**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM 10-KSB/A**





**(mark
      one)**





**x****ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934**





**For
      the fiscal year ended December 31, 2007**





**o****TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                AND****EXCHANGE
                ACT OF 1934**





**For
      the transition period from
                
to**





**Commission
      file number 001-33353**





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


(Name
      of
      Small Business Issuer in Its Charter)





**DELAWARE**
            
            **90-0249676**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





**10880
      WILSHIRE BOULEVARD, SUITE 950**


**LOS
      ANGELES, CALIFORNIA 90024**


**(310)
      312-0700**


(Address
      and telephone number of principal executive


offices
      and principal place of business)





Securities
      registered under Section 12 (b) of the Exchange Act: **None**





Securities
      registered under Section 12(g) of the Exchange Act: **Common
      Stock:**


**$0.001
      par value**





Check
      whether the registrant is not required to file reports pursuant to
      Section


13
      or
      15(d) of the Exchange Act. o





Check
      whether the registrant (1) filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.
      Yes x No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. x





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





The
      registrant’s revenue for the fiscal year ended December 31, 2007 was
      $445,000.





The
      aggregate market value of voting and non-voting common equity held by
      non-affiliates of the registrant as of March 15, 2008 was approximately
      $56,326,000 based upon the closing price reported for such date on the NASDAQ
      Capital Market For purposes of this disclosure, shares of Common Stock held
      by
      persons who hold more than 5% of the outstanding shares of Common Stock and
      shares held by executive officers and directors of the registrant have been
      excluded because such persons may be deemed to be affiliates. This determination
      of executive officer or affiliate status is not necessarily a conclusive
      determination for other purposes.




As
      of
      March 15, 2008 there were 28,433,116 shares of Common Stock issued and
      outstanding.





Portions
      of the Definitive Proxy Statement filed on April 29, 2008 are incorporated
      by
      reference into part III of this Annual Report on Form 10-KSB/A.





Transitional
      Small Business Disclosure Format : Yes o No x
















**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





TABLE
      OF
      CONTENTS





**Page**
              **Number**PART IITEM
                1 - BUSINESS
            
            
            3OUR
                COMPANY
            
            
            3INDUSTRY
                BACKGROUND
            
            
            3OUR
                BUSINESS
            
            
            4OUR
                POWER INLAY TECHNOLOGY AND PRODUCTS
            
            
            5STRATEGIC
                RELATIONSHIPS
            
            
            6RESEARCH
                AND DEVELOPMENT
            
            
            7INTELLECTUAL
                PROPERTY
            
            
            7MANUFACTURING
            
            
            7COMPETITION
            
            
            8GOVERNMENTAL
                REGULATION
            
            
            8EMPLOYEES
            
            
            8RISK
                FACTORS
            
            
            8ITEM
                2 - DESCRIPTION OF PROPERTY
            
            
            14ITEM
                3 - LEGAL PROCEEDINGS
            
            
            15ITEM
                4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            
            15PART IIITEM
                5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            
            
            16QUARTERLY
                COMMON STOCK PRICE RANGES
            
            
            16ITEM
                6 - MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF
                OPERATIONS
            
            
            17ITEM
                7 - FINANCIAL STATEMENTS
            
            
            23ITEM
                8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURES
            
            
            23ITEM
                8A - CONTROLS AND PROCEDURES
            
            
            23ITEM
                8B - OTHER INFORMATION
            
            
            25PART IIIITEM
                9 - OFFICERS AND DIRECTORS
            
            
            25ITEM
                10 - EXECUTIVE COMPENSATION
            
            
            25ITEM
                11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT
            
            
            25ITEM
                12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            
            
            25ITEM
                13 - EXHIBITS
            
            
            25ITEM
                14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
            
            
            28FINANCIAL
                STATEMENTS
            
            
            F-1SIGNATURES




EXPLANATORY
      NOTE





This
      amendment to the Company’s Form 10-KSB, which was filed on April 1, 2008,
      corrects an error in the Consolidated Statements of Operations by reclassifying
      inventory write-offs and reserves from operating expenses to cost of goods
      sold.
      For the year ended December 31, 2007, the reclassification resulted in an
      increase of $575,017 in cost of goods sold, a decrease of $575,017 in gross
      margin and a decrease of $575,017 in operating expenses. For the year ended
      December 31, 2006, the reclassification resulted in an increase of $791,818
      in
      cost of goods sold, a decrease of $791,818 in gross margin and a decrease of
      $791,818 in operating expenses. There was no effect on loss from operations,
      loss before provision for income taxes, net loss, or basic and diluted loss
      per
      share in either period. There is no cumulative effect on retained earnings
      and
      no change in any assets or liabilities. This amendment also revises management’s
      assessment of the Company’s disclosure controls and procedures in Item 8A -
      Controls and Procedures based on a more narrow interpretation of the Exchange
      Act Rules defining disclosure controls and procedures.


2





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      report contains forward-looking statements that involve risks and uncertainties.
      Our forward-looking statements relate to future events or our future performance
      and include, but are not limited to, statements concerning our business
      strategy, future commercial revenues, market growth, capital requirements,
      new
      product introductions, expansion plans and our funding requirements. Other
      statements contained in our filings that are not historical facts are also
      forward-looking statements. We have tried, wherever possible, to identify
      forward-looking statements by terminology such as “may,” “will,” “could,”
“should,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and other comparable terminology.





Forward-looking
      statements are not guarantees of future performance and are subject to various
      risks, uncertainties and assumptions that are difficult to predict. Therefore,
      actual results may differ materially from those expressed in forward-looking
      statements. They can be affected by many factors, including, those discussed
      under the captions “ *Business—Risk
      Factors* ”
and
      “ *Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.* ”
      Forward-looking statements are based on information presently available to
      senior management, and we do not assume any duty to update our forward-looking
      statements.





**WHERE
      YOU CAN FIND MORE INFORMATION**





As
      a
      public company, we are required to file annually, quarterly and special reports,
      proxy statements and other information with the Securities and Exchange
      Commission (the “SEC”). You may read and copy any of our materials on file with
      the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
      DC 20549. Our filings are available to the public over the Internet at the
      SEC’s
      website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
      information on the Public Reference Room. We also provide copies of our Forms
      8-K, 10-KSB and 10-QSB, Proxy Statement and Annual Report at no charge to
      investors upon request and make electronic copies of our most recently filed
      reports available through our website at www.incardtech.com promptly after
      filing such material with the SEC.





**PART I**





**ITEM
      1.**  **BUSINESS**





**OUR
      COMPANY**





As
      used
      in this Form 10-KSB, we refer to Innovative Card Technologies, Inc.
      and its wholly owned subsidiary, PSA Co., as “InCard,” “our company,” “we,” “us”
and “our.”





We
      develop and market secure powered cards for payment, identification, physical
      and logical access applications. Our main product, the ICT DisplayCard,
      integrates the security of a one-time password token directly into a card the
      size of a standard credit or debit card. A token is a portable physical device,
      typically in a key-fob form factor, that generates the one-time password (also
      referred to as a one-time passcode). At the push of a button on the back of
      the
      ICT DisplayCard, a one-time passcode (OTP) is shown on the card’s integrated
      display. During a transaction, this number is entered into a user interface
      with
      other information (such as the user’s static PIN and login name). This
      information is relayed to a backend system for multi-factor authentication.
      InCard does not provide the backend authentication server, but rather will
      integrate the ICT DisplayCard into authentication systems provided by other
      companies including distributors and other resellers of the ICT DisplayCard.
      The
      ICT DisplayCard’s OTP authentication works like tokens issued by VASCO, RSA, and
      ActivIdentity, but in a more convenient, wallet-sized card form
      factor.





Our
      corporate offices are located at 10880 Wilshire Boulevard, Suite 950, Los
      Angeles, California 90024. Our telephone number is (310) 312-0700. Our website
      address is http://www.incardtech.com. The contents of our website are not
      incorporated into this filing. Further, our reference to this website is
      intended to be inactive textual reference only.





**INDUSTRY
      BACKGROUND**





The
      growth in electronic banking and electronic commerce, and the increasing use
      and
      reliance by business, government and educational institutions upon proprietary
      or confidential information that is remotely accessible by many users over
      different networks, has made information security a paramount concern.
      Enterprises are seeking solutions that will continue to allow them to expand
      access to data and financial assets while maintaining network security, and
      firms such as VASCO, RSA, VeriSign, and ActivIdentity are providing solutions
      for these enterprises. We believe that the tokens provided to end users by
      these
      and other network security firms are generally inconvenient as these tokens
      have
      to be carried outside of a wallet or placed on a keychain or in a pocket. Our
      ICT DisplayCard offers the same functionality as a token, but in a form factor
      that can be carried in a wallet. We believe the increased convenience offered
      by
      our device will provide the end user with a better experience and greater
      convenience.




3




Internet
      and Enterprise Security – With the advent of personal computers and
      distributed information systems in the form of wide area networks, intranets,
      local area networks and the Internet, as well as other direct electronic links,
      many organizations have implemented applications to enable their work force
      and
      third parties, including vendors, suppliers and customers, to access and
      exchange data and perform electronic transactions. As a result of the increased
      number of users having direct and remote access to such enterprise applications,
      data and financial assets have become increasingly vulnerable to unauthorized
      access and misuse.





Individual
      User Security – In addition to the need for enterprise-wide security, the
      proliferation of personal computers, personal digital assistants and mobile
      telephones in both the home and office settings, combined with widespread access
      to the Internet, have created significant opportunities for electronic commerce
      by individual users such as electronic bill payment, home banking and home
      shopping.





Fueled
      by
      well-publicized incidents, including misappropriation of credit card information
      and theft of sensitive personal data, there is a growing perception among many
      consumers of risks involved in transmitting information via the Internet. These
      incidents and this perception may hamper the development of consumer-based
      electronic commerce. Because of these factors, data security firms such as
      VASCO, RSA, VeriSign, and ActivIdentity, have seen increasing demand for their
      security solutions. Electronic commerce will benefit from the implementation
      of
      improved security measures that accurately identify users and reliably encrypt
      data transmissions over the Internet. To address these security concerns, in
      2005 many banks in European countries began to issue EMV-compliant smart cards
      (credit cards with a micro-chip).





In
      October 2005, the US Federal Financial Institutions Examination Council
      (FFIEC) issued guidance for strong authentication/two factor authentication
      in
      the Internet banking environment ( See http://www.ffiec.gov/ffiecinfobase/resources/info_sec/2006/ots-ceo-ltr-228.pdf
      ). Financial institutions were expected to achieve compliance by year-end
      2006.





Although
      security solution providers have and, we expect, will continue to have growth
      in
      their businesses, we believe that a barrier to further widespread adoption
      of
      multi-factor authentication is the end user’s experience using the tokens
      provided to them by the security solution providers. Our product, the ICT
      DisplayCard, is more portable and user friendly as it can be kept in a
      wallet.





**OUR
      BUSINESS**





We
      develop and market technology-based card enhancements that can be used for
      both
      the enterprise and the on-line banking markets. The enterprise market, which
      is
      served by authentication companies such as VASCO, ActivIdentity, Verisign,
      and
      RSA, will be able to offer the ICT DisplayCard as an alternative for end users
      to replace existing tokens. We also plan to offer the ICT DisplayCard to
      financial institutions to increase the security of on-line banking transactions.
      In addition to the security authentication function, our ICT DisplayCard can
      be
      specified to have payment functionality, enabling credit and debit card issuers
      to enhance anti-fraud protection for card-not-present transactions. We do not,
      however, anticipate providing ICT DisplayCards with payment functionality in
      the
      short term.





Our
      primary focus is and will continue to be the further development, sale and
      marketing of the ICT DisplayCard. The ICT DisplayCard will generate a
      one-time passcode or other numeric information after the user’s push of a button
      located on the rear surface of the card. Our proprietary power inlay technology
      consists of a battery, circuit, and switch that can power applications on credit
      cards and other information-bearing plastic cards. We have devoted our efforts
      and capital to development of our power inlay technology and marketing for
      this
      product. We believe that our power inlay technology can provide an operating
      platform for new business opportunities for both the enterprise market and
      on-line banking market.





**PRODUCTION**





The
      ICT
      DisplayCard has been available for issuance on a limited quantity basis since
      December 2006. By late summer 2008 we expect to be able to
      produce 200,000 DisplayCards per month. These production numbers are
      estimates; our original equipment manufacturers (OEMs) have not yet manufactured
      the ICT DisplayCard in commercial quantities. However, we have produced pilot
      test quantities and we believe that our OEM’s will be able to produce the
      necessary supply. We believe that our present capacity will meet our short
      term
      anticipated demand. In the event that we receive greater interest or orders
      than
      our projections, our OEMs have indicated to us that they will be able to
      increase capacity. We do not manufacture the ICT DisplayCard; we rely on OEMs,
      and the ability to produce the ICT DisplayCard is limited to the component
      parts
      we are able to procure. Two key components of the ICT DisplayCard are produced
      by OEMs: (1) the battery, presently available from only one supplier,
      Solicore, Inc., and (2) the display, presently available from only one
      supplier, SmartDisplayer. We continue to explore alternative supply
      arrangements, but do not expect any alternatives to be available in the next
      six
      to twelve months.




4




**OUR
      POWER INLAY TECHNOLOGY AND PRODUCTS**





Our
      power
      inlay technology integrates a battery, circuit, switch and output device into
      financial cards or other information-bearing plastic cards that comply with
      the
      various requirements set forth by the International Organization for
      Standardization (ISO) for credit/debit cards. Our technology is designed to
      be
      used as an operating system to add different applications that require power
      into credit card sized cards. Our power inlay technology can be used to power
      display screens, a one-time-passcode generator, and other anti-fraud measures.
      We have developed a process for imbedding our power inlay technology into a
      payment card and into credit card sized cards that meet ISO standards. To our
      knowledge, there are no other currently available methods of placing power
      into
      an ISO compliant credit sized card.





**ONGOING
      PRODUCT TESTING AND DEVELOPMENT**





Our
      Company continues to perform research and development relating to the ICT
      DisplayCard and other related products. Presently, we are performing additional
      internal product testing on the ICT DisplayCard as well as external product
      testing through third party testing facilities. Some of these third party
      testing facilities are for product certifications.





**OUR
      STRATEGY AND SALES CYCLE**





We
      believe that when we introduce our ICT DisplayCard to the enterprise and on-line
      banking markets on a widespread basis, it will emerge as a preferred form factor
      over existing keyfob-style tokens in the marketplace today. We anticipate
      selling our product through resellers and distributors who provide security
      technology such as tokens for enterprise security and on-line banking
      applications. Our ICT DisplayCard, which we believe provides the end user with
      OTP security in a more user-friendly form factor, will assist our resellers
      and
      distributors in further differentiating themselves within their market
      segments.





Presently,
      our sales cycle takes several months and generally requires negotiation and
      completion of a pilot program before any order for our cards. We are now
      entering into pilot programs and completing pilot programs for the ICT
      DisplayCard through several large commercial entities. If these pilot programs
      are successful, with the users in the pilot program having a good experience
      with the ICT DisplayCard and the entity hosting the pilot wanting to order
      larger quantities of cards, we anticipate that the resellers will order
      commercial quantities of cards in greater quantities. Depending upon the size
      of
      the purchaser, there may be several pilot programs involving their employees
      or
      customers prior to a larger sales order being received.





**RESELLERS**





The
      resellers for our ICT DisplayCard include Actividentity, Entrust, Gemalto,
      InfoSERVER, Inteligensa, Inex Americana, Verisign, Innet and IDENTIPHI. These
      companies sell a complete security solution, either by themselves or with other
      providers. Although some of these resellers are required to make a deposit
      for
      the ICT DisplayCard, none of these resellers are required by these agreements
      to
      order our products. The extent to which these resellers market and sell our
      products will depend on the reseller’s customer experience with the ICT
      DisplayCard and our ability to provide a quality product, to deliver quantities
      as needed by the reseller, and to offer competitive pricing.





**PRIOR
      PRODUCTS- LIGHTCARD, SOUNDCARD, AND LENSCARD**





Prior
      to
      our development of the ICT DisplayCard for both the enterprise and on-line
      banking markets, our predecessors commenced sales of our first product, the
      LensCard, or a credit card embedded with a small magnifying lens, in 1998.
      To
      date, we have generated limited revenues from the LensCard pursuant to licensing
      agreements, most of which have terminated. At this time, we do not intend to
      renew these licensing agreements, unless requested by a customer. In 1999,
      we
      began to consider the possibility of placing power into an ISO compliant card
      .
      Since 2002, our core focus has been and continues to be on research and
      development and marketing of our power inlay technology that is designed to
      bring power-based applications for payment and non-payment cards. The first
      products developed using our power inlay technology were LightCard and
      SoundCard. However, we ceased our focus of the LightCard and SoundCard due
      to
      the demand for the ICT DisplayCard. Prior to our focus on the ICT DisplayCard,
      we developed the SoundCard, LightCard, and LensCard all of which remain
      available for sale on a limited quantity basis. In the event that a customer
      wishes to purchase the SoundCard, LightCard and/or LensCard, we will evaluate
      if
      production of the product can be accomplished without removing resources from
      production of the ICT DisplayCard. If such production can be accomplished,
      we
      may outsource manufacturing of the SoundCard, LightCard and/or
      LensCard.




