments to previously reported
results, changes in earnings estimates by analysts, technological innovations, new
product introductions, governmental regulations, or litigation;
    
    sales of common stock by our officers, directors, and other insiders;
    
    investor perceptions concerning the prospects of our business;
    
    market reaction to acquisitions, joint ventures, or strategic investments announced
by us or our competitors;
    
    the liquidity within the market of our common stock;
    
    market conditions and investor sentiment affecting market prices of equity
securities of high technology companies or small cap companies;
    
    general economic, political, and market conditions, such as recessions or
international currency fluctuations;
    
    lawsuits filed against us; and
    
    compliance with the Sarbanes-Oxley Act.
 Rights to acquire shares of common stock could result in dilution to other holders of common stock.
  Certain provisions of our certificate of incorporation, granting our board of directors broad
discretion to issue shares of preferred stock, may adversely affect rights of common stockholders.
  17




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Item 2. Description of Property
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  18




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PART II
 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities
  High
    
    LowYear Ended December 31, 2005First Quarter
    
    $
    2.60
    
    
    $
    1.11Second Quarter
    
    
    3.10
    
    
    
    1.25Third Quarter
    
    
    3.80
    
    
    
    1.20Fourth Quarter
    
    
    4.15
    
    
    
    0.80Year Ended December 31, 2006First Quarter
    
    $
    3.82
    
    
    $
    2.25Second Quarter
    
    
    3.00
    
    
    
    2.18Third Quarter
    
    
    2.75
    
    
    
    1.15Fourth Quarter
    
    
    1.90
    
    
    
    1.13
  Dividend Policy
  Equity Compensation Plan Information
  (a)
    
    
    
    
    
    
    (c)Number of SecuritiesNumber of Securities
    
    
    (b)
    
    
    Remaining Available forto be Issued Upon
    
    
    Weighted Average
    
    
    Future Issuance UnderExercise of
    
    
    Exercise Price of
    
    
    Equity CompensationOutstanding
    
    
    Outstanding
    
    
    Plans (ExcludingOptions, Warrants,
    
    
    Options, Warrants,
    
    
    Securities Reflected inPlan Category
    
    and Rights
    
    
    and Rights
    
    
    Column (a)Equity CompensationPlans Approved by
Stockholders
    
    
    1,468,473
    
    
    $
    6.62
    
    
    
    63,467Equity CompensationPlans Not Approved by
Stockholders
    
    
    509,091
    (1)
    
    $
    3.64
    
    
    
    Total
    
    
    1,977,564
    
    
    $
    5.85
    
    
    
    63,467
 
 (1)
    
    Issuance of warrants in connection with the December 2005 private placement of 1,272,728
shares. 19




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Item 6. Managements Discussion and Analysis
 Overview
       Application of Critical Accounting Policies
   Revenue Recognition.
  20




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Inventory Valuation.
 Impairment or Disposal of Long-Lived Assets.
  Goodwill and Other Intangible
Assets
 Income
Taxes.
 21




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Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended December 31,
2005
 Net Revenue.
 Year ended December 31,
    
    
    Increase (Decrease)2006
    
    
    2005
    
    
    Amount
    
    
    PercentageMagicPoint
    
    $
    8,638,519
    
    
    $
    3,031,115
    
    
    $
    5,607,404
    
    
    
    185
    %Duraswitch
    
    
    853,643
    
    
    
    3,424,429
    
    
    
    (2,570,786
    )
    
    
    (75
    %)Total net revenue
    
    $
    9,492,162
    
    
    $
    6,455,544
    
    
    $
    3,036,618
    
    
    
    47
    %
  Net MagicPoint Revenue.
 Net Duraswitch Revenue.
  Cost of Goods Sold.
 Year ended December 31,
    
    
    Increase2006
    
    
    2005
    
    
    Amount
    
    
    PercentMagicPoint
    
    $
    7,919,064
    
    
    $
    2,224,266
    
    
    $
    5,694,798
    
    
    
    256
    %Duraswitch
    
    
    306,440
    
    
    
    253,105
    
    
    
    53,335
    
    
    
    21
    %Total COGS
    
    $
    8,225,504
    
    
    $
    2,477,371
    
    
    $
    5,748,133
    
    
    
    232
    %
  MagicPoint COGS.
 22




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Duraswitch COGS.
 Selling, General and Administrative Expenses.
 Year ended December 31,
    
    
    Increase (Decrease)2006
    
    
    2005
    
    
    Amount
    
    
    PercentMagicPoint
    
    $
    1,088,268
    
    
    $
    326,475
    
    
    $
    761,793
    
    
    
    233
    %Duraswitch
    
    
    244,939
    
    
    
    710,610
    
    
    
    (465,671
    )
    
    
    (66
    %)Corporate
    
    
    1,897,338
    
    
    
    1,683,815
    
    
    
    213,523
    
    
    
    13
    %Total SG&A
    
    $
    3,230,545
    
    
    $
    2,720,900
    
    
    $
    509,645
    
    
    
    19
    %
 MagicPoint SG&A.
 Duraswitch SG&A.
 Corporate SG&A.
 Research, Development and Commercial Application Engineering Expenses.
 Year ended December 31,
    
    
    Increase (Decrease)2006
    
    
    2005
    
    
    Amount
    
    
    PercentMagicPoint
    
    $
    925,993
    
    
    $
    209,782
    
    
    $
    716,211
    
    
    
    341
    %Duraswitch
    
    
    425,279
    
    
    
    431,265
    
    
    
    (5,986
    )
    
    
    (1
    %)Total R&D
    
    $
    1,351,272
    
    
    $
    641,047
    
    
    $
    710,225
    
    
    
    111
    %
 MagicPoint R&D.
 Duraswitch R&D.
 Interest and Other Income  Net.
 23




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Results of Operations for the Year Ended December 31, 2005 Compared to the Year Ended December 31,
2004
 Net Revenue.
 Year ended December 31,
    
    
    Increase2005
    
    
    2004
    
    
    Amount
    
    
    PercentDuraswitch
    
    $
    3,424,429
    
    
    $
    1,757,053
    
    
    $
    1,667,376
    
    
    