5




**HISTORY**





We
      were
      incorporated as LensCard Corporation in Delaware on November 22, 2002 by
      our founder Alan Finkelstein. On April 2, 2004, Mr. Finkelstein,
      Bradley Ross and Michael Paradise, who owned one percent of
      Mr. Finkelstein’s interest in the royalty payments of the LensCard product,
      transferred their rights to royalty payments relating to the Lens Card to us
      in
      exchange for an aggregate of 5,500,000 shares of our common stock. As a result
      of this exchange, Messrs. Finkelstein, Ross and Paradise were our sole
      stockholders; Mr. Finkelstein held approximately 79% of the then issued and
      outstanding shares. We then immediately transferred these royalty rights to
      PSACo, Inc., a Delaware corporation, in exchange for all of its outstanding
      common stock, causing PSACo to become our wholly owned subsidiary. At the time
      of these transfers, Mr. Finkelstein was the sole director of PSACo, and
      Bradley Ross was the president, chief financial officer, treasurer and secretary
      of PSACo. On April 15, 2004, Mr. Ross resigned from all of his
      positions with PSACo, and thereafter, Mr. Finkelstein was elected to the
      positions of president, chief financial officer and secretary of
      PSACo.





On
      April 6, 2004, LensCard US LLC, one of our predecessor companies, exchanged
      all of its outstanding membership interests with us for 1,000,000 shares of
      our
      common stock. Effective April 6, 2004, LensCard International Limited, our
      other predecessor company, merged with and into our company. As a result of
      this
      reorganization and merger, we own the intellectual property rights to the
      LensCard and are obligated to make payments related to these rights to PSACo,
      our wholly owned subsidiary. This reorganization and merger was the result
      of a
      strategic decision to focus our business on technology-based card enhancements.
      On June 25, 2004, we changed our name to Innovative Card
      Technologies, Inc.





**STRATEGIC
      RELATIONSHIPS**





SMARTDISPLAYER
      TECHNOLOGY CO.





On
      July 25, 2005, we entered into a mutually exclusive agreement with
      SmartDisplayer Technology Co. Ltd., a Taiwanese company that manufactures
      electronic paper modules used in the manufacture of our ICT DisplayCard (the
      “InCard-SmartDisplayer Agreement”). SmartDisplayer agreed to sell its electronic
      paper modules for use in an exclusive field only to us, if we meet certain
      minimum purchase commitments. The exclusive field is defined as powered payment,
      credit, debit, and gift cards and other powered cards issued for authentication,
      validation, or identification purposes that are issued under the auspices of
      or
      endorsed by Visa, MasterCard, JCB, American Express, Europay, Carte Blanche,
      and
      Diners Club, and any devices capable of mimicking or emulating any of the
      forgoing or that stores information from any of the forgoing for use in
      conducting a transaction. We would be relieved of our exclusive purchase
      commitments under the InCard-SmartDisplayer Agreement if SmartDisplayer breaches
      its exclusivity obligations or if we locate an alternate vendor that provides
      products of comparable quality and functionality at a lower price. We assumed
      a
      similar agreement between SmartDisplayer and nCryptone, S.A. pursuant to the
      asset purchase agreement we entered into with nCryptone on June 28, 2006.
      The exclusive field in the nCryptone agreement is the use of certain OTP cards
      outside the exclusive field in the InCard SmartDisplayer Agreement.





SmartDisplayer
      is bound by certain monthly production capability commitments through
      July 2008. We place a 20% down payment within seven days after purchase
      order is confirmed with the remainder to be paid when production is
      completed.





The
      term
      of this agreement is three years and can be renewed upon mutual written
      agreement or extended by us if we satisfy certain purchase commitments. Either
      party may immediately terminate the agreement at any time in the event of any
      incurable material breach by the other party or if the other party files (or
      has
      filed or has filed against it) any bankruptcy, insolvency, or receivership
      proceeding. Either party may terminate the agreement if a curable breach is
      not
      cured within a notice period.





This
      Agreement was amended on May 18, 2006 (the “SmartDisplayer Amendment”)
      whereby the exclusivity period was extended for three years beginning on
      May 18, 2006, and clarifications were made concerning certain improvements
      to the Company’s pre-existing intellectual property rights. All such
      improvements, whether made by us or by SmartDisplayer, shall belong solely
      to
      us. Pursuant to the SmartDisplayer Amendment, we ordered additional electronic
      paper modules and other components used for the DisplayCard. The exclusivity
      provision of the InCard-SmartDisplayer Agreement was cancelled in
      November 2007 due to our failure to meet the minimum purchase
      commitments.





NCRYPTONE





On
      July 25, 2005, we entered into a Joint Development Agreement with nCryptone
      (formerly AudioSmartCard) which agreement was terminated by mutual agreement
      of
      the parties on June 28, 2006 in relation to an asset contribution agreement
      of equal date. Under the Joint Development Agreement, both parties agreed to
      establish a mutually acceptable schedule and budget for development and
      pre-production engineering of the SoundCard and the DisplayCard within 30 days
      after execution of the agreement and to equally share development costs for
      the
      SoundCard and DisplayCard and to share fixed profit-sharing percentage for
      sales
      of LightCard, SoundCard, and DisplayCard for Visa Banking Cards, non-Visa
      Banking Cards, and non-banking cards. We also were to receive a mutually agreed
      upon commission percentage of nCryptone server products and services for
      customers introduced by us.




6




Additionally,
      we had the exclusive right to manufacture and sell power inlays, or cores,
      that
      consist of proprietary electronic components for LightCard, SoundCard, and
      DisplayCard. If a third party vendor produced cores at a significantly lower
      cost, we still would receive a portion of gross profits and the remainder would
      be shared by both parties in equal amounts of the remainder of the gross profit.
      If we reached maximum production capacity and nCryptone was unable to fill
      orders, the remaining cores could be produced by a third party vendor and both
      parties would share equally the entire amount of gross profits as net
      profits.





Furthermore,
      all intellectual property rights prior to this agreement were to remain the
      sole
      and exclusive property of such party. All new intellectual property rights
      relating to physical design and construction of the cards were to be the sole
      and exclusive property of InCard. All new intellectual property rights relating
      to patents and outside or physical design and construction of the cards were
      to
      be shared equally by both parties. The term of the agreement was 10 years,
      unless terminated earlier pursuant to the terms of the agreement.





On
      June 28, 2006, we entered into an Asset Contribution Agreement with
      nCryptone, whereby we purchased rights relating to the DisplayCard from
      nCryptone for 4,500,000 shares of our common stock and $1,000,010 to be paid
      within one year after the close of the acquisition. We acquired all
      intellectual property relating to the DisplayCard under the July 25, 2005
      Joint Development Agreement with nCryptone, all nCryptone intellectual property
      relating to the DisplayCard, and assumed certain accounts payable directly
      allocable to the DisplayCard, as well as all tangible assets relating to the
      DisplayCard. The Asset Contribution Agreement terminated the Joint Development
      Agreement.





Since
      completing the acquisition under the Asset Contribution Agreement, we
      now have all rights, and revenues, relating to the DisplayCard that were
      previously shared by nCryptone under the Joint Development Agreement.
      Additionally, we retained the two top executives of nCryptone who were
      instrumental in developing the technology of the DisplayCard.





**RESEARCH
      AND DEVELOPMENT**





We
      conduct research and development activities both in-house and at an outside
      laboratory. We retain title rights to all improvements or enhancements to our
      technology developed by or worked on by the outside laboratory. We have
      purchased materials and components for our products under development from
      a
      number of technology companies.




We
      have
      spent $1,352,413 and $1,896,499 for research and development for the fiscal
      years ended December 31, 2007 and 2006, respectively.





**INTELLECTUAL
      PROPERTY**





We
      rely
      on a combination of patent, trademark and trade secret laws as well as
      confidentiality procedures and contractual provisions to protect our proprietary
      technology. We currently own eleven U.S. patents and twenty five foreign
      patents. Twenty-nine of these patents apply to the LensCard, five of
      these patents apply to the LightCard, one of these patents applies to the
      SoundCard and one of these patents applies to our power inlay technology.
      We have fifteen foreign patent applications pending, four of which relate to
      the
      LensCard and eleven to the LightCard. The duration of the U.S. patents generally
      is 20 years from the date the original application was filed. At this time,
      we
      do not have patent protection on our ICT DisplayCard technology.





We
      currently have trademarks registered for InCard Technologies and the LensCard
      in
      the United States. We also have additional marks for which registration is
      pending.





From
      time
      to time, we may encounter disputes over rights and obligations concerning
      intellectual property. Also, the efforts we have taken to protect our
      proprietary rights may not be sufficient or effective. Any significant
      impairment of our intellectual property rights could harm our business, our
      reputation, or our ability to compete. Also, protecting our intellectual
      property rights could be costly and time consuming.





**MANUFACTURING**





Although
      we continue to develop our own manufacturing process for the ICT DisplayCard,
      the ICT DisplayCard is presently being manufactured by a European company,
      NagraID. We supply NagraID with the necessary component parts to manufacture
      ICT
      DisplayCards using NagraID’s proprietary process.





Presently,
      we are reliant on a sole source of supply for two major components of the ICT
      DisplayCard. The display is available only from SmartDisplayer. The battery
      is
      available only from Solicore, Inc. The battery is attached to the display
      by SmartDisplayer. If we are unable to procure batteries from Solicore, we
      may
      have production delays of up to one year as we seek another source for
      batteries. If we are unable to procure displays from SmartDisplayer, we may
      have
      production delays of up to one year as we seek another source for displays.
      If
      NagraID is unable to assemble the component parts, we may have production delays
      of up to one year as we seek another source for assembling our components.
      Although we intend to purchase our batteries from Solicore, we are working
      with
      other battery manufacturers to produce batteries suitable to our cards so that
      we are not reliant on one battery supplier. Although we intend to purchase
      our
      displays from our current supplier, we are working with other display
      manufacturers to locate displays suitable to our cards so that we are not
      reliant on one display supplier. Although we intend to have our cards assembled
      by our current manufacturer, we are trying to develop our own process and are
      researching other processes so that we are not reliant on one
      manufacturer.




7




**MARKETING
      AND SALES**





We
      anticipate that the majority of our revenues in the coming year will come from
      the sale of ICT DisplayCards. We intend to sell these cards through resellers.
      However, these resellers are not obligated to sell our product and in fact
      the
      degree of success of these resellers will depend on our ability to develop
      interest in the ICT DisplayCard with end-users and with companies that need
      or
      provide security solutions.





We
      have
      one agreement with a bank that issues financial cards for the LensCard product.
      The revenue generated from the LensCard agreements is negligible, and we expect
      that the sales of the LensCard will have no impact on our results of
      operations.





**COMPETITION**





We
      are
      not aware of any product that is being mass produced in the same form factor
      as
      our ISO-compliant CR80 form factor that incorporates the token technology.
      However, there are companies creating tokens and random number generators for
      use in dual-factor authentication (as an item separate from the transaction
      card). For example, RSA, Vasco, and VeriSign token devices may be cost
      competitive to our technology but are not in a credit card form factor. Smart
      Card, biometrics, and software programs can provide multi-factor authentication
      competitive to our ICT DisplayCard.





We
      believe that the principal competitive factors that affect the market for tokens
      include convenience, price, quality/reliability, ease of use, and distribution
      cost. Although we believe that our ICT DisplayCard will be able to compete
      favorably with respect to some of these factors, there can be no assurances
      that
      we will be able to maintain our competitive position against current and
      potential competitors, especially those with significant marketing, service,
      support, technical and other competitive resources.





Some
      of
      our present and potential competitors have significantly greater financial,
      technical, marketing, purchasing and other resources than we do, and as a
      result, may be able to respond more quickly to new or emerging technologies
      and
      changes in customer requirements, or to devote greater resources to the
      development, promotion and sale of products, or to deliver competitive products
      at a lower end-user price. Current and potential competitors have established
      or
      may establish cooperative relationships among themselves or with third parties
      to increase the ability of their products to address the needs of our
      prospective customers. It is possible that new competitors or alliances may
      emerge and rapidly acquire significant market share. Accordingly, we continue
      to
      pursue our technological advantage and effective relationships to develop,
      manufacture and sell our ICT DisplayCard to the market.





**GOVERNMENTAL
      REGULATION**





The
      development of our products is generally not subject to government regulation.
      However, because we intend to market our products in countries other than the
      United States, importation and exportation regulations may impact our
      activities. A breach of these laws or regulations may result in the imposition
      of penalties or fines, suspension or revocation of licenses. We are not
      currently involved in any such judicial or administrative proceedings and
      believe that we are in compliance with all applicable regulations.





Although
      it is impossible to predict the effect that additional import and export
      requirements and other regulations may have on future earnings and operations,
      we are presently unaware of any future regulations that may have a material
      effect on our financial position, but cannot rule out the
      possibility.





**EMPLOYEES**





We
      have
      fifteen full-time employees, including our Chief Executive Officer/President
      and
      Chief Financial Officer. None of our employees is represented by a collective
      bargaining agreement, and we have never experienced any work stoppage. We
      consider our relationships with our employees to be good.





**RISK
      FACTORS**





You
      should carefully consider the risks described below as well as other information
      provided to you in this document, including information in the section of this
      document entitled “ *Special
      Note Regarding Forward Looking Statements* .”
The
      risks and uncertainties described below are not the only ones facing the
      Company. Additional risks and uncertainties not presently known to us or that
      we
      currently believe are immaterial may also impair our business operations. If
      any
      of the following risks actually occur, our business, financial condition or
      results of operations could be materially adversely affected, the value of
      our
      common stock could decline, and you may lose all or part of your
      investment.




8




***We
      are an early stage company with an unproven business strategy. Our limited
      history of operations makes evaluation of our business and prospects
      difficult.***





Our
      business prospects are difficult to predict because of our limited operating
      history, early stage of development and unproven business strategy. Since our
      incorporation on November 22, 2002, we have primarily been and continue to
      be involved in development of products using our power inlay technology and
      marketing these products to industry partners. In 1998, Alan Finkelstein
      commenced commercialization of our first product, the LensCard, and entered
      into
      license agreements with banks and credit card issuers, most of which have
      terminated. After discovering the possibility of placing power into an
      International Organization of Standards (ISO) compliant card, we began to focus
      our efforts on the development of our power inlay technology and not on the
      marketing of the LensCard. For these reasons, we expect that future orders
      for
      the LensCard will be insignificant. We closed our first commercial sale of
      our
      ICT DisplayCard, which uses our power inlay technology, in the fourth quarter
      of
      2007. Although management believes that our power inlay technology and products
      under development have significant profit potential, we may not attain
      profitable operations and our management may not succeed in realizing our
      business objectives.





***We
      have an accumulated deficit of $28,067,183 as of December 31, 2007 and we
      may never achieve profitability***





We
      have
      incurred significant net losses every year since our inception, including net
      losses of $14,333,622 and $6,866,614 for the fiscal years ending
      December 31, 2007 and 2006, respectively. As of December 31, 2007, we
      had an accumulated deficit of $28,067,183. These losses have resulted
      principally from expenses incurred in our research and development programs
      and
      general and administrative expenses. To date we have not generated significant
      revenues. We have used capital raised in October 2005, May 2006 and
      January 2008 to sustain operations through the date of this report. We
      anticipate that we will continue to incur substantial operating losses based
      on
      projected sales revenues less manufacturing, general and administrative and
      other operating costs for an indefinite period of time. However, we cannot
      assure you that we will ever be profitable.





***To
      be successful we may require additional capital, which we may be unable to
      obtain.***





We
      expect
      that our current resources, including anticipated revenues, will be insufficient
      to sustain our operations past April 2008. Assuming that we continue to
      operate at our existing cost structure, our current resources will not be
      sufficient to fund operations for the next twelve months. As we are in the
      early
      stage of manufacturing and have not sold substantial quantities of our products,
      we are unable to determine the amount of additional capital we will need to
      become successful. Unless we are able to generate significant sales from the
      ICT
      DisplayCard that cover the manufacturing costs and operating overhead, we will
      continue to incur net losses that exceed our revenue. We currently do not have
      any binding commitments for, or readily available sources of, additional
      financing, and we cannot assure that such funding will be available at all
      or
      available on terms acceptable to us.





***We
      depend on a limited number of suppliers, and we will be unable to manufacture
      or
      deliver our products if shipments from these suppliers stop, are late or are
      otherwise interrupted*** .