    95
    %MagicPoint
    
    
    3,031,115
    
    
    
    
    
    
    
    3,031,115
    
    
    
    Total Net Revenue
    
    $
    6,455,544
    
    
    $
    1,757,053
    
    
    $
    4,698,491
    
    
    
    267
    %
  Net Duraswitch Revenue.
 Net MagicPoint Revenue.
 Cost of Goods Sold.
 Year ended December 31,
    
    
    Increase2005
    
    
    2004
    
    
    Amount
    
    
    PercentDuraswitch
    
    $
    253,105
    
    
    $
    187,547
    
    
    $
    65,558
    
    
    
    35
    %MagicPoint
    
    
    2,224,266
    
    
    
    
    
    
    
    2,224,266
    
    
    
    Total COGS
    
    $
    2,477,371
    
    
    $
    187,547
    
    
    $
    2,289,824
    
    
    
    1221
    %
  Duraswitch COGS.
 MagicPoint COGS.
 Selling, General and Administrative Expenses.
 Year ended December 31,
    
    
    Increase2005
    
    
    2004
    
    
    Amount
    
    
    PercentDuraswitch
    
    $
    710,610
    
    
    $
    640,975
    
    
    $
    69,635
    
    
    
    11
    %MagicPoint
    
    
    326,475
    
    
    
    
    
    
    
    326,475
    
    
    
    Corporate
    
    
    1,683,815
    
    
    
    1,266,059
    
    
    
    417,756
    
    
    
    33
    %Total SG&A
    
    $
    2,720,900
    
    
    $
    1,907,034
    
    
    $
    813,866
    
    
    
    43
    %
 24




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Duraswitch SG&A.
 MagicPoint SG&A.
 Corporate SG&A.
 Research, Development and Commercial Application Engineering Expenses.
 Year ended December 31,
    
    
    Increase (Decrease)2005
    
    
    2004
    
    
    Amount
    
    
    PercentDuraswitch
    
    $
    431,265
    
    
    $
    472,485
    
    
    $
    (41,220
    )
    
    
    (9
    %)MagicPoint
    
    
    209,782
    
    
    
    
    
    
    
    209,782
    
    
    
    Total R&D
    
    $
    641,047
    
    
    $
    472,485
    
    
    $
    168,562
    
    
    
    36
    %
 Duraswitch R&D.
 MagicPoint R&D.
 Impairment Loss on Note Receivable.
  Interest and Other Income  Net.
 Liquidity and Capital Resources
   25




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New Accounting Pronouncements.
 26




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27




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Item 7. Financial Statements
  
    Share-Based Payment.
 
  28




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29




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INPLAY TECHNOLOGIES, INC.
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,591,312
    
    
    $
    4,022,734Restricted short-term investment
    
    
    
    
    
    
    400,000Accounts receivable
    
    
    379,369
    
    
    
    1,460,169Inventory (Note 5)
    
    
    1,159,629
    
    
    
    1,311,077Prepaid expenses and other current assets
    
    
    190,847
    
    
    
    87,071Total current assets
    
    
    3,321,157
    
    
    
    7,281,051PROPERTY AND EQUIPMENT  Net (Note 6)
    
    
    510,167
    
    
    
    557,145GOODWILL
    
    
    1,321,240
    
    
    
    1,321,240PATENTS  Net (Note 7)
    
    
    1,303,474
    
    
    
    1,389,153OTHER ASSETS
    
    
    12,258
    
    
    
    19,299TOTAL
    
    $
    6,468,296
    
    
    $
    10,567,888LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    698,600
    
    
    $
    1,496,780Accrued salaries and benefits
    
    
    498,090
    
    
    
    510,794Accrued purchase commitments (Note 16)
    
    
    456,000
    
    
    
    Other accrued expenses and other current liabilities
    
    
    192,974
    
    
    
    539,786Deferred licensing and other revenue (Note 9)
    
    
    25,526
    
    
    
    82,879Current portion of notes payable and capital leases payable
    
    
    
    
    
    
    165,914Total current liabilities
    
    
    1,871,190
    
    
    
    2,796,153LONG-TERM LIABILITIESOther non-current liabilities
    
    
    851
    
    
    
    11,465Total long-term liabilities
    
    
    851
    
    
    
    11,465Total liabilities
    
    
    1,872,041
    
    
    
    2,807,618COMMITMENTS AND CONTINGENCIES (Notes 4 and 16)STOCKHOLDERS EQUITY (Notes 10 and 11)Preferred stock, no par value, 10,000,000 shares authorized,
no shares issued and outstanding in 2006 and 2005
    
    
    
    
    
    
    Common stock, $.001 par value, 40,000,000 shares authorized
in 2006 and 2005, 11,502,315 and 11,481,512 shares issued and
outstanding in 2006 and 2005, respectively
    
    
    11,502
    
    
    
    11,482Additional paid-in capital
    
    
    31,424,436
    
    
    
    31,373,292Accumulated deficit
    
    
    (26,839,683
    )
    
    
    (23,624,504
    )Total stockholders equity
    
    
    4,596,255
    
    
    
    7,760,270TOTAL
    
    $
    6,468,296
    
    
    $
    10,567,888
  30




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##### Table of Contents



INPLAY TECHNOLOGIES, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 2006
    
    
    2005
    
    
    2004NET REVENUE:MagicPoint
    
    $
    8,638,519
    
    
    $
    3,031,115
    
    
    $
    Duraswitch related party  Delphi (Note 9)
    
    
    
    
    
    
    2,955,118
    
    
    
    1,407,978Duraswitch non-related parties
    
    
    853,643
    
    
    
    469,311
    
    
    
    349,075Total net revenue
    
    
    9,492,162
    
    
    
    6,455,544
    
    
    
    1,757,053COST OF GOODS SOLD:MagicPoint (Includes $545,599 related to inventory
obsolescence and $456,000 for purchase commitments
in 2006, and $16,205 for inventory obsolescence
in 2005.)
    