We
      obtain
      the battery, a key component for our power inlay technology, from a single
      source on a purchase order basis from Solicore, Inc. In the event of a
      disruption or discontinuation in supply, we could not obtain replacement
      batteries on a timely basis, which would disrupt our operations, delay
      production for up to one year and impair our ability to manufacture and sell
      our
      products.





We
      obtain
      the display, a key component for the ICT DisplayCard, from a single source,
      SmartDisplayer, under a written agreement. In the event of a disruption or
      discontinuation in supply, we could not obtain replacement displays on a timely
      basis, which would disrupt our operations, delay production for up to one year
      and impair our ability to manufacture and sell our ICT DisplayCard.





We
      assemble our ICT DisplayCard, using a single source, NagraID, under a written
      agreement by issuing written purchase orders that we pay in advance. We believe
      that we would be unable to obtain on a timely basis alternative sources for
      assembly in the event of a disruption, which would disrupt our operations,
      delay
      production for up to one year and impair our ability to manufacture and sell
      our
      ICT DisplayCard.





Our
      dependence upon outside suppliers exposes us to risks, including:





·
            the
                possibility that our suppliers will experience major disruptions
                in
                production, which is exacerbated by the fact that we are the major
                customer of our suppliers;






9




·
            the
                solvency of our suppliers and the potential that our suppliers will
                be
                solely dependent upon us;


·
            the
                potential inability of our suppliers to obtain required components
                or
                products;


·
            reduced
                control over pricing, quality and timely delivery, due to the difficulties
                in switching to alternative
                suppliers;


·
            the
                potential delays and expense of seeking alternative sources of suppliers;
                and


·
            increases
                in prices of key components.





***If
      we are not able to devote adequate resources to product development and
      commercialization, we may not be able to develop our
      products.***





Our
      business strategy is to develop and market new products using our power inlay
      technology that can enhance payment and other information-bearing plastic cards.
      We believe that our revenue growth and profitability, if any, will substantially
      depend upon our ability to:





·
            continuing
                to fund research and development
                endeavors;


·
            complete
                development of new products; and


·
            successfully
                introduce and commercialize new
                products.





If
      we do
      not devote adequate resources to our product development efforts, we may be
      unable to develop our products, which would adversely affect our revenue growth
      and profitability.





***If
      we or our suppliers fail to adequately protect our proprietary rights, third
      parties could use our technology, or very similar technology, and could reduce
      our ability to compete in the market, and any proprietary rights litigation
      could be time-consuming and expensive to prosecute and
      defend.***





Establishment
      of patents and other proprietary rights by us and our suppliers is important
      to
      our success and our competitive position. Performance in the payment card
      industry can depend, among other factors, on patent protection. Our policy
      is to
      identify patentable inventions developed by our company, and to seek to acquire
      patent rights for such inventions. We mainly develop and patent technology
      in
      the fields of card enhancements and methods of card manufacturing. We seek
      to
      obtain a reasonably broad territorial protection for our patented technologies.
      We usually file initial patent applications in the United States, and
      subsequently file corresponding applications in foreign countries depending
      on
      the relevant circumstances. We may elect to forego patent protection for some
      of
      our proprietary technologies and treat such technologies as trade secrets.
      Despite our efforts to establish and protect our patents, trade secrets or
      other
      proprietary rights, unauthorized parties may attempt to copy aspects of our
      technology or to obtain and use information that we regard as proprietary.
      In
      addition, the laws of some foreign countries do not protect our proprietary
      rights as much as the laws of the United States protect them. Our means of
      establishing and protecting our proprietary rights may not be adequate, and
      our
      competitors may independently develop similar technology, duplicate our products
      or design around our patents or our other proprietary rights. We do not have
      patent protection for our ICT DisplayCard.





Due
      to
      the importance of proprietary technology in the payment card industry, our
      business involves a risk of overlap with third party patents and subsequent
      litigation with competitors or patent-holders. Any claims, with or without
      merit, could be time-consuming, result in costly litigation, or cause us to
      enter into licensing agreements





***We
      depend on key personnel in a competitive market for skilled employees, and
      failure to retain and attract qualified personnel could substantially harm
      our
      business.***





We
      rely
      to a substantial extent on the management, marketing and product development
      skills of our key employees and consultants, particularly Steven Delcarson,
      our
      President and Chief Executive Officer, Charles Caporale, our Chief Financial
      Officer, and Craig Nelson, who supervises the manufacturing and testing of
      the
      ICT DisplayCard, to formulate and implement our business plan, including the
      development of our power inlay technology. Our success depends to a significant
      extent upon our ability to retain and attract key personnel. Competition for
      employees can be intense in the payment card industry, and the process of
      locating key personnel with the right combination of skills is often lengthy.
      The loss of the services of our key personnel may significantly delay or prevent
      the achievement of product development and could have a material adverse effect
      on us.





***If
      our future products do not achieve a significant level of market acceptance,
      it
      is highly unlikely that we ever will become
      profitable.***





To
      our
      knowledge, no enterprise or on-line banking token issuers have adopted
      power-based card enhancements to date using our power inlay technology on a
      mass
      quantity basis. As a result, our ability to enable enterprises to improve and
      add card functionality, reduce attrition and increase acquisition rates, and
      enhance security and anti-fraud protection for customers through power-based
      card enhancements has yet to be proven. The commercial success of our future
      products will depend upon the adoption of our power inlay technology as a
      preferred method of applying card enhancements to payment cards. In order to
      be
      successful, our future products must meet the technical and cost requirements
      for card enhancements within the payment card industry. Market acceptance will
      depend on many factors, including:




10




·
            our
                ability to convince prospective strategic partners and customers
                to adopt
                our products;


·
            the
                willingness and ability of prospective strategic partners and customers
                to
                adopt our products; and


·
            our
                ability to sell and service sufficient quantities of our
                products.





Because
      of these and other factors, our products may not achieve market acceptance.
      If
      our products do not achieve a significant level of market acceptance, demand
      for
      our future products will not develop as expected and it is highly unlikely
      that
      we ever will become profitable.





***We
      have granted third parties substantial marketing rights to certain of our
      products and products under development. If the third parties are not successful
      in marketing our products, we may not be able to commercialize our
      products.***





Some
      of
      our agreements with our corporate marketing partners contain no minimum purchase
      requirements in order for them to maintain their exclusive marketing rights.
      In
      the future, third-party marketing assistance may not be available on reasonable
      terms, if at all. If marketing partners do not order adequate quantities of
      our
      products or if we are unable to procure third-party marketing assistance on
      reasonable terms, we may not be able to commercialize our products, which could
      negatively impact our results of operations or substantially limit our ability
      to execute our business strategy.





***We
      may experience customer concentration in the enterprise and on-line banking
      marketplace, which may expose us to all of the risks faced by our potential
      material customers.***





Until
      and
      unless we secure multiple customer relationships in the enterprise and on-line
      banking marketplaces, we may experience periods during which we will be highly
      dependent on one or a limited number of customers. Dependence on a single or
      a
      few customers will make it difficult to satisfactorily negotiate attractive
      prices for our products and will expose us to the risk of substantial losses
      if
      a single dominant customer stops conducting business with us. Moreover, to
      the
      extent that we may be dependent on any single customer, we could be subject
      to
      the risks faced by that customer to the extent that such risks impede the
      customer’s ability to stay in business and make timely payments to
      us.





***The
      power inlay technology has not been proven in full scale production. Failure
      to
      develop the prototype scale into mass production may have a material negative
      effect on our business strategy and operations*** .





Our
      power
      inlay technology has been proven solely during the manufacture of cards in
      prototype quantities. We have developed an automated process in our laboratory
      and are now working on mass production. However, our product has yet to be
      proven to be manufactured in full scale mass production. We are applying our
      own
      resources and working in cooperation with other companies that have specialized
      technical expertise related to the power inlay technology for thin, flexible
      non-payment cards. We expect to enter into agreements that will grant us
      ownership or exclusive license rights to the manufacturing process of the power
      inlay technology for use in credit and other information-bearing plastic cards.
      Failure to secure or maintain exclusive rights or failure of the prototype
      technology to successfully transfer to full scale production, without the use
      of
      proprietary technology of others, may have a material negative effect on our
      business strategy and operations.





***We
      rely substantially on third-party manufacturers. The loss of any third-party
      manufacturer could limit our ability to launch our products in a timely manner,
      or at all.***





To
      be
      successful, we must manufacture, or contract for the manufacture of, our future
      products in compliance with industry standards and on a timely basis, while
      maintaining product quality and acceptable manufacturing costs. As discussed
      in
      the risk factor above, we are working in cooperation with other companies that
      have specialized technical expertise related to the manufacturing process of
      our
      power inlay technology for the ICT DisplayCard. We also currently use a limited
      number of sources for most of the supplies and services that we use in the
      manufacturing of our power inlay technology and prototypes. Our manufacturing
      strategy presents the following risks:





·
            delays
                in the quantities needed for product development could delay
                commercialization of our products in
                development;


·
            if
                we need to change to other commercial manufacturers, any new manufacturer
                would have to be educated in, or develop substantially equivalent
                processes necessary for, the production of our
                products;


·
            if
                market demand for our products increases suddenly, our current
                manufacturers might not be able to fulfill our commercial needs,
                which
                would require us to seek new manufacturing arrangements and may result
                in
                substantial delays in meeting market demand;
                and


·
            we
                may not have intellectual property rights, or may have to share
                intellectual property rights, to any improvements in the manufacturing
                processes or new manufacturing processes for our
                products.




11




Any
      of
      these factors could delay commercialization of our products under development,
      entail higher costs and result in our being unable to effectively sell our
      products.





***Some
      of our competitors have significantly greater resources than we do and may
      be
      able to respond more quickly to new or emerging technologies and changes in
      customer requirements, which could adversely affect our ability to generate
      or
      maintain revenues and be profitable.***





We
      are
      not aware of any product that is being mass produced (or in the final stages
      of
      development) in the same credit card form factor as our ICT DisplayCard that
      incorporates the token technology. However, there are companies creating tokens
      and random number generators for use in dual-factor authentication (as an item
      separate from the transaction card). For example, RSA, Vasco, and VeriSign
      token
      devices may be cost competitive to our technology but are not in a credit card
      form factor. Smart Card, biometrics, and software programs can provide
      multi-factor authentication competitive to our ICT DisplayCard.





We
      believe that the principal competitive factors that affect the market for tokens
      include convenience, price, quality/reliability, ease of use, and distribution
      cost. We cannot assure you that we will be able to maintain our competitive
      position against current and potential competitors, especially those with
      significant marketing, service, support, technical and other competitive
      resources.





Some
      of
      our present and potential competitors have significantly greater financial,
      technical, marketing, purchasing and other resources than we do, and as a
      result, may be able to respond more quickly to new or emerging technologies
      and
      changes in customer requirements, or to devote greater resources to the
      development, promotion and sale of products, or to deliver competitive products
      at a lower end-user price. Current and potential competitors have established
      or
      may establish cooperative relationships among themselves or with third parties
      to increase the ability of their products to address the needs of our
      prospective customers. It is possible that new competitors or alliances may
      emerge and rapidly acquire significant market share. We cannot guarantee that
      we
      will be able to compete successfully against present or future competitors
      or
      that competitive pressures will not materially and adversely affect our
      business, financial condition and results of operations.





**Risks
      Related to our Securities**





***Our
      common stock is subject to trading restrictions as a “penny stock,” which could
      adversely affect the liquidity and price of such
      stock.***





As
      long
      as the trading price of our common stock is below $5.00 per share, the
      open-market trading of our common stock will be a “low-priced” security under
      the “penny stock” rules promulgated under the Securities Exchange Act of
      1934 (the “Exchange Act”). The “penny stock” rules impose additional sales
      practice requirements on broker-dealers who sell securities to persons other
      than established customers and accredited investors (generally those with assets
      in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
      with their spouse). In accordance with these rules, broker-dealers participating
      in transactions in low-priced securities must first deliver a risk disclosure
      document that describes the risks associated with such stocks, the
      broker-dealer’s duties in selling the stock, the customer’s rights and remedies
      and certain market and other information. Furthermore, the broker-dealer must
      make a suitability determination approving the customer for low-priced stock
      transactions based on the customer’s financial situation, investment experience
      and objectives. Broker-dealers must also disclose these restrictions in writing
      to the customer, obtain specific written consent from the customer, and provide
      monthly account statements to the customer. These restrictions will probably
      decrease the willingness of broker-dealers to make a market in our common stock,
      decrease liquidity of our common stock and increase transaction costs for sales
      and purchases of our common stock as compared to other securities, which could
      reduce the price of our common stock and the value of any investment you make
      in
      our shares. We make no guarantee that our market-makers will make a market
      in
      our common stock, or that any market for our common stock will
      continue.





***NASD
      sales practice requirements may also limit a stockholder’s ability to buy and
      sell our stock.***





In
      addition to the “penny stock” rules described above, if our stock trades
      below $5.00 per share, the NASD has adopted rules that require that in
      recommending an investment to a customer, a broker-dealer must have reasonable
      grounds for believing that the investment is suitable for that customer. Prior
      to recommending speculative low-priced securities to their non-institutional
      customers, broker-dealers must make reasonable efforts to obtain information
      about the customer’s financial status, tax status, investment objectives and
      other information. The NASD requirements make it more difficult for
      broker-dealers to recommend that their customers buy our common stock, which
      may
      limit your ability to buy and sell our stock and have an adverse effect on
      the
      market for and price of our shares.




12




***We
      do not anticipate paying any cash dividends in the foreseeable future, which
      may
      reduce your return on an investment in our common
      stock.***





We
      plan
      to use all of our earnings, to the extent we have earnings, to fund our
      operations. We do not plan to pay any cash dividends in the foreseeable future.
      We cannot guarantee that we will, at any time, generate sufficient surplus
      cash
      that would be available for distribution as a dividend to the holders of our
      common stock. Therefore, any return on your investment would derive from an
      increase in the price of our stock, which may or may not occur.





***Substantial
      future sales of our common stock in the public market may depress our stock
      price, which could result in significant losses to you and could limit our
      ability to raise capital.***





As
      of
      March 12, 2008, we have 28,433,116 shares of common stock outstanding. Of
      these shares, 25,625,169 can be traded pursuant to a prospectus or via a
      transaction pursuant to Rule 144 under the Securities Act of 1933. Of our
      5,302,098 warrants outstanding, 4,500,223 have been registered and common stock
      issued on exercise can be sold pursuant to a prospectus. 2,194,498 shares
      issuable upon exercise of options issued under our 2004 Stock Incentive Plan
      were registered as well.





If
      our
      stockholders sell substantial amounts of common stock in the public market,
      or
      the market perceives that such sales may occur, the market price of our common
      stock could fall, which could result in a significant loss on any investment
      you
      make in our common stock. The sale of a large number of shares could impair
      our
      ability to raise needed capital by depressing the price at which we could sell
      our common stock.





***We
      may raise additional capital through a securities offering that could dilute
      your ownership interest and voting rights.***





Our
      certificate of incorporation currently authorizes our board of directors to
      issue up to 75,000,000 shares of common stock and 5,000,000 shares of preferred
      stock. As of March 12, 2008, after taking into consideration our
      outstanding common and preferred shares, our board of directors will be entitled
      to issue up to 46,566,884 additional common shares and 5,000,000 preferred
      shares. The power of the board of directors to issue these shares of common
      stock, preferred stock or warrants or options to purchase shares of our stock
      is
      generally not subject to stockholder approval.





We
      may
      require additional working capital to fund our business. If we raise additional
      funds through the issuance of equity, equity-related or convertible debt
      securities, these securities may have rights, preferences or privileges senior
      to those of the holders of our common stock. The issuance of additional common
      stock or securities convertible into common stock by our board of directors
      will
      also have the effect of diluting the proportionate equity interest and voting
      power of holders of our common stock. We cannot assure you that we will be
      able
      to raise additional capital on terms that are acceptable to us, or at
      all.





***Our
      ownership is highly concentrated in a few individuals, and as a result, the
      trading price for our shares may be depressed and these stockholders can take
      actions that may be adverse to your interests.***





Our
      principal stockholders, executive officers and directors, in the aggregate,
      beneficially own approximately 35% of our common stock including options held
      by
      each principal stockholder, executive officer and director that are exercisable
      within 60 days of March 12, 2008. These stockholders, acting together, will
      have the ability to exert substantial influence over all matters requiring
      approval by our stockholders, including the election and removal of directors
      and any proposed merger, consolidation or sale of all or substantially all
      of
      our assets. In addition, they could dictate the management of our business
      and
      affairs. This concentration of ownership could have the effect of delaying,
      deferring or preventing a change in control, or impeding a merger or
      consolidation, takeover or other business combination that could be favorable
      to
      you. This significant concentration of share ownership may also adversely affect
      the trading price for our common stock because investors may perceive
      disadvantages in owning stock in companies with controlling stockholders. An
      adverse effect on the trading price of our common stock could cause you to
      incur
      a significant loss on any investment you make in our common stock.





***Our
      incorporation documents and Delaware law may inhibit a takeover that
      stockholders consider favorable and could also limit the market price of your
      stock, which may inhibit an attempt by our stockholders to change our direction
      or management.***





Our
      amended and restated certificate of incorporation and bylaws contain provisions
      that could delay or prevent a change in control of our company. Some of these
      provisions:





·
            authorize
                our board of directors to determine the rights, preferences, privileges
                and restrictions granted to, or imposed upon, the preferred stock
                and to
                fix the number of shares constituting any series and the designation
                of
                such series without further action by our
                stockholders;


·
            prohibit
                stockholders from calling special
                meetings;


·
            prohibit
                cumulative voting in the election of directors, which would otherwise
                allow less than a majority of stockholders to elect director
                candidates;






13




·
            establish
                advance notice requirements for submitting nominations for election
                to the
                board of directors and for proposing matters that can be acted upon
                by
                stockholders at a meeting; and


·
            prohibit
                stockholder action by written consent, requiring all stockholder
                actions
                to be taken at a meeting of our
                stockholders.





In
      addition, we are governed by the provisions of Section 203 of the Delaware
      General Corporate Law. These provisions may prohibit large stockholders, in
      particular those owning 15% or more of our outstanding voting stock, from
      merging or combining with us, which may prevent or frustrate any attempt by
      our
      stockholders to change our management or the direction in which we are heading.
      These and other provisions in our amended and restated certificate of
      incorporation and bylaws and under Delaware law could reduce the price that
      investors might be willing to pay for shares of our common stock in the future
      and result in the market price being lower than it would be without these
      provisions.





***New
      rules, including those contained in and issued under the Sarbanes-Oxley act
      of
      2002, may make it difficult for us to retain or attract qualified officers
      and
      directors, which could adversely affect the management of our business and
      our
      ability to obtain or retain listing of our common
      stock.***





We
      may be
      unable to attract and retain qualified officers, directors and members of board
      committees required to provide for our effective management as a result of
      the
      recent and currently proposed changes in the rules and regulations that
      govern publicly held companies, including, but not limited to, certifications
      from executive officers and requirements for financial experts on the board
      of
      directors. The perceived increased personal risk associated with these recent
      changes may deter qualified individuals from accepting these roles. The
      enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of
      a
      series of new rules and regulations and the strengthening of existing
      rules and regulations by the Securities and Exchange Commission (the
“SEC”). Further, certain of these recent and proposed changes heighten the
      requirements for board or committee membership, particularly with respect to
      an
      individual’s independence from the corporation and level of experience in
      finance and accounting matters. We may have difficulty attracting and retaining
      directors with the requisite qualifications. If we are unable to attract and
      retain qualified officers and directors, the management of our business could
      be
      adversely affected.





***If
      we are unable to complete our assessment as to the adequacy of our internal
      control over financial reporting within the required time periods as required
      by
      Section 404 of the Sarbanes-Oxley Act of 2002, or in the course of such
      assessments identify and report material weaknesses in our controls, investors
      could lose confidence in the reliability of our financial statements, which
      could result in a decrease in the value of our common
      stock.***





As
      directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
      rules requiring public companies to include a report of management on
      internal control over financial reporting in their Annual Reports on
      Form 10-K. This report is required to contain an assessment by management
      of the effectiveness of a company’s internal control over financial reporting.
      Our non-affiliated market capitalization qualified us as a non-accelerated
      filer
      until the end of the 2007 fiscal year. As a result, we are required to include
      our management’s report on internal control over financial reporting in this
      Annual Report on Form 10-KSB for the 2007 fiscal year and will not be
      required to include our auditors’ attestation report on our internal control
      over financial reporting until we file our Annual Report on Form 10-K for
      the 2008 fiscal year. As discussed in detail below in the section entitled
      “Controls and Procedures – Internal Control over Financial Reporting,” we have
      concluded that, as of December 31, 2007, our internal control over financial
      reporting was not effective and have identified a number of material weaknesses
      in our internal control over financial reporting. While we intend to remedy
      these weaknesses during the current fiscal year, we may be unable to do so.
      If
      we fail to implement required new or improved controls, or if our auditors
      are
      unable to attest to the effectiveness of our internal control over financial
      reporting when we file our Annual Report on Form 10-K for the 2008 fiscal year,
      there may be an adverse reaction in the financial markets due to a loss of
      confidence in the reliability of our financial statements, which could cause
      the
      market price of our common stock to decline.





***If
      we trigger an “event of default” under our debt agreement, the debt holders
      could require us to repay the loan in full and force a sale of all of our assets
      to do so, which could cause our common shareholders to incur a total loss on
      their investments in us.***





Our
      debt
      agreement, entered into in January 2008, requires us to adhere to certain
      covenants to avoid triggering an “event of default.” Failure to remain in
      compliance could prompt investors to call the debt and demand immediate
      repayment. We could be forced to seek bankruptcy protection if our loan is
      called and we are unable to repay the loan in full. All of our assets are
      pledged to the debt holders. If proceeds from the disposal of our assets are
      insufficient to repay the loan in full, common shareholders will receive nothing
      for their stock and suffer a total loss on their investments in us.





**ITEM
      2 - DESCRIPTION OF PROPERTY**





We
      do not
      own any real property. Our corporate office is approximately 6,200 square feet
      of leased office space in Los Angeles, California. We sublease this office
      space
      at a monthly base rent of $17,292. We have agreed under the terms of the
      sublease to pay 32.5% of any additional rents or charges due from our
      sublandlord to the master landlord. This sublease expires on July 31, 2009.
      We expect that this property will be adequate for our needs for the near to
      medium term.




14




**ITEM
      3 - LEGAL PROCEEDINGS**





We
      are
      not a party to any material legal proceeding, nor to the knowledge of
      management, are any legal proceedings threatened against us. From time to time,
      we may be involved in litigation relating to claims arising out of operations
      in
      the normal course of business.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





The
      following matters were voted on and approved by stockholders at the annual
      meeting of the stockholders of the Company held on December 21,
      2007:





**1.** The
      election of six directors to serve until the 2008 annual meeting of
      stockholders.


**2.** The
      ratification of the appointment of Singer Lewak Greenbaum & Goldstein
      LLP as the Company’s independent registered public accounting firm for the 2007
      fiscal year.


**3.** The
      approval of an amendment to the Company’s Certificate of Incorporation to
      increase the total number of shares of common stock which the Company is
      authorized to issue from 50,000,000 shares to 75,000,000 shares.


**4.** The
      approval of an amendment to increase the number of shares of common stock
      available under the Company’s 2004 Stock Incentive Plan by 14,500 shares from
      2,215,000 to 2,229,500 shares.


**5.** The
      approval of the proposed 2007 Equity Incentive Plan of the Company, that
      provides for the issuance of up to 4,000,000 shares of common stock and related
      stock awards.


The
      number of votes cast at the annual meeting for each matter was as set forth
      in
      the following table:





**Matter
                voted upon**
            
            **For**
            
            **Against/Withheld**
            
            **Abstentions/Broker**
              **Non-votes**Election
                of Donald Joyce
            
            
            20,920,394
            
            
            16,652Election
                of W. Robert Ramsdell
            
            
            20,920,394
            
            
            16,652Election
                of Maoshing Ni
            
            
            20,918,234
            
            
            18,812Election
                of Richard Nathan
            
            
            20,917,294
            
            
            19,752Election
                of Scott V. Ogilvie
            
            
            20,917,294
            
            
            19,752Election
                of Henry L. Treddenick III
            
            
            20,918,294
            
            
            18,752Ratification
                of appointment of Singer Lewak Greenbaum & Goldstein
                LLP
            
            
            20,859,360
            
            
            14,441
            
            
            63,244Approval
                of amendment to Certificate of Incorporation to increase authorized
                common
                stock
            
            
            20,824,937
            
            
            96,708
            
            
            15,400Approval
                of amendment to increase shares of common stock available under 2004
                Stock
                Incentive Plan
            
            
            10,109,571
            
            
            131,076
            
            
            10,696,399Approval
                of 2007 Equity Incentive Plan
            
            
            10,124,326
            
            
            126,931
            
            
            10,685,789





15





**PART II**





**ITEM
      5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





On
      March 9, 2007, we were listed on the NASDAQ Capital Market and trade under
      the symbol “INVC”. From October 18, 2005 to March 8, 2007, our common
      stock traded on the OTC Bulletin Board under the symbol “INVC.OB”. Our common
      stock is not listed on any other markets or exchanges. As of March 15,
      2008, we had 28,433,116 shares of common stock issued and outstanding. The
      following table sets forth the high and low close information as reported by
      Nasdaq Capital Market and includes the high and low bid information for our
      common stock as reported by the OTC Bulletin Board with respect to prices
      preceding the listing of our stock on the Nasdaq Capital Market:





**QUARTERLY
      COMMON STOCK PRICE RANGES**





**2007
                CALENDAR YEAR**
            
            **HIGH**
            
            **LOW**FIRST
                QUARTER
            
            $
            6.20
            
            $
            4.26SECOND
                QUARTER
            
            $
            6.24
            
            $
            4.00THIRD
                QUARTER
            
            $
            4.90
            
            $
            1.93FOURTH
                QUARTER
            
            $
            3.80
            
            $
            1.69





**2006
                CALENDAR YEAR**
            
            **HIGH**
            
            **LOW**FIRST
                QUARTER
            
            $
            3.50
            
            $
            2.15SECOND
                QUARTER
            
            $
            4.50
            
            $
            3.12THIRD
                QUARTER
            
            $
            5.50
            
            $
            4.49FOURTH
                QUARTER
            
            $
            5.08
            
            $
            4.30





The
      OTC
      Bulletin Board quotations reflect inter-dealer prices, without retail mark-up,
      mark-down or commission and may not represent actual transactions. As of
      March 15, 2008, there were approximately 40 stockholders of record of
      our common stock and no stockholders of record of our preferred
      stock.





Our
      transfer agent is American Stock Transfer & Trust Company
      www.amstock.com .





**DIVIDENDS**





We
      have
      never paid any dividends on our common stock. We anticipate that any future
      earnings will be retained for the development of our business and do not
      anticipate paying any dividends on our stock in the foreseeable
      future.





**EQUITY
      COMPENSATION PLAN INFORMATION**





Our
      board
      of directors and stockholders approved our 2004 Stock Incentive Plan in
      August 2004. Our 2007 Equity Incentive Plan was approved by our board of
      directors in September 2007 and by our stockholders in December 2007.
      The following table provides information as of December 31, 2007 about
      common stock that may be issued upon the exercise of options, warrants and
      rights under our 2004 Stock Incentive Plan and 2007 Equity Incentive
      Plan.





**Plan
                name and type**
            
            **Number of securities**
              **to be issued upon**
              **exercise of**
              **outstanding options,**
              **warrants and rights**
            
            **Weighted-average**
              **exercise price of**
              **outstanding options,**
              **warrants and rights**
            
            **Number of securities**
              **remaining available**
              **for future issuance**
              **under equity**
              **compensation plans**
              **(excluding securities**
              **reflected in column (a))**(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by stockholders
            
            
            3,488,011
            
            $
            2.10
            
            
            2,741,489Equity
                compensation plans not approved by stockholders
            
            
            N/A
            
            $
            N/A
            
            
            N/ATotal
            
            
            3,488,011
            
            $
            2.10
            
            
            2,741,489





We
      were
      authorized to issue up to 2,215,000 shares of common stock under our 2004 Stock
      Incentive Plan until December 2007, when our board of directors increased
      the number of shares authorized for issuance under the plan to 2,229,500, which
      increase was subsequently approved by our stockholders. We are authorized to
      issue up to 4,000,000 shares of common stock under our 2007 Equity Incentive
      Plan, which was approved by stockholders in December 2007.




16




**ITEM
      6 - MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF
      OPERATIONS**





The
      following discussion of our financial condition and results of operations should
      be read in conjunction with our consolidated financial statements and the notes
      to those statements included elsewhere in this report. In addition to the
      historical consolidated financial information, the following discussion and
      analysis contains forward-looking statements that involve risks and
      uncertainties. Our actual results may differ materially from those anticipated
      in these forward-looking statements as a result of certain factors, including
      those set forth under “ *Business
      – Risk Factors”* and
      elsewhere in this report.





**OVERVIEW**





Since
      2002, we have continued to develop our power inlay technology that is designed
      to bring power-based applications to the enterprise market and on-line banking
      market. Our present focus is the ICT DisplayCard power inlay technology which
      consists of a battery, circuit, and switch that can power applications on credit
      card sized cards and other information-bearing plastic cards. We have devoted
      a
      majority of our efforts to completing the development of our power inlay
      technology, initiating marketing and raising the financing required to do so
      and
      fund our expenses. We have generated limited revenues that derive from licensing
      agreements of our LensCard product, most of which have terminated. At this
      time,
      we have no plans to renew the LensCard licensing agreements or to further market
      or sell the LensCard, unless requested by a customer.





Since
      inception, we have been unprofitable. We incurred net losses of $14,333,622
      and
      $6,866,614 for the fiscal years ending December 31, 2007 and 2006,
      respectively. As of December 31, 2007, we had an accumulated deficit of
      $28,067,183. Our continued existence is dependent upon our ability to obtain
      additional financing, as we have not been able to successfully sell the ICT
      DisplayCard in substantial quantities. We further anticipate that after such
      introduction of the ICT DisplayCard in 2008, we will continue to incur net
      losses due to our costs exceeding our revenues for an indefinite period of
      time.
      Our capital requirements for the next 12 months for retention and hiring of
      key
      personnel, implementation of a sales force for our products, and further
      research and development relating to the production of our power inlay
      technology will continue to be significant. To date, our operations have been
      funded primarily through equity and debt financings totaling
      $25,303,691.





We
      believe that we currently have enough cash to meet our short term needs and
      continue our current operations through early spring 2008. We anticipate that
      we
      will not be able to generate sales of the ICT DisplayCard in substantial
      quantities until the second half of 2008 to support our cash needs since the
      sales cycle for that product is longer than originally anticipated. To maintain
      exclusivity under some of our agreements, we purchased inventory and made
      deposits prior to orders being received from customers. These inventory
      purchases and deposits along with our operating expenses have collectively
      reduced the Company’s cash resources since we have not been able to sell our
      acquired inventory or utilize our deposits with suppliers or otherwise replenish
      such cash. As such, we will be required to raise operating capital in order
      to
      continue our current operations. We have engaged an investment advisor to
      explore capital raising opportunities.





We
      raised
      $3,500,000 of operating capital in January 2008 (see Equity and Debt
      Financings and Accounts Payable in this Item 6) but may be unable to raise
      additional operating capital on terms satisfactory to us, if at all. There
      can
      be no assurances that we will be able to raise operating capital on satisfactory
      terms, or that sufficient revenues will be generated from the sales of our
      product in order to sustain our operations. Should our cash and liquidity
      position become severe, we would need to limit our operations which would harm
      the value of your investment in the Company.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the U.S. The
      preparation of these financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses for each period. The following represents a summary of our critical
      accounting policies, defined as those policies that we believe are the most
      important to the portrayal of our financial condition and results of operations
      and that require management’s most difficult, subjective or complex judgments,
      often as a result of the need to make estimates about the effects of matters
      that are inherently uncertain.





Revenue
      recognition. We recognize revenues in accordance with SEC Staff Accounting
      Bulletin No. 104 (“SAB 104”). Revenues are recognized when persuasive
      evidence of an arrangement exists, delivery has occurred or services have been
      rendered, the price is fixed and determinable and collectability is reasonably
      assured. Revenue is not recognized on product sales transacted on a test or
      pilot basis. Instead, receipts from these types of transactions offset marketing
      expenses. We recognize certain long-term contracts using the complete-contract
      method in accordance with SOP 81-1, “Accounting for Performance of
      Construction-Type and Certain Production-Type of Contracts.”




17




We
      have
      generated revenue from three sources: sale of the ICT DisplayCard, licensing
      of
      the LensCard to various credit card issuers and selling the Light Card to a
      credit card issuer. The LensCard is composed of a credit card with a small
      magnifying lens embedded into the card. The LightCard is composed of a credit
      card that when a button is pressed a small LED light is activated. We sell
      time-based licenses to various credit card issuers for the LensCard. We
      recognize royalties attributable to these time-based licenses as they are sold
      to the credit card issuers’ customers. Royalty revenue is recognized when each
      LensCard is sold by an issuer in accordance with SAB 104.





We
      anticipate that the majority of our revenues in the coming year will come from
      the ICT DisplayCard. We intend to sell these cards through resellers. We do
      not
      recognize revenue when we sell the ICT DisplayCard in small quantities under
      a
      test or pilot program. Cash receipts from these transactions are used to offset
      research and development expenses.