    
    7,919,064
    
    
    
    2,224,266
    
    
    
    Duraswitch
    
    
    306,440
    
    
    
    253,105
    
    
    
    187,547Total cost of goods sold
    
    
    8,225,504
    
    
    
    2,477,371
    
    
    
    187,547Gross profit
    
    
    1,266,658
    
    
    
    3,978,173
    
    
    
    1,569,506OPERATING EXPENSES:Selling, general and administrative
    
    
    3,230,545
    
    
    
    2,720,900
    
    
    
    1,907,034Research, development and commercial
application engineering
    
    
    1,351,272
    
    
    
    641,047
    
    
    
    472,485Total operating expenses
    
    
    4,581,817
    
    
    
    3,361,947
    
    
    
    2,379,519INCOME (LOSS) FROM OPERATIONS
    
    
    (3,315,159
    )
    
    
    616,226
    
    
    
    (810,013
    )OTHER INCOME (EXPENSE):Impairment loss on note receivable (Note 8)
    
    
    
    
    
    
    
    
    
    
    (500,000
    )Interest and other income  net
    
    
    99,980
    
    
    
    51,424
    
    
    
    37,935NET INCOME (LOSS)
    
    $
    (3,215,179
    )
    
    $
    667,650
    
    
    $
    (1,272,078
    )NET INCOME (LOSS) PER COMMON SHARE,BASIC
    
    $
    (0.28
    )
    
    $
    0.07
    
    
    $
    (0.13
    )NET INCOME (LOSS) PER COMMON SHARE,DILUTED
    
    $
    (0.28
    )
    
    $
    0.07
    
    
    $
    (0.13
    )WEIGHTED AVERAGE SHARES OUTSTANDING,BASIC
    
    
    11,493,205
    
    
    
    9,823,637
    
    
    
    9,603,717WEIGHTED AVERAGE SHARES OUTSTANDING,DILUTED
    
    
    11,493,205
    
    
    
    9,903,485
    
    
    
    9,603,717
  31




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##### Table of Contents



INPLAY TECHNOLOGIES, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 AdditionalCommon Stock
    
    
    Paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBALANCE, DECEMBER 31, 2003
    
    
    9,591,673
    
    
    $
    9,592
    
    
    $
    27,383,479
    
    
    $
    (23,020,076
    )
    
    $
    4,372,995Employee stock options exercised
    
    
    23,000
    
    
    
    23
    
    
    
    27,437
    
    
    
    
    
    
    
    27,460Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,272,078
    )
    
    
    (1,272,078
    )BALANCE, DECEMBER 31, 2004
    
    
    9,614,673
    
    
    
    9,615
    
    
    
    27,410,916
    
    
    
    (24,292,154
    )
    
    
    3,128,377Shares issued for acquisition of FinePoint
    
    
    567,611
    
    
    
    567
    
    
    
    799,764
    
    
    
    
    
    
    
    800,331Shares and warrants issued in private offering
    
    
    1,272,728
    
    
    
    1,273
    
    
    
    3,132,468
    
    
    
    
    
    
    
    3,133,741Employee stock options exercised
    
    
    26,500
    
    
    
    27
    
    
    
    30,144
    
    
    
    
    
    
    
    30,171Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    667,650
    
    
    
    667,650BALANCE, DECEMBER 31, 2005
    
    
    11,481,512
    
    
    
    11,482
    
    
    
    31,373,292
    
    
    
    (23,624,504
    )
    
    
    7,760,270Issuance of stock options
    
    
    
    
    
    
    
    
    
    
    73,573
    
    
    
    
    
    
    
    73,573Issuance of restricted stock
    
    
    4,803
    
    
    
    4
    
    
    
    7,496
    
    
    
    
    
    
    
    7,500Payments in connection with registration of
stock previously issued
    
    
    
    
    
    
    
    
    
    
    (56,189
    )
    
    
    
    
    
    
    (56,189
    )Employee stock options exercised
    
    
    16,000
    
    
    
    16
    
    
    
    26,264
    
    
    
    
    
    
    
    26,280Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,215,179
    )
    
    
    (3,215,179
    )BALANCE, DECEMBER 31, 2006
    
    
    11,502,315
    
    
    $
    11,502
    
    
    $
    31,424,436
    
    
    $
    (26,839,683
    )
    
    $
    4,596,255
  32




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##### Table of Contents



INPLAY TECHNOLOGIES, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (3,215,179
    )
    
    $
    667,650
    
    
    $
    (1,272,078
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    335,559
    
    
    
    282,879
    
    
    
    214,535Impairment loss on note receivable and commitment
    
    
    
    
    
    
    
    
    
    
    500,000Stock compensation
    
    
    81,073
    
    
    
    
    
    
    
    (Gain) loss on disposal of equipment
    
    
    42,291
    
    
    
    
    
    
    
    (12,335
    )Write down of inventory
    
    
    545,599
    
    
    
    31,000
    
    
    
    Changes in operating assets and liabilities; net of assets
acquired and liabilities assumed:Accounts receivable
    
    
    1,080,800
    
    
    
    (1,347,081
    )
    
    
    1,162Inventory
    
    
    (394,151
    )
    
    
    (582,935
    )
    
    
    (45,561
    )Prepaid expenses and other current assets
    
    
    (96,735
    )
    
    
    16,894
    
    
    
    43,914Other assets
    
    
    
    
    
    
    
    
    
    
    (1,224
    )Accounts payable
    
    
    (798,183
    )
    
    
    1,016,187
    
    
    
    (13,778
    )Accrued salaries and benefits
    
    
    (12,702
    )
    
    
    275,374
    
    
    
    24,472Other accrued expenses and other current liabilities
    
    
    109,188
    
    
    
    55,635
    
    
    
    (32,424
    )Other non-current liabilities
    
    
    (10,614
    )
    
    
    (7,021
    )
    
    
    (11,201
    )Deferred licensing revenue
    
    
    (57,353
    )
    
    
    (993,212
    )
    
    
    (400,160
    )Net cash used in operating activities
    
    
    (2,390,407
    )
    