The
      revenue generated from the LensCard and LightCard is negligible, and we expect
      that the sales of these products will have no impact on our results of
      operations.





Deferred
      revenue is recorded when the payments from a reseller are received by us prior
      to the sale of a ICT DisplayCard to the resellers’ customer.





Accounts
      receivable allowances. Our sales to date have been to large credit card issuers
      and we have been successful in collecting for products and services.
      Consequently, we have no allowances for doubtful accounts. We perform a regular
      review of our customer activity and associated credit risks and do not require
      collateral from our customers.





Inventory.
      Our inventories are valued at the lower of cost or market. We use estimates
      and
      judgments regarding the valuation of inventory to properly value inventory.
      Inventory adjustments are made for the difference between the cost of the
      inventory and the estimated market value and charged to cost of goods sold
      in
      the period in which the facts that give rise to the adjustments become
      known.





Research
      and Development. Costs of research and development, principally the design
      and
      development of hardware and software prior to the determination of technological
      feasibility, are expensed as incurred.





Valuation
      of Intangible Assets and Long-Lived Assets. We assess the impairment of
      identifiable intangibles and long-lived assets whenever events or changes in
      circumstances indicate that the carrying value may not be recoverable. Factors
      considered important that could trigger an impairment review include, but are
      not limited to, the following: a significant underperformance to expected
      historical or projected future operating results, a significant change in the
      manner of the use of the acquired asset or the strategy for the overall
      business, or a significant negative industry or economic trend.





We
      assess
      the carrying value of long-lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” During the
      year ended December 31, 2007, we incurred an impairment charge of
      $1,000,010 for the write down of our buzzer patent. During the year ended
      December 31, 2006, we did not recognize any impairment to intangible assets
      or property and equipment.





Stock
      Based Compensation. On January 1, 2006, we adopted SFAS No. 123 (R),
“Share Based Payment,” which establishes standards for the accounting of
      transactions in which an entity exchanges its equity instruments for goods
      or
      services, primarily focusing on accounting for transactions where an entity
      obtains employee services in share-based payment transactions. SFAS
      No.123(R) requires a public entity to measure the cost of employee services
      received in exchange for an award of equity instruments, including stock
      options, based on the grant-date fair value of the award and to recognize it
      as
      compensation expense over the period the employee is required to provide service
      in exchange for the award, usually the vesting period. The Company has selected
      the modified prospective method of transition. SFAS No.123(R) supersedes
      the Company’s previous accounting under Accounting Principles Board (APB)
      Opinion No. 25, *Accounting
      for Stock Issued to Employees* for
      periods beginning in fiscal year 2006. In March 2005, the SEC issued Staff
      Accounting Bulletin (“SAB”) No. 107 relating to SFAS No. 123(R). We
      have applied the provisions of SAB No.107 in our adoption of SFAS
      No. 123(R).





**RESULTS
      OF OPERATIONS**





**YEARS
      ENDED DECEMBER 31, 2007 AND 2006**





Total
      revenue increased to $445,000 in the year ended December 31, 2007 from
      $35,382 for the year ended December 31, 2006. In the 2007 period, revenue
      is from the sale of the ICT DisplayCard. In the 2006 period, revenue was from
      recognition of deferred revenue on LensCard royalties received from a terminated
      licensing agreement. We believe that future revenue will be primarily from
      the
      sales of the ICT DisplayCard; revenue from LensCard royalties is expected to
      be
      negligible.




18




Cost
      of
      Goods Sold consists of costs to manufacture the ICT DisplayCard and inventory
      write-offs and reserves. For the year ended December 31, 2007 cost of goods
      sold
      includes $575,017 for inventory write-offs and reserves for battery
      obsolescence. Cost of goods sold in the earlier period is entirely comprised
      of
      inventory write-offs and reserves due to the reduced shelf lives of batteries
      on
      hand. There was no cost of goods associated with the royalty revenue recognized
      in 2006. As a result, total cost of goods sold increased from $791,818 for
      the
      year ended December 31, 2006 to $851,637 for the year ended
      December 31, 2007. We believe that future cost of goods sold will be
      primarily from the ICT DisplayCard.





Administrative
      expense consists of travel and marketing expenses, compensation expense,
      administrative fees and depreciation and amortization expense. Administrative
      expense increased $4,389,870, or 110%, from $4,000,117 for the year ended
      December 31, 2006 to $8,389,987 for the year ended December 31, 2007.
      The increase is primarily due to the hiring of additional employees, insurance
      costs, compensation expenses relating to vesting of employee and director’s
      stock options of $2,121,751, and travel expenses relating to business
      development. We anticipate that administrative expenses will increase in 2008
      as
      we incur increased costs associated with establishing our
      operations.





Consulting
      fees, which increased $221,906, or 53%, from $419,978 for the year ended
      December 31, 2006 to $641,884 for the year ended December 31, 2007,
      include amounts paid to independent contractors for services provided. We expect
      consulting fees to decline significantly as consultants are transitioned to
      full-time employees.





Professional
      fees consist of amounts paid to our outside counsel, auditors and to providers
      of other outside services rendered to the Company. Professional fees expense
      increased from $917,882 for the year ended December 31, 2006 to $1,157,781
      for the year ended December 31, 2007, an increase of $239,899, or 26%.
      Professional fees expense increased due to legal fees for the maintenance and
      establishment of the Company’s intellectual property rights, costs relating to
      the acquisition of certain assets of nCryptone, due diligence costs related
      to
      the potential acquisition by us of one of our suppliers, and the legal and
      accounting fees costs associated with being a public company. We anticipate
      that
      professional fees will continue to increase as we will have to assess our
      internal controls pursuant to Sarbanes-Oxley and the related legal costs
      associated with being a public company.





Research
      and development expense consists primarily of costs relating to the continued
      testing and quality control analysis of the ICT DisplayCard. Research and
      development costs increased from $1,104,681 for the year ended December 31,
      2006 to $1,352,413 for the year ended December 31, 2007, an increase of
      $247,732, or 22%, due to increased testing expenses at one of our major
      suppliers offset by a reduction of expenses related to prior products. We expect
      our research and development expenses to increase as we continue to invest
      in
      developing enhancements of our ICT DisplayCard with one time
      password.





During
      the year ended December 31, 2007 our analysis of long lived intangible
      assets determined that the value we had assigned to a buzzer patent acquired
      from nCryptone in June 2006 was not recoverable. Accordingly, we impaired
      the full value of the asset during the year ended December 31,
      2007.





Unrecoverable
      Payments to Suppliers. Unrecoverable payments to suppliers expense consist
      of
      payments made to third party suppliers for deposits that we no longer expect
      to
      utilize, purchase orders that we do not expect to fulfill and accrued
      expenses to satisfy irrevocable purchase orders. Unrecoverable payments to
      suppliers increased from $0 for the year ended December 31, 2006 to
      $1,546,428 for the year ended December 31, 2007 to recognize the diminished
      value of certain deposits made on the basis of production volume that will
      not
      be realized and to accrue for costs that we expect to pay in the
      future as we did not complete certain irrevocable purchase orders. At this
      time,
      we do not anticipate that unrecoverable payments to suppliers will increase
      in
      the future as management considers these to be one time charges.





Interest
      income decreased $152,326, or 45%, from $336,119 for the year ended
      December 31, 2006 to $183,793 for the year ended December 31, 2007 as
      a result of a decrease in operating cash during the year ended December 31,
      2007.





Interest
      expense increased from $1,239 for the year ended December 31, 2006 to
      $21,475 for the year ended December 31, 2007 due to interest accruing on a
      related party account payable that has not been settled.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      principal sources of liquidity since our inception through December 31,
      2007 have been equity and debt financings totaling $21,803,691. Since our
      inception, we have incurred significant losses, and as of December 31, 2007
      we had an accumulated deficit of $28,067,183. Our cash balance at
      December 31, 2007 was $339,600, down from $8,270,096 at December 31,
      2006.





Net
      cash
      used in operating activities was $7,945,470 for the year ended December 31,
      2007 as compared with $5,990,620 for the year ended December 31, 2006. The
      increase in cash used was due primarily to increases in operating expenses
      and
      investment in raw materials held for production. We have increased inventory
      in
      anticipation of being able to generate substantial sales of the DisplayCard
      beginning in the second half of 2008. Partially offsetting this increase in
      cash
      used was an increase in accounts payable caused by more stringent cash
      management.




19




Net
      cash
      used in investing activities was $21,351 for the year ended December 31,
      2007 as compared with $218,786 used in investing activities for the year ended
      December 31, 2006. The decrease in cash used for investing was due to a
      smaller amount of production equipment purchased during the year ended
      December 31, 2007.





Net
      cash
      provided by financing activities was $36,325 for the year ended
      December 31, 2007 as compared to $11,201,970 for the year ended
      December 31, 2006. No capital raise took place during the year ended
      December 31, 2007; $11,356,500 was raised during the year ended
      December 31, 2006.





Through
      the date of this report, our operations have been funded primarily through
      equity and debt financings totaling $25,303,691. We believe that we have
      adequate funding to meet our cash needs and continue our operations through
      the
      early spring of 2008. We have engaged an investment advisor to explore capital
      raising opportunities but there can be no assurance that capital will be
      available to us on terms that are acceptable, or at all.





Our
      auditors have included a “going concern” caveat in their unqualified opinion of
      our 2007 financial statements signifying that without additional capital doubt
      exists concerning our ability to survive until year-end 2008.





**EQUITY
      AND DEBT FINANCINGS AND ACCOUNTS PAYABLE**





On
      December 23, 2003, we entered into a Securities Purchase Agreement with
      Bristol Capital, LLC under which we were to sell a unit that consisted of
      500,000 shares of our common stock and warrants to purchase 2,400,000 shares
      of
      our common stock at an exercise price of $1.00 per share in exchange for
      $50,000. On May 5, 2004, we received $50,000 from Bristol Capital, LLC and
      issued 500,000 shares of our common stock and warrants to purchase 2,400,000
      shares of our common stock. On March 1, 2006, we received $50,000 on the
      exercise of 50,000 of these warrants. On April 3, 2006, we received
      $200,000 on the exercise of 200,000 of these warrants.





On
      October 19, 2005, we completed a private equity financing pursuant to which
      we raised gross proceeds of $6,500,000 and converted $571,066 of indebtedness.
      The transaction was a unit offering, pursuant to which each investor or debt
      holder received a unit comprised of one share of restricted common stock and
      warrants convertible into 0.50 shares of restricted common stock, resulting
      in
      the placement of an aggregate 7,071,066 shares of restricted common stock and
      warrants convertible into an additional 3,535,533 shares of restricted common
      stock. The warrants have an exercise price of $1.25 per share and expire on
      October 19, 2010. The financing was arranged by TR Winston &
Company, a fund manager, which received a net commission of 6% of the total
      gross proceeds and a warrant to purchase 780,000 shares of the Company’s common
      stock at an exercise price of $1.25 per share that expires on October 19,
      2010. Additionally, we issued a warrant to purchase 117,600 shares of our common
      stock at an exercise price of $1.25 per share that expires on October 19,
      2010 to C.E. Unterberg, Towbin, LLC pursuant to a letter agreement we had
      previously entered into with C.E. Unterberg, Towbin, LLC. On June 15, 2006,
      we received $18,125 as a result of 14,500 warrants being exercised by a warrant
      holder. On June 26, 2006 we received $6,250 as a result of 5,000 warrants
      being exercised by a warrant holder. On July 24, 2006, we received $6,250
      as a result of 5,000 warrants being exercised by a warrant holder.





On
      May 30, 2006, we issued 3,785,500 shares of common stock at a price of
      $3.00 per share to accredited investors pursuant to a private placement for
      total gross proceeds of $11,356,500. T.R. Winston & Company served as
      placement agent for the securities sold in this transaction and received a
      net
      commission of 5% of the total gross proceeds and a warrant to purchase 113,565
      shares of our common stock at an exercise price of $3.30 per share that expire
      on May 30, 2011. The shares of common stock we issued and the shares of
      common stock underlying warrants issued on May 30, 2006 have full ratchet
      anti-dilution protection for 12 months. If during 12 months following
      May 30, 2006, we obtain additional capital through the issuance of equity
      securities, other than the issuance of shares of common stock or securities
      convertible into or exchangeable for common stock of InCard in connection with
      (i) any mergers or acquisitions of securities, business, property or other
      assets (ii) joint ventures or other strategic corporate transactions,
      (iii) any other transaction, the primary purpose of which is not to raise
      capital for the company, (iv) the exercise of an option or warrant or the
      conversion of a security outstanding as of May 30, 2006, or (v) any
      employee benefit plan that has been adopted by our board and our stockholders,
      the holders of these then-existing shares will receive full ratchet
      anti-dilution protection.





On
      June 28, 2006, we purchased rights relating to the ICT DisplayCard from
      nCryptone for 4,500,000 shares of our common stock and acquired a license to
      use
      a patent for $1,000,010 that was due by June 27, 2007. We have paid
      $400,000 towards the cost of the patent through December 31, 2007; the
      remainder is due in January 2009. We wrote off the value of the patent
      during the year ended December 31, 2007.




20




On
      January 8, 2008, we entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with 13 institutional and accredited investors (the
“Purchasers”). Pursuant to the terms of the Purchase Agreement, the Purchasers
      purchased $3.5 million of our 8% Senior Secured Convertible Debenture
      (“Debenture”). The Debenture: (i) bears interest at 8% per year, paid
      quarterly in cash or registered common stock, at our discretion; (ii) has a
      maturity of January 8, 2011, (iii) is convertible at the holder’s
      option into shares of our common stock at $2.50 per share, (iv) is secured
      by all of our and our subsidiary’s assets including inventory, receivables,
      unencumbered equipment and intellectual property under the terms of a Security
      Agreement, and (v) has a forced conversion feature which allows us to force
      the conversion of the Debenture if our common stock trades above $5.00 for
      20
      consecutive trading days and certain other conditions are met. We also issued
      to
      the Purchasers five-year common stock purchase warrants to purchase 700,000
      shares of our common stock at an exercise price of $2.75 per share (the
“Warrants”). We expect to use the net proceeds of the financing for our working
      capital requirements and to pay down certain obligations.





Both
      the
      conversion price under the Debenture and the exercise price under the Warrants
      are subject to “full-ratchet” price protection in the event of stock issuances
      below their respective conversion or exercise prices, except for specified
      exempted issuances including grants of stock options and stock issuances to
      officers, directors, employees and consultants.





We
      agreed
      to grant registration rights to the investors, by filing a registration
      statement covering the shares of common stock issuable upon the conversion
      of
      the Debenture, exercise of the Warrants, and issuable as interest payments,
      within 30 days of the closing, and obtaining effectiveness of the registration
      statement within 90 days after the closing. These dates have been extended
      to
      June 7, 2008. Our officers, directors, and 10% stockholders also agreed to
      execute lock-up letter agreements prohibiting sales of our common stock by
      them
      until July 30, 2008. In connection with the transaction, we also secured
      voting agreements from our officers, directors and 10% stockholders approving
      the transaction in the event that we are required to seek such approval pursuant
      to the rules of the NASDAQ.





T.R.
      Winston & Company, LLC acted as the sole placement agent for the
      transaction.





The
      securities offered in the financing have not been registered under the
      Securities Act of 1933, as amended, and may not be offered or sold in the United
      States absent registration or an applicable exemption from registration
      requirements. We relied upon the exemption from securities registration afforded
      by Rule 506 of Regulation D as promulgated by the United States Securities
      and Exchange Commission under the Securities Act of 1933, as amended (the
“Securities Act”) and/or Section 4(2) of the Securities Act. No
      advertising or general solicitation was employed in offering the securities.
      The
      offerings and sales were made to a limited number of persons, all of whom were
      accredited investors, and transfer was restricted by our company in accordance
      with the requirements of the Securities Act of 1933. In addition to
      representations by the above-referenced persons, we made independent
      determinations that all of the above-referenced persons were accredited or
      sophisticated investors, and that they were capable of analyzing the merits
      and
      risks of their investment, and that they understood the speculative nature
      of
      their investment. Furthermore, all of the above-referenced persons were provided
      with access to our Securities and Exchange Commission filings.





**FUTURE
      NEEDS**





We
      believe that our current cash of $425,860 as of March 15, 2008, will
      provide us with sufficient resources to fund our operations through the early
      spring of 2008. We will need additional capital and we do not have any binding
      commitments for, or readily available sources of, additional financing.
      Additional financing, whether through public or private equity or debt
      financing, arrangements with stockholders or other sources to fund operations,
      may not be available, or if available, may be on terms unacceptable to us.
      Our
      ability to maintain sufficient liquidity is dependent on our ability to raise
      additional capital. If we issue additional equity securities to raise funds,
      the
      ownership percentage of our existing stockholders would be reduced. New
      investors may demand rights, preferences or privileges senior to those of
      existing holders of our common stock. Debt incurred by us would be senior to
      equity in the ability of debt holders to make claims on our assets. The terms
      of
      any debt issued could impose restrictions on our operations. If adequate funds
      are not available to satisfy our capital requirements, our operations and
      liquidity could be materially adversely affected.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any off-balance sheet transactions.





**NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
      Hybrid Financial Instruments” (“SFAS 155”), which amends SFAS No. 133,
“Accounting for Derivatives Instruments and Hedging Activities” (“SFAS 133”) and
      SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
      and Extinguishment of Liabilities” (“SFAS 140”). SFAS 155 amends SFAS 133 to
      narrow the scope exception for interest-only and principal-only strips on debt
      instruments to include only such strips representing rights to receive a
      specified portion of the contractual interest or principle cash flows. SFAS
      155
      also amends SFAS 140 to allow qualifying special-purpose entities to hold a
      passive derivative financial instrument pertaining to beneficial interests
      that
      itself is a derivative instrument. The adoption of this new Standard did not
      have a material impact on the Company’s financial position, results of
      operations or cash flows.




21




In
      July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
      Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
      No. 109. FIN No. 48 clarifies the accounting for uncertainty in income
      taxes recognized in an enterprise’s financial statements in accordance with SFAS
      No. 109, Accounting for Income Taxes. It prescribes a recognition threshold
      and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      This new standard also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. The provisions of FIN No. 48 are to be applied to all tax
      positions upon initial adoption of this standard. Only tax positions that meet
      the more-likely-than-not recognition threshold at the effective date may be
      recognized or continue to be recognized upon adoption of FIN No. 48. The
      cumulative effect of applying the provisions of FIN No. 48 should be
      reported as an adjustment to the opening balance of retained earnings (or other
      appropriate components of equity or net assets in the statement of financial
      position) for that fiscal year. The provisions of FIN No. 48 are effective
      for fiscal years beginning after December 15, 2006. Earlier application is
      permitted as long as the enterprise has not yet issued financial statements,
      including interim financial statements, in the period of adoption. The adoption
      of FIN No. 48 did not have a material impact on the Company’s financial
      position, results of operations or cash flows in 2007.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
      SFAS No. 157 clarifies the principle that fair value should be based on the
      assumptions market participants would use when pricing an asset or liability
      and
      establishes a fair value hierarchy that prioritizes the information used to
      develop those assumptions. Under the standard, fair value measurements would
      be
      separately disclosed by level within the fair value hierarchy. SFAS No. 157
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years, with
      early adoption permitted. The Company is currently determining the effect,
      if
      any, the adoption of SFAS No. 157 will have on the Company’s financial
      statements.





In
      February 2007, the FASB issued Statement of Financial Accounting Standard
      No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value. Unrealized gains
      and losses on items for which the fair value option has been elected are
      reported in earnings. SFAS 159 is effective for fiscal years beginning after
      November 15, 2007. We are currently evaluating the impact of implementing
      SFAS 159 on our consolidated financial statements; however we anticipate that
      SFAS 159 will not have a material impact on the Company’s financial position,
      results of operations or cash flows.





In
      June 2007, the Emerging Issues Task Force (EITF) issued Issue
      No. 07-3, Accounting for Non-Refundable Advance Payments for Goods or
      Services To Be Used in Future Research and Development Activities (EITF 07-3)
      which concluded that nonrefundable advance payments for goods and services
      to be
      received in the future for use in research and development should be deferred
      and capitalized. The capitalized amounts should be expensed as the related
      goods
      are delivered or services are performed. Such capitalized amounts should be
      charged to expense if expectations change such that the goods will not be
      delivered or services will not be performed. The provisions of EITF 07-3 are
      effective for new contracts entered into during fiscal years beginning after
      December 15, 2007. The consensus may not be applied to earlier periods and
      early adoption is not permitted. The adoption of this standard had no impact
      on
      the Company’s financial position, results of operations, or cash
      flows.





In
      December 2007 the FASB issued SFAS 160 “Non-controlling Interests in
      Consolidated Financial Statements—an amendment of ARB No. 51”. This Statement
      amends ARB 51 to establish accounting and reporting standards for the
      non-controlling interest in a subsidiary and for the deconsolidation of a
      subsidiary. It clarifies that a non-controlling interest in a subsidiary is
      an
      ownership interest in the consolidated entity that should be reported as equity
      in the consolidated financial statements. This Statement changes the way the
      consolidated income statement is presented. It requires consolidated net income
      to be reported at amounts that include the amounts attributable to both the
      parent and the non-controlling interest. It also requires disclosure, on the
      face of the consolidated statement of income, of the amounts of consolidated
      net
      income attributable to the parent and to the non-controlling interest. This
      Statement establishes disclosure requirements in the consolidated financial
      statements, which will enable users to clearly distinguish between the interests
      of the parent’s owners and the interests of the non-controlling owners of a
      subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
      those fiscal years, beginning on or after December 15, 2008; earlier adoption
      is
      prohibited. Management anticipates that the adoption of this standard will
      have
      no impact to the Company’s financial position, results of operations, or cash
      flows.





In
      March
      2008 the FASB issued SFAS 161 “Disclosures about Derivative Instruments and
      Hedging Activities—an amendment of FASB Statement No. 133”. This Statement
      changes the disclosure requirements for derivative instruments and hedging
      activities. Entities are required to provide enhanced disclosures about (a)
      how
      and why an entity uses derivative instruments, (b) how derivative instruments
      and related hedged items are accounted for under Statement 133 and its related
      interpretations, and (c) how derivative instruments and related hedged items
      affect an entity’s financial position, financial performance, and cash flows.
      This Statement is effective for financial statements issued for fiscal years
      and
      interim periods beginning after November 15, 2008; earlier adoption is
      encouraged. Management has not yet determined what impact the adoption of this
      statement will have on the Company’s financial position, results of operations,
      or cash flows.




22




In
      December 2007, the FASB issued No. 141 (revised 2007), “Business Combinations”,
      which replaces SFAS No. 141. SFAS 141R establishes principles and requirements
      for how an acquirer recognizes and measures in its financial statements the
      identifiable assets acquired and the liabilities assumed, any non-controlling
      interest in the acquiree and the goodwill acquired. This Statement also
      establishes disclosure requirements which will enable users to evaluate the
      nature and financial effects of the business combination. This Statement is
      effective for business combinations for which the acquisition date is on or
      after the beginning of the first annual reporting period beginning on or after
      December 15, 2008. Management anticipates that the adoption of this statement
      will have no impact to the Company’s financial position, results of operations,
      or cash flows.





**ITEM
      7 - FINANCIAL STATEMENTS**





Our
      financial statements appear at the end of this report beginning with the Index
      to Financial Statements on page F-1 of this report.





**ITEM
      8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURES**





None.





**ITEM
      8A - CONTROLS AND PROCEDURES**





Our
      management, with the participation of our Chief Executive Officer (“CEO”) and
      Chief Financial Officer (“CFO”), has evaluated the effectiveness of the
      Company’s disclosure controls and procedures (as such term is defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”)) as of the end of the period covered by this report
      (December 31, 2007). Based on such evaluation which disclosed numerous material
      weaknesses as noted below, our CEO and CFO have concluded that, as of the end
      of
      such period, the Company’s disclosure controls and procedures were not effective
      in recording, processing, summarizing and reporting, on a timely basis,
      information required to be disclosed by the Company in the reports that it
      files
      or submits under the Exchange Act and are not effective in ensuring that
      information required to be disclosed by the Company in the reports that it
      files
      or submits under the Exchange Act is accumulated and communicated to the
      Company’s management, including the Company’s CEO and CFO, as appropriate to
      allow timely decisions regarding required disclosure.





**Internal
      Control over Financial Reporting**





**(a)** ***Management’s
      annual report on internal control over financial
      reporting***





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Our internal control over financial reporting
      has been designed to provide reasonable assurance regarding the reliability
      of
      financial reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles generally
      accepted in the United States of America.





Our
      internal control over financial reporting includes policies and procedures
      that
      pertain to the maintenance of records that, in reasonable detail, accurately
      and
      fairly reflect transactions and dispositions of assets of the Company; provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States of America, and that receipts and
      expenditures are being made only in accordance with authorization of our
      management and directors; and provide reasonable assurance regarding prevention
      or timely detection of unauthorized acquisition, use or disposition of our
      assets that could have a material effect on our financial
      statements.





Because
      of its inherent limitations, our internal control over financial reporting
      may
      not prevent or detect misstatements. Therefore, even those systems determined
      to
      be effective can provide only reasonable assurance with respect to financial
      statement preparation and presentation. Projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, management
      used the criteria set forth by the Committee of Sponsoring Organizations of
      the
      Treadway Commission (COSO) in *Internal
      Control—Integrated Framework* .




23




Based
      on
      our assessment, management believes that, as of December 31, 2007, our
      internal control over financial reporting was not effective based on those
      criteria. The following material weaknesses were identified in our internal
      control over financial reporting during the year end closing process. We
      believe the weaknesses arose from the organizational turmoil that began in
      2007
      with the resignation of two directors from the Board of Directors, the stepping
      down of our founder as president and chief operating officer to become chief
      strategic officer and the resignation of the chairman of the board, who stayed
      on the board until December 2007. By October 2007 only the staff accountant
      remained with the Company following the resignations of the chief financial
      officer and the controller. We believe the extensive management changes,
      combined with the turnover at the board level, resulted in the breakdown in
      the
      internal control environment evidenced by the following material
      weaknesses :





·
            We
                performed a financial close on a quarterly basis only. The analysis
                of
                actual to budgeted results was either done marginally or not at all
                and
                there was no mechanism in place to evaluate variances, investigate
                unusual
                activity or communicate findings to senior management or the board
                of
                directors. The financial close process is not formally
                documented.


·
            During
                the quarterly financial close we did not utilize a financial closing
                checklist to ensure that all items had been considered for inclusion
                in
                the three quarterly filings of
                Form 10-QSB.


·
            We
                are unable to maintain the proper segregation of various accounting
                and
                finance duties because of our small size and limited resources. At
                risk
                areas include cash receipts and payments, processing of journal entries
                and account reconciliations.


·
            We
                do not maintain a standard listing of recurring journal entries.
                We rely
                on the previous quarter’s journal entries during the closing process and
                may overlook adjustments that need to be made to ensure our financial
                statements are presented fairly.


·
            Much
                of the financial closing process is done off-line on electronic
                spreadsheets that are maintained on individual computers, unable
                to be
                shared by accounting personnel and not backed
                up.


·
            We
                have not performed a physical inventory of fixed assets. As a result,
                we
                failed to identify idle fixed assets that were not in our possession
                until
                late in the closing process necessitating an adjustment to our
                results.


·
            We
                do not consistently utilize purchase orders when purchasing inventory,
                which may lead to uncertainty regarding our quarter end
                commitments.


·
            Board
                and management turnover during 2007 resulted in an uneven “tone at the
                top”. The current CEO and CFO were hired in September 2007 and
                October 2007 respectively. Of the five board members at
                December 31, 2007 only two were on the board at the beginning of
                2007. Formal job descriptions do not exist, annual reviews are not
                performed and an organization chart was not developed until
                January 2008.


·
            We
                were unable to complete our analysis of the Section 382 limitation on
                loss carryforwards in a timely manner because of poor
                recordkeeping.


·
            We
                did not properly account for modifications made to stock option grants
                in
                accordance with SFAS 123(R) resulting in a late journal entry being
                made to prevent the financial statements from being misleading. The
                modifications were******the
                result of accelerating the vesting of existing stock options and
                extended
                the exercise period for three officers/directors whose service to
                the
                Company was terminated in the fourth quarter of 2007. The modifications
                were not required by the terms of the officers/directors employment
                agreements, or by the terms of the stock option plans, or by the
                terms of
                the stock option grants but were done solely as part of the
                officers/directors separation agreements. We accounted for the
                modifications by expensing that portion of the unrecognized compensation
                expense relating to these three former officers/directors. We recalculated
                the expense as part of the year-end closing following a further review
                of
                the authoritative literature.





We
      intend
      to remediate these material weaknesses during 2008. As concerns the material
      weakness relating to segregation of duties, we are re-examining our procedures
      to include compensating controls and minimize the risk associated with having
      limited resources in the accounting department.





Notwithstanding
      these material weaknesses, we believe that our financial condition, results
      of
      operations and cash flows presented in this report of Form 10-KSB are
      fairly presented in all material respects. We base our conclusion on our ability
      to substantiate, with a high degree of confidence, the small number of
      significant general ledger accounts that comprise our financial
      statements.





This
      annual report does not include an attestation report of the Company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the Company to provide only management’s report
      in this annual report.




24




***(b) Changes
      in internal control over financial reporting***





Through
      the date of this amendment we have made the following changes in internal
      control over financial reporting:





Beginning
      in April we instituted a monthly financial closing process. A formal report,
      including balance sheet, results of operations and analyses of key accounts,
      was
      prepared by the accounting manager, reviewed and signed off by the CFO and
      distributed to the CEO and the board of directors.





Beginning
      in April we established a standard listing of recurring journal entries that
      are
      reviewed and signed off by the CFO as part of the monthly closing
      process.





We
      instituted a formal purchasing policy in May that requires the use of purchase
      orders for all inventory purchases.





We
      established with certainty the Section 382 limitation on our loss
      carryforwards.





The
      CFO
      has reviewed the accounting literature surrounding stock option modifications
      and is now familiar with the proper treatment. In addition, we now subscribe
      to
      a daily internet service that keeps the CFO apprised of current developments
      affecting financial reporting.


.





**ITEM
      8B -**  **OTHER
      INFORMATION**





None.





**PART
      III**





**ITEM
      9.**  **OFFICERS
      AND DIRECTORS**





Information
      regarding our executive officers and directors is incorporated by reference
      to
      the information set forth under the caption “ *Directors
      and Executive Officers* “
in
      our
      Proxy Statement filed on April 29, 2008.





We
      have a
      Code of Business Conduct and Ethics for all of our employees, including our
      Chief Executive Officer, Chief Financial Officer and Principal Accounting
      Officer. The purpose of the code is to ensure that our business is conducted
      in
      a consistently legal and ethical matter. We have posted the text of the code
      on
      our website at www.incardtech.com. We will post any material amendments or
      waivers to the code on our website. We will provide a copy of our code free
      of
      charge to any person upon request by writing to us at the following address:
      10880 Wilshire Blvd. Suite 950 Los Angeles, CA 90024 Attn: Corporate
      Secretary.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





Information
      regarding executive compensation is incorporated by reference to the information
      set forth under the caption “ *Executive
      Officer Compensation* “
in
      our
      Proxy Statement filed on April 29, 2008.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





Information
      regarding security ownership of certain beneficial owners and management is
      incorporated by reference to the information set forth under the caption “ *Voting
      Securities Of Principal Stockholders And Management”* in our
      Proxy Statement filed on April 29, 2008.





**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





Information
      regarding certain relationships and related transactions is incorporated by
      reference to the information set forth under the caption *“Certain
      Transactions”* in our
      Proxy Statement filed on April 29, 2008.