    
    (584,630
    )
    
    
    (1,004,678
    )CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of FinePoint
    
    
    
    
    
    
    (527,347
    )
    
    
    Sale (purchase) of restricted short-term investment
    
    
    400,000
    
    
    
    (400,000
    )
    
    
    Funding of note receivable
    
    
    
    
    
    
    (110,000
    )
    
    
    (390,000
    )Increase in patents
    
    
    (48,244
    )
    
    
    (38,803
    )
    
    
    (35,619
    )Proceeds from sale of equipment
    
    
    
    
    
    
    
    
    
    
    17,549Purchases of property and equipment
    
    
    (196,948
    )
    
    
    (109,099
    )
    
    
    (31,022
    )Net cash (used in) provided by investing activities
    
    
    154,808
    
    
    
    (1,185,249
    )
    
    
    (439,092
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments in connection with the registration of previously issued
stock
    
    
    (56,189
    )
    
    
    
    
    
    
    Net proceeds from issuance of stock
    
    
    
    
    
    
    3,196,007
    
    
    
    Net proceeds from exercise of employee stock options
    
    
    26,280
    
    
    
    30,171
    
    
    
    27,460Principal payments on capital leases and notes payable
    
    
    (165,914
    )
    
    
    (266,020
    )
    
    
    (8,213
    )Net cash (used in) provided by financing activities
    
    
    (195,823
    )
    
    
    2,960,158
    
    
    
    19,247INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (2,431,422
    )
    
    
    1,190,279
    
    
    
    (1,424,523
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    4,022,734
    
    
    
    2,832,455
    
    
    
    4,256,978CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    1,591,312
    
    
    $
    4,022,734
    
    
    $
    2,832,455SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:Cash paid for interest
    
    $
    2,755
    
    
    $
    11,651
    
    
    $
    555Fees accrued in connection with the issuance of stock
    
    
    
    
    
    $
    62,266Fair value of FinePoint Innovations, Inc. assets acquired
    
    
    
    
    
    
    2,824,282Less consideration given:Cash advances converted into FinePoint Innovations, Inc. equity
    
    
    
    
    
    
    161,937Cash paid at closing in settlement of certain assumed liabilities,
net of cash acquired
    
    
    
    
    
    
    309,761Acquisition costs
    
    
    
    
    
    
    169,522Unregistered common stock issued
    
    
    
    
    
    
    800,331Reversal of valuation allowance on Companys deferred tax assets
    
    
    
    
    
    
    (81,072
    )Liabilities assumed, net of payments
    
    
    
    
    
    $
    1,463,803
  33




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##### Table of Contents



INPLAY TECHNOLOGIES, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
2006, 2005, AND 2004
 1. NATURE OF BUSINESS
    2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
  Principles of Consolidation.
 Cash Equivalents.
 Inventory.
 Property and Equipment.
 Computer software
    
    3 yearsComputer equipment
    
    3 to 5 yearsTooling
    
    5 to 7 yearsOther machinery and equipment
    
    5 yearsOffice furniture and fixtures
    
    7 years
  Patents.
 Goodwill.
 34




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##### Table of Contents



Revenue Recognition.
   Accounts Receivable.
  Stock-Based Compensation.
 35




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2004Net income (loss), as reported
    
    $
    667,650
    
    
    $
    (1,272,078
    )Add: Stock-based compensation
recorded as an expense
    
    
    
    
    
    
    Less: Total stock-based employee
expense determined under fair value
based method for all awards, no tax
effect
    
    
    (463,690
    )
    
    
    (147,953
    )Pro forma net income (loss)
    
    $
    203,960
    
    
    $
    (1,420,031
    )Income (loss) per share:Basic and diluted, as reported
    
    $
    0.07
    
    
    $
    (0.13
    )Basic and diluted, pro forma
    
    $
    0.02
    
    
    $
    (0.15
    )
 Income Taxes.
 Income (Loss) Per Common Share.
 36




---



##### Table of Contents



2005Weighted average shares outstanding  Basic
    
    
    9,823,637Effect of dilutive stock options
    
    
    79,848Weighted average shares outstanding  Fully diluted
    
    
    9,903,485
 Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of.
  New Accounting Pronouncements.
    37




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##### Table of Contents



Fair Value of Financial Instruments.
 Use of Estimates.
 3. ACQUISITION OF FINEPOINT INNOVATIONS, INC.
 ®
   38




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##### Table of Contents



FinePoint InnovationsAt September 1, 2005Current assets
    
    $
    636,103Deferred tax asset
    
    
    261,200Property, plant and equipment
    
    
    391,005Patents
    
    
    650,000Goodwill
    
    
    877,366Other non current assets
    
    
    8,608Total assets acquired
    
    
    2,824,282Current liabilities
    
    
    1,115,848Deferred tax liability
    
    
    342,272Long-term portion of capital lease
    
    
    5,683Total liabilities assumed, net of payments
    
    
    1,463,803Net assets acquired
    
    $
    1,360,479
    Twelve months ended
    
    
    Twelve months endedDecember 31, 2005
    
    
    December 31, 2004Revenue
    
    $
    6,758,919
    
    
    $
    2,901,763Net income (loss)
    
    $
    2,907
    
    
    $
    (1,611,411
    )Income (loss) per share, basic and diluted
    
    $
    0.00
    
    
    $
    (0.16
    )
 4. CONCENTRATIONS
   39




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##### Table of Contents



5. INVENTORY
  2006
    
    
    2005Raw materials
    
    $
    1,337,202
    
    
    $
    831,369Finished goods
    
    
    457,676
    
    
    
    621,680Subtotal
    
    
    1,794,878
    
    
    
    1,453,049Less reserves
    
    
    (635,249
    )
    
    
    (141,972
    )Inventory  net
    
    $
    1,159,629
    
    
    $
    1,311,077
  6. PROPERTY AND EQUIPMENT
  2006
    
    
    2005Computer equipment and software
    
    $
    765,455
    
    
    $
    720,978Tooling
    
    
    389,351
    
    
    
    310,121Other machinery and equipment
    
    
    225,390
    
    
    
    219,555Leasehold improvements
    
    
    133,743
    
    
    
    133,743Office furniture and fixtures
    
    
    89,099
    
    
    
    90,514Total
    
    
    1,603,038
    
    
    
    1,474,911Accumulated depreciation
    
    
    (1,092,871
    )
    
    
    (917,766
    )Property and equipment  net
    
    $
    510,167
    
    
    $
    557,145
  7. PATENTS
   2006
    
    
    2005Patents
    
    $
    1,747,719
    
    
    $
    1,699,474Accumulated amortization
    
    
    (444,245
    )
    
    
    (310,321
    )Patents  net
    
    $
    1,303,474
    
    
    $
    1,389,153
 8. NOTE RECEIVABLE FROM ACTIVE RECOGNITION TECHNOLOGIES, INC.
  40




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##### Table of Contents



9. DEFERRED LICENSING REVENUE
     10. STOCKHOLDERS EQUITY
 Common Stock.
 41




---



##### Table of Contents



Preferred Stock.
 Warrants.
    Warrants
    
    
    Price RangeBalance, December 31, 2003
    
    
    425,000
    
    
    $
    7.00-$8.25Issued
    
    
    Exercised
    
    
    Expired
    
    
    (425,000
    )
    
    $
    7.00-$8.25Balance, December 31, 2004
    
    
    Issued
    
    
    509,091
    
    
    $
    3.44-$4.22Exercised
    
    
    Expired
    
    
    Balance, December 31, 2005
    
    
    509,091
    
    
    $
    3.44-$4.22Issued
    
    
    Exercised
    
    
    Expired
    
    
    Balance, December 31, 2006
    
    
    509,091
    
    
    $
    3.44-$4.22
 11. STOCK OPTION PLANS
   42




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##### Table of Contents



43




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##### Table of Contents



WeightedAverageOption
    
    ExerciseShares
    
    PriceBalance, December 31, 2003
    
    
    1,042,440
    
    
    $
    9.02Granted
    
    
    85,000
    
    
    $
    2.14Exercised
    
    
    (23,000
    )
    
    $
    1.19Expired or terminated
    
    
    (73,484
    )
    
    $
    9.17Balance, December 31, 2004
    
    
    1,030,956
    
    
    $
    8.61Granted
    
    
    354,600
    
    
    $
    2.36Exercised
    
    
    (26,500
    )
    
    $
    1.14Expired or terminated
    
    
    (8,000
    )
    
    $
    1.60Balance, December 31, 2005
    
    
    1,351,056
    
    
    $
    7.16Granted
    
    
    210,000
    
    
    $
    2.09Exercised
    
    
    (16,000
    )
    
    $
    1.64Expired or terminated
    
    
    (76,583
    )
    
    $
    4.72Balance, December 31, 2006
    
    
    1,468,473
    
    
    $
    6.62
 2006
    
    
    2005
    
    
    2004Exercisable at the end of the year
    
    
    1,378,473
    
    
    
    1,351,056
    
    
    
    1,030,956Weighted average fair value of options
granted during the year
    
    $
    1.00
    
    
    $
    1.33
    
    
    $
    1.18
  OptionsOptions Outstanding
    
    ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageOptions
    
    Contractual
    
    Exercise
    
    Options
    
    ExerciseRange of Exercise Price
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$   0.81
    
    
    
    $
    1.58
    
    
    
    305,300
    
    
    
    7.4
    
    
    $
    1.33
    
    
    
    290,300
    
    
    $
    1.40$   1.65
    
    
    
    $
    3.38
    
    
    
    538,300
    
    
    
    8.3
    
    
    $
    2.39
    
    
    
    463,300
    
    
    $
    2.78$   6.00
    
    
    
    $
    10.85
    
    
    
    384,401
    
    
    
    3.1
    
    
    $
    7.03
    
    
    
    384,401
    
    
    $
    7.03$ 13.01
    
    
    
    $
    22.31
    
    
    
    240,472
    
    
    
    1.0
    
    
    $
    22.16
    
    
    
    240,472
    
    
    $
    22.16$   0.81
    
    
    
    $
    22.31
    
    
    
    1,468,473
    
    
    
    5.5
    
    
    $
    6.62
    
    
    
    1,378,473
    
    
    $
    7.05
 Years Ended December 31,
    
    2006
    
    2005
    
    2004Options exercisable at end of period
    
    
    1,378,473
    
    
    
    1,351,056
    
    
    
    1,030,956Options available for future grant
    
    
    63,467
    
    
    
    201,687
    
    
    
    48,287Intrinsic value of options exercised
    
    $
    16,493
    
    
    $
    64,292
    
    
    $
    35,777Aggregate intrinsic value of
options outstanding
    
    $
    54,670
    
    
    $
    863,933
    
    
    $
    275,194Aggregate intrinsic value of
options exercisable
    
    $
    53,920
    
    
    $
    863,933
    
    
    $
    275,194
 44




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##### Table of Contents



12. INCOME TAXES
  2006
    
    
    2005Deferred tax assets:Operating loss carryforwards
    
    $
    8,455,384
    
    
    $
    8,418,625Capitalized research and development
    
    
    1,559,329
    
    
    
    1,190,958Research and development credits
    
    
    1,398,235
    
    
    
    1,605,265Deferred licensing revenue
    
    
    11,013
    
    
    
    33,152Note receivable
    
    
    
    
    
    
    200,000Inventory reserve
    
    
    247,194
    
    
    
    56,789Accruals
    
    
    322,566
    
    
    
    99,397Other
    
    
    28,733
    
    
    
    33,132Total
    
    
    12,022,454
    
    
    
    11,637,318Less valuation allowance
    
    
    (11,436,074
    )
    
    
    (10,972,874
    )Total
    
    
    586,380
    
    
    
    664,444Deferred tax liabilities:Patents
    
    
    (526,641
    )
    
    
    (555,662
    )Other
    
    
    (59,739
    )
    