**ITEM
      13.**  **EXHIBITS**





2.1(2)
            
            
            Exchange
                agreement by and among the registrant, LensCard US, LLC, Alan Finkelstein,
                Forest Finkelstein, Bradley Ross and Luc Berthoud, dated April 1,
                20042.2(2)
            
            
            Exchange
                agreement by and among the registrant, Alan Finkelstein,  Bradley
                Ross and Michael Paradise, dated April 1,
                2004




25




2.3(2)
            
            
            Exchange
                agreement between the registrant and its wholly-owned subsidiary,
                PSACo, Inc., dated April 1, 20042.4(2)
            
            
            Merger
                agreement between the registrant and LensCard International Limited,
                a
                British Virgin Islands International Business Company, dated April 6,
                20043.1(2)
            
            
            Amended
                and Restated Certificate of incorporation of the registrant, as currently
                in effect3.2(2)
            
            
            Amended
                and Restated Bylaws of the registrant, as currently in
                effect3.3(12)
            
            
            Certificate
                of Amendment of Amended and Restated Certificate of
                Incorporation.10.1(2)
            
            
            2004
                Stock Incentive Plan10.2(2)
            
            
            Sublease
                agreement between registrant and Bemel & Ross for premises at
                11601 Wilshire Blvd.,#2160, Los Angeles, California 90025, dated
                January 5, 200310.3(2)
            
            
            Guaranty
                of lease between Alan Finkelstein and Bemel & Ross, dated
                January 5, 200310.4(3)
            
            
            Form of
                common stock warrant, as amended on September 7,
                2005.10.5(2)
            
            
            Securities
                purchase agreement between registrant and Bristol Capital, LLC dated
                December 23, 200310.5(a)
                (2)
            
            Waiver
                of section 2.3 of the securities purchase agreement between registrant
                and
                Bristol Capital, LLC10.6(2)
            
            
            Shares
                for debt agreement between registrant and Alan Finkelstein, dated
                June 22, 200410.7(2)
            
            
            Shares
                for debt agreement between registrant and Bradley Ross, dated
                June 22, 200410.8(2)
            
            
            Shares
                for debt agreement between registrant and Luc Berthoud, dated
                June 22, 200410.9(2)
            
            
            Promissory
                note (loan no. 00003) between registrant and City National Bank,
                dated
                May 24, 200410.10(2)
            
            
            Promissory
                note (loan no. 00005) between registrant and City National Bank,
                dated
                May 24, 200410.11(2)
            
            
            Promissory
                note (1oan no. 00004) between registrant and City National Bank,
                dated
                May 24, 200410.12(2)
            
            
            Promissory
                note (loan no. 00006) between registrant and City National Bank,
                dated
                May 24 ,200410.13
                (2)
            
            
            Commercial
                guaranty between Alan Finkelstein and City National Bank dated
                May 24, 200410.14
                (2)
            
            
            Commercial
                guaranty between Bradley Ross and City National Bank dated May 24,
                200410.15
                (2)
            
            
            Commercial
                guaranty between Luc Berthoud and City National Bank dated May 24,
                200410.16
                (2)
            
            
            Offer
                letter between registrant and Murdoch Henretty dated July 28,
                200410.17
                (2)
            
            
            Employment
                agreement between registrant and Alan Finkelstein dated
                January 199810.18
                (2)
            
            
            Strategic
                Alliance Agreement between registrant and Visa International Service
                Association dated May 26, 200410.19
                (2)
            
            
            Secured
                Demand Promissory Note between registrant and Union Finance International
                Corp. dated March 31, 200510.20
                (2)
            
            
            Secured
                Demand Promissory Note between registrant and Bristol Investment
                Fund,
                Ltd. dated March 30, 2005




26




10.21
                (2)
            
            
            Capital
                Lease Agreement between registrant and CNC Associates, Inc. dated
                November 30, 200410.22
                (2)
            
            
            Guaranty
                between Alan Finkelstein and CNC Associates, Inc. dated
                November 30, 200410.23
                (2)
            
            
            Security
                Agreement between registrant and Union Finance International Corp.
                dated
                March 31, 2005 (See Exhibit 10.19)10.24
                (2)
            
            
            Security
                Agreement between registrant and Bristol Investment Fund, Ltd. dated
                March 30, 2005 (See Exhibit 10.20)10.25
                (2)
            
            
            Secured
                Demand Promissory Note between registrant and Bradley Ross dated
                August 31, 200510.26
                (2)
            
            
            Secured
                Demand Promissory Note between registrant and Rodger Bemel dated
                August 31, 200510.27
                (2)
            
            
            Joint
                Development Agreement between registrant and nCryptone dated July 25,
                200510.28
                (2)
            
            
            Agreement
                between registrant and SmartDisplayer Technology, Inc. dated
                July 25, 200510.29
                (5)
            
            
            Form of
                Lock-Up agreement by and between registrant’s directors and executive
                officers pursuant to the private placement dated October 19,
                200510.30
                (4)
            
            
            Form of
                Warrant pursuant to private placement dated October 19,
                200510.31
                (4)
            
            
            Registration
                Rights Agreement by and between the registrant and each investor
                pursuant
                to the private placement dated October 19, 200510.32
                (4)
            
            
            Side
                Letter Agreement between the registrant, T.R. Winston & Company
                and investors pursuant to the private placement dated October 19,
                200510.33
                (6)
            
            
            Letter
                of Intent by and between VASCO Data Security, nCryptone and Registrant,
                dated October 28, 2005.10.34
                (9)
            
            
            Form of
                Warrant to TR Winston dated as of May 30, 2006.10.35
                (9)
            
            
            Form of
                Securities Purchase Agreement dated May 30, 2006.10.36
                (9)
            
            
            Form of
                Registration Rights Agreement dated May 30, 2006.10.37
                (10)
            
            
            Asset
                Agreement dated June 28, 2006 by and between Registrant NCryptone, SA
                and its shareholders.10.38
                (10)
            
            
            Registration
                Rights Agreement dated June 28, 2006 by and between Registrant and
                NCrytone, SA10.39
                (10)
            
            
            License
                Agreement dated June 28, 2006 by and between Registrant as licensor
                and NCryptone, SA as licensee10.40
                (10)
            
            
            License
                Agreement dated June 28, 2006 by and between NCryptone, SA as
                licensor and Registrant as licensee.10.41 (11)
            
            
            Sublease
                between Registrant as sublessee and Bergman and Dacey, Inc. as
                sublessor.10.42 (8)
            
            
            Indemnification
                Agreement10.43 (7)
            
            
            Code
                of Ethics21.1
                (2)
            
            
            List
                of subsidiaries23.1
                (1)
            
            
            Consent
                of Independent Registered Public Accounting Firm for Registration
                Statements (No. 333-137033 and 333-149844) on Form S-8 and (No.
                333-151256) on Form S-3.




27




31.1
                (1)
            
            
            Certification
                of Chief Executive Officer, as required by Rule 13a-14(a) or
                Rule 15d-14(a) of the Securities Exchange Act of
                193431.2
                (1)
            
            
            Certification
                of Chief Financial Officer, as required by Rule 13a-14(a) or
                Rule 15d-14(a) of the Securities Exchange Act of
                193432
                (1)
            
            
            Certification
                of Chief Executive Officer and Chief Financial Officer, as required
                by
                Section 1350 of Chapter 63 of Title 18 of the United States Code (18
                U.S.C. 1350)







(1)
            
            Filed
                herewith.(2)
            
            Previously
                filed by the registrant on Form SB-2 (File No. 333-119814), as
                amended, with the Securities and Exchange Commission.(3)
            
            Previously
                filed by the registrant on Form 8-K with the Securities and Exchange
                Commission on September 7, 2005.(4)
            
            Previously
                filed by the registrant on Form 8-K, as amended, with the Securities
                and Exchange Commission on October 25, 2005.(5)
            
            Previously
                filed by the registrant on Form SB-2 (File No. 333-129564) with
                the Securities and Exchange Commission on November 8,
                2005.(6)
            
            Previously
                filed by the registrant on Form 8-K with the Securities and Exchange
                Commission on November 18, 2005.(7)
            
            Previously
                filed by the registrant on Form 10-KSB with the Securities and
                Exchange Commission on March 20, 2006.(8)
            
            Previously
                filed by the registrant on Form 8-K with the Securities and Exchange
                Commission on March 23, 2007.(9)
            
            Previously
                filed by the registrant on Form 8-K filed with the Securities and
                Exchange Commission on May 31, 2006.(10)
            
            Previously
                filed by the registrant on Form SB-2 (File No. 333-135715) with
                the SEC on July 12, 2006.(11)
            
            Previously
                filed by the registrant on Form 10QSB with the SEC on
                November 13, 2006.(12)
            
            Previously
                filed by the registrant on Form 8-K with the SEC on January 2,
                2008(13)
            
            Previously
                filed by the registrant on Form 8-K with the SEC on November 1,
                2007(14)
            
            Previously
                filed by the registrant on Form 10-QSB with the SEC on November 19,
                2007(15)
            
            Previously
                filed by the registrant on Form 8-K with the SEC on November 29,
                2007(16)
            
            Previously
                filed by the registrant on Form 8-K with the SEC on December 20,
                2007(17)
            
            Previously
                filed by the registrant on Form 8-K with the SEC on January 9,
                2008





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTING FEES AND DISCLOSURES**





Information
      regarding accounting fees and disclosures is incorporated by reference to the
      information set forth under the caption *“Fees
      Paid to Independent Auditors”* in our
      Proxy Statement filed on April 29, 2008.





28





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





**CONTENTS**





**DECEMBER
      31, 2007AND DECEMBER 31, 2006**





**Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
            
            F-2CONSOLIDATED
                FINANCIAL STATEMENTSConsolidated
                Balance Sheets
            
            
            F-3Consolidated
                Restated Statements of Operations
            
            
            F-4Consolidated
                Statements of Shareholders’ Equity
            
            
            F-5Consolidated
                Statements of Cash Flows
            
            
            F-6 - F-7Notes
                to Consolidated Financial Statements
            
            
            F-8 - F-23


F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Shareholders


Innovative
      Card Technologies, Inc.


Los
      Angeles, California





We
      have
      audited the consolidated balance sheets of Innovative Card Technologies, Inc.
      and subsidiaries (collectively, the “Company”) as of December 31, 2007 and 2006,
      and the related consolidated statements of operations, shareholders’ equity and
      cash flows for the years then ended. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Innovative Card
      Technologies, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
      results of their operations and their cash flows for the years then ended,
      in
      conformity with U.S. generally accepted accounting principles.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      consolidated financial statements, the Company has suffered recurring losses
      and
      has negative cash flows from operations. This raises substantial doubt about
      the
      Company’s ability to continue as a going concern. Management’s plans in regard
      to these matters are also described in Note 1. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





As
      discussed in Note 2 to the consolidated financial statements, the Company has
      adopted the provisions of Statement of Financial Accounting Standards
      Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes — an Interpretation of FASB Statement No.
      109* ”
on
      January 1, 2007.





As
      described in Note 1A to the consolidated financial statements, the 2007 and
      2006
      consolidated financial statements have been restated for an error relating
      to
      inventory write-offs and reserves.





We
      were
      not engaged to examine management's assertion about the effectiveness of
      Innovative Card Technologies, Inc. and subsidiaries’ internal control over
      financial reporting as of December 31, 2007 included in the accompanying
      management’s annual report on internal control over financial reporting and,
      accordingly, we do not express an opinion thereon.





SINGER
      LEWAK GREENBAUM & GOLDSTEIN LLP





Los
      Angeles, California


March
      31,
      2008, except for Note 1A as to which the date is June 16, 2008




F-2




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





**December 31,**
              **2007**
            
            **December 31,**
              **2006****ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            339,600
            
            $
            8,270,096Accounts
                receivable
            
            
            13,077
            
            
            14,836Prepaids
                and other current assets
            
            
            54,127
            
            
            42,658Deposits
                on raw materials held for production
            
            
            605,662
            
            
            1,199,453Raw
                materials held for production
            
            
            1,315,960
            
            
            —Work
                in progress inventory
            
            
            886,259
            
            
            1,098,553Total
                current assets
            
            
            3,214,685
            
            
            10,625,596Property
                and equipment, net of $218,902 and $234,742 accumulated
                depreciation
            
            
            193,185
            
            
            360,920Deposits
            
            
            177,747
            
            
            71,244Intangible
                assets, net of $954,047 and $363,667 accumulated
                amortization
            
            
            2,075,953
            
            
            3,666,343Total
                assets
            
            $
            5,661,570
            
            $
            14,724,103**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable and accrued expenses
            
            $
            3,660,044
            
            $
            468,517Accounts
                payable - related parties
            
            
            657,254
            
            
            1,322,159Warranty
                reserve
            
            
            27,816Deferred
                revenue
            
            
            898,585
            
            
            340,010Total
                current liabilities
            
            
            5,243,699
            
            
            2,130,686Commitments
                and Contingencies
            
            
            —
            
            
            —**STOCKHOLDERS’
                EQUITY**Preferred
                stock $0.001 par value, 5,000,000 shares authorized, 0 and 0 shares
                issued
                and outstanding
            
            
            —
            
            
            —Common
                stock $0.001 par value, 75,000,000 shares authorized, 28,433,116
                and
                28,372,308 shares issued and outstanding
            
            
            28,433
            
            
            28,372Additional
                paid-in capital
            
            
            28,456,621
            
            
            26,298,606Accumulated
                deficit
            
            
            (28,067,183
            )
            
            (13,733,561
            )Total
                stockholders’ equity
            
            
            417,871
            
            
            12,593,417Total
                liabilities and stockholders’ equity
            
            $
            5,661,570
            
            $
            14,724,103





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


F-3


**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Year Ended**
            
            **Year Ended****December 31,**
            
            **December 31,****2007**
            
            **2006**(restated)
            
            (restated)Revenues
            
            $
            445,000
            
            $
            35,382Cost
                of Goods Sold
            
            
            (851,637
            )
            
            (791,818
            )Gross
                Margin
            
            
            (406,637
            )
            
            (756,436
            )Operating
                expensesAdministrative
            
            
            8,389,987
            
            
            4,000,117Consulting
                Fees
            
            
            641,884
            
            
            419,978Impairment
            
            
            1,000,010Unrecoverable
                payments to suppliers
            
            
            1,546,428Professional
                Fees
            
            
            1,157,781
            
            
            917,882Research
                and development
            
            
            1,352,413
            
            
            1,104,681Total
                operating expenses
            
            
            14,088,503
            
            
            6,442,658Loss
                from operations
            
            
            (14,495,140
            )
            
            (7,199,094
            )Other
                income (expense)Interest
                income
            
            
            183,793
            
            
            336,119Interest
                expense
            
            
            (21,475
            )
            
            (1,239
            )Total
                other income (expense)
            
            
            162,318
            
            
            334,880Loss
                before provision  for income taxes
            
            
            (14,332,822
            )
            
            (6,864,214
            )Provision
                for income taxes
            
            
            (800
            )
            
            (2,400
            )Net
                loss
            
            $
            (14,333,622
            )
            $
            (6,866,614
            )Basic
                and diluted loss per share
            
            $
            (0.50
            )
            $
            (0.29
            )Weighted-average
                  common shares outstanding
            
            
            28,420,141
            
            
            23,535,792





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


F-4


**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




**Series A**
                **Preferred Stock**
              
              **Common**
                **Stock**
              
              **Additonal**
                  **Paid-in**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **Total**Balance,
                  December 31, 2005
              
              —
              
              $
              —
              
              17,964,566
              
              $
                  17,965
              
              $
                  10,347,710
              
              $
                  (6,866,947)
              
              $
                  3,498,728Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              400,100
              
              
              400
              
              
              437,225
              
              
              —
              
              
              437,625Issuance
                  of shares of Common Stock
              
              
              —
              
              
              —
              
              
              3,785,500
              
              
              3,785
              
              
              11,352,715
              
              
              —
              
              
              11,356,500Offering
                  Costs
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,027,318
              )
              
              —
              
              
              (1,027,318
              )Issuance
                  of shares of Common Stock in Connection with the acquisition of
                  certain
                  assets of nCryptone
              
              
              —
              
              
              —
              
              
              4,500,000
              
              
              4,500
              
              
              3,463,905
              
              
              —
              
              
              3,468,405Share-based
                  compensation expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              472,598
              
              
              —
              
              
              472,598Cashless
                  exercise of warrants
              
              
              —
              
              
              —
              
              
              1,722,142
              
              
              1,722
              
              
              (1,722
              )
              
              —
              
              
              —Warrant
                  compensation expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,253,493
              
              
              —
              
              
              1,253,493Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,866,614
              )
              
              (6,866,614
              )Balance,
                  December 31, 2006
              
              
              —
              
              
              —
              
              
              28,372,308
              
              
              28,372
              
              
              26,298,606
              
              
              (13,733,561
              )
              
              12,593,417Exercise
                  of warrants
              
              
              
              
              
              
              
              
              32,000
              
              
              32
              
              
              39,968
              
              
              
              
              
              40,000Cashless
                  exercise of options
              
              
              
              
              
              
              
              
              28,808
              
              
              29
              
              
              (3,704
              )
              
              
              
              
              (3,675
              )Share-based
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,121,751
              
              
              
              
              
              2,121,751Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (14,333,622
              )
              
              (14,333,622
              )Balance,
                  December 31, 2007
              
              
              
              
              $
              —
              
              
              28,433,116
              
              $
              28,433
              
              $
              28,456,621
              
              $
              (28,067,183
              )
              $
              417,871




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


F-5





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For the Years Ended**
              **December 31,****2007**
            
            **2006**Cash
                flows from operating activitiesNet
                loss
            
            $
            (14,333,622
            )
            $
            (6,866,614
            )Adjustments
                to reconcile net loss to net cash used in operating
                activitiesDepreciation
                and amortization
            
            
            779,466
            
            
            488,390Stock
                compensation expense
            
            
            2,121,751
            
            
            472,598Warrant
                compensation expense
            
            
            —
            
            
            809,000Impairment
                charge
            
            
            1,000,010(Increase)
                decrease in Accounts receivable
            
            
            1,759
            
            
            18,291(Increase)
                decrease in Prepaid expenses and other current assets
            
            
            (11,469
            )
            
            (30,885
            )(Increase)
                decrease in Deposits on raw materials held for production
            
            
            593,791
            
            
            (701,472
            )(Increase)
                decrease in Raw materials held for production
            
            
            (1,315,960
            )
            
            172,497(Increase)
                decrease in Work in Progress Inventory
            
            
            212,294
            
            
            (1,098,553
            )(Increase)
                decrease in Deposit
            
            
            (106,503
            )
            
            (71,244
            )Increase
                (decrease) in Accounts payable and accrued expenses
            
            
            3,191,527
            
            
            207,356Increase
                (decrease) in warranty reserve
            
            
            27,816Increase
                (decrease) in Accounts payable - related parties
            
            
            (664,905
            )
            
            307,149Increase
                (decrease) in Deferred revenue
            
            
            558,575
            
            
            302,867Net
                cash used in operating activities
            
            
            (7,945,470
            )
            
            (5,990,620
            )Cash
                flows from investing activitiesPurchase
                of Property and Equipment
            
            
            (21,351
            )
            
            (218,786
            )Net
                cash used in investing activities
            
            
            21,351
            
            
            (218,786
            )Cash
                flows from financing activitiesProceeds
                from exercise of warrants
            
            
            36,325
            
            
            437,625Proceeds
                from 5/30/06 Common Stock offering
            
            
            —
            
            
            11,356,500Offering
                costs- 5/30/06 Common Stock offering
            
            
            —
            
            
            (582,825
            )Payments
                on capital lease
            
            
            —
            
            
            (9,330
            )Net
                cash provided by financing activities
            
            
            36,325
            
            
            11,201,970Net
                increase (decrease) in cash and cash equivalents
            
            
            (7,930,496
            )
            
            4,992,564Cash
                and cash equivalents, beginning of year
            
            
            8,270,096
            
            
            3,277,532Cash
                and cash equivalents, end of period
            
            $
            339,600
            
            $
            8,270,096





The
      accompanying notes are an integral part of these financial
      statements


F-6





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Supplemental
      disclosures of cash flow





**For the Years Ended**
              **December 31,****2007**
            
            **2006**Interest
                paid
            
            $
            21,475
            
            $
            1,239Income
                tax paid
            
            $
            —
            
            $
            —





Supplemental
      schedule of non-cash investing and financing activities





During
      the year ended December 31, 2006:





On
      May 30, 2006, the Company issued warrants to purchase 113,565 shares of
      common stock at an exercise price of $3.30 to T.R Winston in conjunction with
      the Company’s May 30, 2006 financing and recognized $444,493 in offering
      costs relating to the issuance of these warrants.