    
    (108,782
    )Total
    
    $
    
    
    
    $
    
    45




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##### Table of Contents



2006
    
    
    2005
    
    
    2004(Expense) / benefit calculated at statutory rate
    
    $
    1,093,162
    
    
    $
    (227,001
    )
    
    $
    432,507Increase (decrease) in income resulting from:Research and development and other tax credits
    
    
    112,495
    
    
    
    39,101
    
    
    
    667,658State income taxes, net
    
    
    147,073
    
    
    
    (38,134
    )
    
    
    76,960Permanent differences
    
    
    (11,707
    )
    
    
    (10,950
    )
    
    
    (8,562
    )Expiration of state net operating loss carryforwards
    
    
    (351,988
    )
    
    
    (274,917
    )
    
    
    Other, net
    
    
    5,106
    
    
    
    1,628
    
    
    
    20,891Valuation allowance
    
    
    (457,584
    )
    
    
    510,273
    
    
    
    (1,189,454
    )Adjustment for change in state income tax rate
    
    
    (536,557
    )
    
    
    
    
    
    
    Total
    
    $
    
    
    
    $
    
    
    
    $
    
 13. SEGMENTS
  2006
    
    
    2005RevenuesMagicPoint
    
    $
    8,638,519
    
    
    $
    3,031,115Duraswitch
    
    
    853,643
    
    
    
    3,424,429Total revenue
    
    $
    9,492,162
    
    
    $
    6,455,544Cost of
goods soldMagicPoint
    
    $
    7,919,064
    
    
    $
    2,224,266Duraswitch
    
    
    306,440
    
    
    
    253,105Total cost of goods sold
    
    $
    8,225,504
    
    
    $
    2,477,371Gross profitMagicPoint
    
    $
    719,455
    
    
    $
    806,849Duraswitch
    
    
    547,203
    
    
    
    3,171,324Total gross profit
    
    $
    1,266,658
    
    
    $
    3,978,173Selling, general and administrativeMagicPoint
    
    $
    1,088,268
    
    
    $
    326,475Duraswitch
    
    
    244,939
    
    
    
    710,610Corporate
    
    
    1,897,338
    
    
    
    1,683,815Total
selling, general and administrative
    
    $
    3,230,545
    
    
    $
    2,720,900
 46




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##### Table of Contents



2006
    
    
    2005Research, development and
application engineeringMagicPoint
    
    $
    925,993
    
    
    $
    209,782Duraswitch
    
    
    425,279
    
    
    
    431,265Total research, development and application
engineering
    
    $
    1,351,272
    
    
    $
    641,047Income (loss) from operationsMagicPoint
    
    $
    (1,294,806
    )
    
    $
    270,592Duraswitch
    
    
    (123,015
    )
    
    
    2,029,449Corporate
    
    
    (1,897,338
    )
    
    
    (1,683,815
    )Total net revenue
    
    $
    (3,315,159
    )
    
    $
    616,226
 December 31,2006
    
    
    2005GoodwillMagicPoint
    
    $
    877,366
    
    
    $
    877,366Duraswitch
    
    
    443,874
    
    
    
    443,874Total goodwill
    
    $
    1,321,240
    
    
    $
    1,321,240Total assetsMagicPoint
    
    $
    3,254,582
    
    
    $
    3,599,754Duraswitch
    
    
    1,548,133
    
    
    
    1,600,954Corporate
    
    
    1,665,581
    
    
    
    5,367,180Total assets
    
    $
    6,468,296
    
    
    $
    10,567,888
 14. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
  2006 - Quarter Ended,December 31
    
    September 30
    
    June 30
    
    March 31Net revenue
    
    $
    2,133,701
    
    
    $
    3,089,316
    
    
    $
    2,551,150
    
    
    $
    1,717,995Gross profit
    
    
    (371,499
    )
    
    
    805,167
    
    
    
    366,779
    
    
    
    466,211Net loss
    
    
    (1,741,810
    )
    
    
    (257,332
    )
    
    
    (683,646
    )
    
    
    (532,391
    )Net loss per common share,
basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.02
    )
    
    $
    (0.06
    )
    
    $
    (0.05
    )
 2005 - Quarter Ended,December 31
    
    September 30
    
    June 30
    
    March 31Net revenue
    
    $
    3,193,179
    
    
    $
    819,172
    
    
    $
    2,236,544
    
    
    $
    206,649Gross profit
    
    
    1,361,445
    
    
    
    282,389
    
    
    
    2,173,387
    
    
    
    160,952Net income (loss)
    
    
    118,022
    
    
    
    (410,790
    )
    
    
    1,372,193
    
    
    
    (411,775
    )Net income (loss)
per common share,
basic and diluted
    
    $
    0.01
    
    
    $
    (0.04
    )
    
    $
    0.14
    
    
    $
    (0.04
    )
 47




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##### Table of Contents



15. GEOGRAPHIC CONCENTRATION
  2006
    
    
    2005
    
    
    2004United States
    
    $
    1,092,149
    
    
    $
    3,406,397
    
    
    $
    1,569,578China
    
    
    8,234,047
    
    
    
    2,858,805
    
    
    
    Europe
    
    
    43,428
    
    
    
    92,975
    
    
    
    92,100Other
    
    
    122,538
    
    
    
    97,367
    
    
    
    95,375Total
    
    $
    9,492,162
    
    
    $
    6,455,544
    
    
    $
    1,757,053
 16. COMMITMENTS
 Purchase Commitments.
 Management Services Agreement.
 FinePoint Earn-Out.
 Employment Agreements.
 Lease Agreements.
 Tooling.
 Litigation.
 17. SUBSEQUENT EVENT
  48




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##### Table of Contents



Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
     
 Item 8A. Controls and Procedures
   
 Item 8B. Other Information
  49




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##### Table of Contents



PART III
 
 Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance With Section 16(a) of the Exchange Act
  
 Item 10. Executive Compensation
  
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 12. Certain Relationships and Related Transactions, and Director Independence
  
 Item 13. Exhibits
 Exhibit No.
    
    Description of Exhibit2.1
    
    Stock Purchase Agreement dated as of April l, 2004 among
Duraswitch Industries, Inc., Active Recognition Technologies,
Arthur Lawida, Ole Sorensen, and Alex Parrish (1)2.2
    
    Agreement and Plan of Merger, dated as of July 27, 2005, among
InPlay Technologies, Inc., FPI Acquisition, Inc., FinePoint
Innovations, Inc., and Stephen Caldwell (2)2.3
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of
July 27, 2005, among InPlay Technologies, Inc., FPI
Acquisition, Inc., FinePoint Innovations, Inc., and Stephen
Caldwell (2)3.1
    
    Amended and Restated Articles of Incorporation (12)3.2
    
    Amended and Restated Bylaws4.1
    
    Specimen Common Stock Certificate (3)10.2
    
    1997 Stock Option Plan (3)10.3
    
    1999 Stock Option Plan (3)10.4
    
    2000 Stock Option Plan (4)10.5
    
    2000 Stock Option Plan Amendment (6)10.6
    
    Management Services Agreement dated May 1, 1997 by and between
Total Switch, Inc. and VanDun, LLC (3)10.7
    
    Agreement for Assignment of Present and Future Inventions in
Certain Subject Matter, dated May 1, 1997, by and between
Total Switch, Inc. and Anthony J. Van Zeeland (3)10.8
    
    Licensing Agreement, dated April 20, 2000, between Delphi
Automotive Systems LLC and Duraswitch Industries, Inc. (7)10.9
    
    Shareholders Agreement, dated June 19, 2000, among Duraswitch
Industries, Inc., Delphi Automotive Systems Corporation, and
the Primary Shareholders named therein (8)
 50




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.10
    
    Employment Agreement, dated July 1, 2003, by and between
Duraswitch Industries, Inc. and Anthony J. Van Zeeland (9)10.11
    
    Standard sublease, dated November 1, 2003, by and between 234
South Extension, L.L.C. and Duraswitch Industries, Inc. (4)10.12
    
    Form of Indemnification Agreement (16)10.13(a)
    
    Employment Agreement, dated October 1, 2005, by and between
InPlay Technologies, Inc. and Robert J. Brilon (14)10.13(b)
    
    2005 Stock Award Plan (10)10.14
    
    FinePoint Innovations, Inc. convertible promissory note
($300,000), dated July 27, 2005, issued in favor of InPlay
Technologies, Inc. (2)10.15
    
    Form of Credit Facility Note, dated July 27, 2005, issued by
FinePoint Innovations, Inc. in favor of InPlay Technologies,
Inc. (2)10.19
    
    Securities Purchase Agreement, dated December 27, 2005, among
InPlay Technologies, Inc. and the investor parties thereto
(11)10.20
    
    Registration Rights Agreement, dated December 27, 2005, among
InPlay Technologies, Inc. and the investor parties thereto
(11)10.21
    
    Form of Investor Warrant, dated December 27, 2005, issued by
InPlay Technologies, Inc. to the investors in connection with
the December 2005 private offering (11)10.22
    
    Form of Agent Warrant, dated December 27, 2005, issued by
InPlay Technologies, Inc. to the placement agent in connection
with the December 2005 private offering (11)10.23
    
    Settlement Agreement between InPlay Technologies and Delphi
Automotive Systems, LLC (15)14
    
    Code of Ethics (16)21
    
    List of Subsidiaries23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of Deloitte & Touche, LLP31
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Action of 1934, as
amended32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to InPlay Technologies, Inc.s Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 2004,
as filed with the Commission on April 29, 2004.(2)
    
    Incorporated by reference to InPlay Technologies, Inc.s Form 8-K
dated July 27, 2005, as filed with the Commission on August 2, 2005.(3)
    
    Incorporated by reference to InPlay Technologies, Inc.s Registration
Statement on Form SB-2, as filed with the Commission on or about
August 16, 1999.(4)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual
Report on Form 10-K for the year ended December 31, 2003, as filed
with the Commission on or about March 29, 2004.(5)
    
    Incorporated by reference to InPlay Technologies, Inc.s definitive
Proxy Statement, as filed with the Commission on or about May 12,
2000.(6)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual
Report on Form 10-K for the year ended December 31, 2001, as filed
with the Commission on or about March 23, 2002.(7)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated April 20, 2000, as filed with the Commission
on or about April 26, 2000.(8)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual
Report on Form 10-K for the year ended December 31, 2000, as filed
with the Commission on or about March 30, 2001. 51




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##### Table of Contents



(9)
    
    Incorporated by reference to InPlay Technologies, Inc.s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2003, as
filed with the Commission on or about August 5, 2003.(10)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated May 20, 2005, as filed with the Commission
on or about May 25, 2005.(11)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated December 27, 2005, as filed with the
Commission on or about December 29, 2005.(12)
    
    Incorporated by reference to InPlay Technologies, Inc.s Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 2005,
as filed with the Commission on or about August 5, 2005.(13)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated September 1, 2005, as filed with the
Commission on or about September 8, 2005.(14)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated September 30, 2005, as filed with the
Commission on or about September 30, 2005.(15)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated February 27, 2007, as filed with the
Commission on or about February 27, 2007.(16)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual
Report on Form 10-KSB for the year ended December 31, 2004, as filed
with the Commission on or about March 29, 2005. 
 Item 14. Principal Accountant Fees and Services
  52




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##### Table of Contents



SIGNATURES
  InPlay Technologies, Inc./s/ Robert J. BrilonRobert J. Brilon, President &
Chief Executive  Officer,Chief Financial Officer, Secretary and
Treasurer
(Principal Executive, Financial and Accounting
Officer)   Signature
    
    Capacity
    
    Date/s/ Steven P. Hanson

Steven P. Hanson
    
    Chairman of the Board
    
    April 2, 2007/s/ Robert J. Brilon

Robert J. Brilon
    
    President, Chief Executive
Officer, Chief Financial
Officer, Secretary,
Treasurer and Director
    
    April 2, 2007/s/ John W. Hail

John W. Hail
    
    Director
    
    April 2, 2007/s/ P. Robert Moya

P. Robert Moya
    
    Director
    
    April 2, 2007/s/ William E. Peelle

William E. Peelle
    
    Director
    
    April 2, 2007/s/ Michael A. Van Zeeland

Michael A. Van Zeeland
    
    Director
    
    April 2, 2007
 53




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description of Exhibit2.1
    
    Stock Purchase Agreement dated as of April l, 2004 among
Duraswitch Industries, Inc., Active Recognition Technologies,
Arthur Lawida, Ole Sorensen, and Alex Parrish (1)2.2
    
    Agreement and Plan of Merger, dated as of July 27, 2005, among
InPlay Technologies, Inc., FPI Acquisition, Inc., FinePoint
Innovations, Inc., and Stephen Caldwell (2)2.3
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as of
July 27, 2005, among InPlay Technologies, Inc., FPI
Acquisition, Inc., FinePoint Innovations, Inc., and Stephen
Caldwell (2)3.1
    
    Amended and Restated Articles of Incorporation (12)3.2
    
    Amended and Restated Bylaws4.1
    
    Specimen Common Stock Certificate (3)10.2
    
    1997 Stock Option Plan (3)10.3
    
    1999 Stock Option Plan (3)10.4
    
    2000 Stock Option Plan (4)10.5
    
    2000 Stock Option Plan Amendment (6)10.6
    
    Management Services Agreement dated May 1, 1997 by and between
Total Switch, Inc. and VanDun, LLC (3)10.7
    
    Agreement for Assignment of Present and Future Inventions in
Certain Subject Matter, dated May 1, 1997, by and between
Total Switch, Inc. and Anthony J. Van Zeeland (3)10.8
    
    Licensing Agreement, dated April 20, 2000, between Delphi
Automotive Systems LLC and Duraswitch Industries, Inc. (7)10.9
    
    Shareholders Agreement, dated June 19, 2000, among Duraswitch
Industries, Inc., Delphi Automotive Systems Corporation, and
the Primary Shareholders named therein (8)10.10
    
    Employment Agreement, dated July 1, 2003, by and between
Duraswitch Industries, Inc. and Anthony J. Van Zeeland (9)10.11
    
    Standard sublease, dated November 1, 2003, by and between 234
South Extension, L.L.C. and Duraswitch Industries, Inc. (4)




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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.12
    
    Form of Indemnification Agreement (16)10.13(a)
    
    Employment Agreement, dated October 1, 2005, by and between
InPlay Technologies, Inc. and Robert J. Brilon (14)10.13(b)
    
    2005 Stock Award Plan (10)10.14
    
    FinePoint Innovations, Inc. convertible promissory note
($300,000), dated July 27, 2005, issued in favor of InPlay
Technologies, Inc. (2)10.15
    
    Form of Credit Facility Note, dated July 27, 2005, issued by
FinePoint Innovations, Inc. in favor of InPlay Technologies,
Inc. (2)10.19
    
    Securities Purchase Agreement, dated December 27, 2005, among
InPlay Technologies, Inc. and the investor parties thereto
(11)10.20
    
    Registration Rights Agreement, dated December 27, 2005, among
InPlay Technologies, Inc. and the investor parties thereto
(11)10.21
    
    Form of Investor Warrant, dated December 27, 2005, issued by
InPlay Technologies, Inc. to the investors in connection with
the December 2005 private offering (11)10.22
    
    Form of Agent Warrant, dated December 27, 2005, issued by
InPlay Technologies, Inc. to the placement agent in
connection with the December 2005 private offering (11)10.23
    
    Settlement Agreement between InPlay Technologies and Delphi
Automotive Systems, LLC (15)14
    
    Code of Ethics (16)21
    
    List of Subsidiaries23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of Deloitte & Touche, LLP31
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
promulgated under the Securities Exchange Action of 1934, as
amended32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated by reference to InPlay Technologies, Inc.s Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 2004,
as filed with the Commission on April 29, 2004.(2)
    
    Incorporated by reference to InPlay Technologies, Inc.s Form 8-K
dated July 27, 2005, as filed with the Commission on
August 2, 2005.(3)
    
    Incorporated by reference to InPlay Technologies, Inc.s Registration
Statement on Form SB-2, as filed with the Commission on or about
August 16, 1999.(4)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual Report
on Form 10-K for the year ended December 31, 2003, as filed with the
Commission on or about March 29, 2004.(5)
    
    Incorporated by reference to InPlay Technologies, Inc.s definitive
Proxy Statement, as filed with the Commission on or about May 12,
2000.(6)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual Report
on Form 10-K for the year ended December 31, 2001, as filed with the
Commission on or about March 23, 2002.(7)
    
    Incorporated by reference to InPlay Technologies, Inc.s Current
Report on Form 8-K dated April 20, 2000, as filed with the Commission
on or about April 26, 2000.(8)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual Report
on Form 10-K for the year ended December 31, 2000, as filed with the
Commission on or about March 30, 2001.




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##### Table of Contents



(9)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2003, as filed with the Commission on or about August
5, 2003.(10)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Current Report on Form 8-K dated May 20, 2005, as filed with
the Commission on or about May 25, 2005.(11)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Current Report on Form 8-K dated December 27, 2005, as filed
with the Commission on or about December 29, 2005.(12)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2005, as filed with the Commission on or about August
5, 2005.(13)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Current Report on Form 8-K dated September 1, 2005, as filed
with the Commission on or about September 8, 2005.(14)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Current Report on Form 8-K dated September 30, 2005, as filed
with the Commission on or about September 30, 2005.(15)
    
    Incorporated by reference to InPlay Technologies, Inc.s
Current Report on Form 8-K dated February 27, 2007, as filed
with the Commission on or about February 27, 2007.(16)
    
    Incorporated by reference to InPlay Technologies, Inc.s Annual
Report on Form 10-KSB for the year ended December 31, 2004, as
filed with the Commission on or about March 29, 2005.