On
      June 28, 2006 the Company exchanged 4,500,000 shares of its common stock
      for certain assets of nCryptone. The assets acquired were intangible assets
      of
      $3,030,000, accounts receivable of $14,830, fixed assets of $25,619, and
      deposits on raw materials inventory of $397,956.





On
      June 28, 2006, the Company entered into an agreement with nCryptone whereby
      for $1,000,010, the Company could acquire a license to nCryptone’s buzzer patent
      that is payable within one year of June 28, 2006. $595,365 of the debt
      remains outstanding as of December 31, 2007. The Company wrote down the
      value of the buzzer patent during the year ended December 31,
      2007.





On
      July 17, 2006, warrant holders cashlessly exercised 2,150,000 warrants
      resulting in the issuance of 1,722,142 shares of Common Stock.





During
      the year ended December 31, 2007:





On
      January 12, 2007 employees cashlessly exercised 35,002 stock options
      resulting in the issuance of 28,808 shares of common stock.





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


F-7


**NOTE
      1 - ORGANIZATION AND LINE OF BUSINESS**





**BASIS
      OF PRESENTATION**





The
      accompanying consolidated financial statements of Innovative Card
      Technologies, Inc. (“ICTI”) include the amounts of its wholly-owned
      subsidiary, PSA Co. (“PSAC”) which was incorporated in the State of Delaware on
      August 27, 2003.




The
      Company has a history of recurring losses from operations and has an accumulated
      deficit of $28,067,183 as of December 31, 2007. As of March 15, 2008,
      the Company had available cash and cash equivalents totaling $425,860. Sales
      of
      the ICT DisplayCard, the Company’s main product, are not expected to generate
      adequate revenue until the second half of 2008. Until that time, the Company
      will require additional cash funding to purchase inventory, meet selling,
      general and administrative expenses and to continue research and development
      efforts associated with the ICT DisplayCard. As a result, there is substantial
      doubt about the Company’s ability to continue as a going concern. The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. This basis of accounting
      contemplates the recovery of the Company’s assets and the satisfaction of
      liabilities in the normal course of business and this does not include any
      adjustments to reflect the possible future effects on the recoverability and
      classification of assets or the amounts and classification of liabilities that
      might be necessary should the Company be unable to continue as a going concern.
      The Company is actively seeking additional funding to finance its continuing
      operations. There can be no assurances that funds will be available to the
      Company when needed or, if available, that such funds would be available under
      favorable terms. In the event that the Company cannot obtain additional funds
      in
      the near future, the Company may seek protection under bankruptcy
      laws.





**COMPANY
      OVERVIEW**





The
      Company develops and markets secure powered cards for payment, identification,
      physical and logical access applications. Our main product, the ICT DisplayCard,
      integrates the security of a one-time password token directly into a card the
      size of a standard credit or debit card. A token is a portable physical device,
      typically in a key-fob form factor, that generates the one-time password (also
      referred to as a one-time passcode). At the push of a button on the back of
      the
      ICT DisplayCard, a one-time passcode (OTP) is shown on the card’s integrated
      display. During a transaction, this number is entered into a user interface
      with
      other information (such as the user’s static PIN and login name). This
      information is relayed to a backend system for multi-factor authentication.
      InCard does not provide the backend authentication server, but rather will
      integrate the ICT DisplayCard into authentication systems provided by other
      companies including distributors and other resellers of the ICT DisplayCard.
      The
      ICT DisplayCard’s OTP authentication works like tokens issued by VASCO, RSA, and
      ActivIdentity, but in a more convenient, wallet-sized card form
      factor.




**NOTE
      1A - RESTATEMENT**




This
      amendment to the Company’s Form 10-KSB restates its Consolidated Statements of
      Operations for the years ended December 31, 2007 and 2006 to correct the
      following errors in the Consolidated Statements of Operations previously
      filed:




The
      Company erroneously recorded inventory write-offs and reserves as a component
      of
      operating expenses instead of as a component of cost of cost of goods
      sold..




The
      net
      effect of the correction of these errors was to:




·
            Increase
                the Company's reported cost of goods sold for the year ended December
                31,
                2007 by $575,017 from $276,620 to $851,637. Increase the Company’s
                reported cost of goods sold for the year ended December 31, 2006
                by$791,818 from $0 to $791,818.




·
            Decrease
                the Company’s reported gross margin for the year ended December 31, 2007
                by $575,017 from $168,380 to negative $406,637. Decrease the Company’s
                reported gross margin for the year ended December 31, 2006 by $791,818
                from $35,382 to negative $756,436.




·
            Decrease
                the Company's reported operating expenses for the year ended December
                31,
                2007 by $575,017, from $14,663,520 to $14,088,503. Decrease the Company’s
                reported operating expenses for the year by $791,818 from $7,234,476
                to
                $6,442,658.


F-8




The
      correction of the errors has resulted in no change in the Company's reported
      Consolidated Balance Sheets as of December 31, 2007 and 2006, Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and 2006, and
      Consolidated Statements of Shareholders’ Equity for the years ended December 31,
      2007 and 2006.




Following
      are reconciliations of the Company's restatement of the Consolidated Statemenst
      of Operations for the year ended December 31, 2007 and 2006:.


F-9




Year ended December
              31, 2007 (As restated)
            
            Year ended December
              31, 2007 (As reported)Revenues
            
            $
            445,000
            
            $
            445,000Cost
                of Goods Sold
            
            
            (851,637
            )
            
            (276,620
            )Gross
                Margin
            
            
            (406,637
            )
            
            168,380Operating
                expensesAdministrative
            
            
            8,389,987
            
            
            8,389,987Consulting
                Fees
            
            
            641,884
            
            
            641,884Impairment
            
            
            1,000,010
            
            
            1,000,010Unrecoverable
                payments to suppliers
            
            
            1,546,428
            
            
            1,546,428Inventory
                write-offs and reserves
            
            
            0
            
            
            575,017Professional
                Fees
            
            
            1,157,781
            
            
            1,157,781Research
                and development
            
            
            1,352,413
            
            
            1,352,413Total
                operating expenses
            
            
            14,088,503
            
            
            14,663,520Loss
                from operations
            
            
            (14,495,140
            )
            
            (14,495,140
            )Other
                income (expense)Interest
                income
            
            
            183,793
            
            
            183,793Interest
                expense
            
            
            (21,475
            )
            
            (21,475
            )Total
                other income (expense)
            
            
            162,318
            
            
            162,318Loss
                before provision  for income taxes
            
            
            (14,332,822
            )
            
            (14,332,822
            )Provision
                for income taxes
            
            
            (800
            )
            
            (800
            )Net
                loss
            
            $
            (14,333,622
            )
            $
            (14,333,622
            )Basic
                and diluted loss per share
            
            $
            (0.50
            )
            $
            (0.50
            )Weighted-average
                  common shares outstanding
            
            
            28,420,141
            
            
            28,420,141Year ended December
                31, 2006 (As restated)
            
            
            Year ended December
                31, 2006 (As reported)Revenues
            
            $
            35,382
            
            $
            35,382Cost
                of Goods Sold
            
            
            (791,818
            )
            
            0Gross
                Margin
            
            
            (756,436
            )
            
            35,382Operating
                expensesAdministrative
            
            
            4,000,117
            
            
            4,000,117Consulting
                Fees
            
            
            419,978
            
            
            419,978Impairment
            
            
            0
            
            
            0Unrecoverable
                payments to suppliers
            
            
            0
            
            
            0Inventory
                write-offs and reserves
            
            
            0
            
            
            791,818Professional
                Fees
            
            
            917,882
            
            
            917,882Research
                and development
            
            
            1,104,681
            
            
            1,104,681Total
                operating expenses
            
            
            6,442,658
            
            
            7,234,476Loss
                from operations
            
            
            (7,199,094
            )
            
            (7,199,094
            )Other
                income (expense)Interest
                income
            
            
            336,119
            
            
            336,119Interest
                expense
            
            
            (1,239
            )
            
            (1,239
            )Total
                other income (expense)
            
            
            334,880
            
            
            334,880Loss
                before provision  for income taxes
            
            
            (6,864,214
            )
            
            (6,864,214
            )Provision
                for income taxes
            
            
            (2,400
            )
            
            (2,400
            )Net
                loss
            
            $
            (6,866,614
            )
            $
            (6,866,614
            )Basic
                and diluted loss per share
            
            $
            (0.29
            )
            $
            (0.29
            )Weighted-average
                  common shares outstanding
            
            
            23,535,792
            
            
            23,535,792




F-10


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**PRINCIPLES
      OF CONSOLIDATION**





The
      consolidated financial statements include the accounts of Innovative Card
      Technologies and its wholly owned subsidiary, PSA Co. All significant
      inter-company accounts and transactions are eliminated in
      consolidation.





**REVENUE
      RECOGNITION**





The
      Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
      No. 104, or SAB 104. Revenue is recognized when persuasive evidence of an
      arrangement exists, delivery has occurred or services have been rendered, the
      price is fixed and determinable and collectibility is reasonably assured.
      Revenue is not recognized on product sales transacted on a test or pilot basis.
      Instead, receipts from these types of transactions offset marketing expenses.
      Revenue from royalties is recognized with the passage of time in accordance
      with
      the underlying agreement. The Company recognizes certain long-term contracts
      using the completed-contract method in accordance to SOP 81-1, “Accounting for
      Performance of Construction-Type and Certain Production-Type of Contracts.” No
      revenue has been recognized to date from these contracts





**COMPREHENSIVE
      INCOME**





The
      Company utilizes Statement of Financial Accounting Standards (“SFAS”)
      No. 130, “Reporting Comprehensive Income.” This statement establishes
      standards for reporting comprehensive income and its components in a financial
      statement. Comprehensive income as defined includes all changes in equity (net
      assets) during a period from non-owner sources. Examples of items to be included
      in comprehensive income, which are excluded from net income, include foreign
      currency translation adjustments, minimum pension liability adjustments, and
      unrealized gains and losses on available-for-sale securities. Comprehensive
      income is not presented in the Company’s financial statements since the Company
      did not have any changes in equity from non-owner sources.


F-11





**INVENTORY**





The
      Company values its inventory at the lower of cost (first-in, first-out) or
      market. The Company uses estimates and judgments regarding the valuation of
      inventory to properly value inventory. Inventory adjustments are made for the
      difference between the cost of the inventory and the estimated market value
      and
      charged to cost of goods sold in the period in which the facts that give rise
      to
      the adjustments become known.





**INTANGIBLE
      ASSETS AND LONG-LIVED ASSETS**





The
      cost
      incurred to acquire intangible assets, which are active and relate to products
      with a definitive life cycle, are amortized over the estimated useful life
      of
      three to five years. The Company assesses the carrying value of long-lived
      assets in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets.” The Company assesses the impairment of
      identifiable intangibles and long-lived assets whenever events or changes in
      circumstances indicate that the carrying value may not be recoverable. Factors
      considered important that could trigger an impairment review include, but are
      not limited to, the following: a significant underperformance to expected
      historical or projected future operating results, a significant change in the
      manner of the use of the acquired asset or the strategy for the overall
      business, or a significant negative industry or economic trend. Based on
      anticipated future income and cash flows and other factors relevant in the
      opinion of the Company’s management, the buzzer patent was completely impaired
      during the year ended December 31, 2007.





**CASH
      AND CASH EQUIVALENTS**





For
      the
      purpose of the statements of cash flows, the Company considers all highly liquid
      investments purchased with original maturities of three months or less to be
      cash equivalents.





**MAJOR
      SUPPLIERS**





The
      Company obtains the battery, a key component for the Company’s power inlay
      technology, from a single source, Solicore, Inc., on a purchase order
      basis. The Company believes that alternative sources for this component in
      the
      event of a disruption or discontinuation in supply would not be available on
      a
      timely basis, which could disrupt Company operations, delay production for
      up to
      twelve months and impair the Company’s ability to manufacture and sell
      products.





The
      Company obtains the display, a key component for the Company’s ICT DisplayCard,
      from a single source, SmartDisplayer, pursuant to the Company’s agreement with
      SmartDisplayer. On November 10, 2007, the Company was required to make a deposit
      on a purchase order to maintain its exclusivity. The Company was unable to
      make
      the deposit and therefore does not have exclusivity with SmartDisplayer. The
      Company has a purchase commitment with SmartDisplayer to purchase inventory
      through July 2008 worth $1,181,020. The Company believes that alternative
      sources for this component in the event of a disruption or discontinuation
      in
      supply would not be available on a timely basis, which could disrupt Company
      operations relating to the ICT DisplayCard, delay production of the ICT
      DisplayCard for up to twelve months and impair the Company’s ability to
      manufacture and sell the ICT DisplayCard.





The
      Company assembles its ICT DisplayCard using a single source, NagraID, pursuant
      to a written agreement. Included in this agreement is a provision that gives
      the
      Company exclusivity until June 2008 subject to meeting certain requirements.
      The
      Company believes that alternative sources for this component in the event of
      a
      disruption or discontinuation in supply would not be available on a timely
      basis, which could disrupt Company operations relating to the ICT DisplayCard,
      delay production of the ICT DisplayCard for up to twelve months and impair
      the
      Company’s ability to manufacture and sell the ICT DisplayCard.





**MAJOR
      CUSTOMERS**





One
      customer accounted for all of the Company’s revenues in 2007.





**PROPERTY
      AND EQUIPMENT**





Property
      and equipment are stated at cost. The Company provides for depreciation and
      amortization using the double-declining method over estimated useful lives
      of
      five to seven years. Expenditures for maintenance and repairs are charged to
      operations as incurred while renewals and betterments are capitalized. Gains
      or
      losses on the sale of property and equipment are reflected in the statements
      of
      operations.




F-12




**FAIR
        VALUE OF FINANCIAL INSTRUMENTS**
 
 The
        Company’s financial instruments include cash and cash equivalents, prepaid
        expenses and other current assets, due from related parties, accounts payable
        and accrued expenses, advances payable, and deferred revenue. The book value
        of
        all financial instruments are representative of their fair values.
 
 **RESEARCH
        AND DEVELOPMENT**
 
 Research
        and development costs are charged to operations as incurred.
 
 **LOSS
        PER SHARE**
 
 The
        Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share
        is computed by dividing loss available to common shareholders by the
        weighted-average number of common shares outstanding. Diluted loss per share
        is
        computed similar to basic loss per share except that the denominator is
        increased to include the number of additional common shares that would have
        been
        outstanding if the potential common shares had been issued and if the additional
        common shares were dilutive. Common equivalent shares are excluded from the
        computation if their effect is anti-dilutive.
 
 Since
        their effect would have been anti-dilutive, common stock equivalents of
        4,614,598 warrants and 2,253,009 stock options were excluded from the
        calculation of diluted loss per share for the year ended December 31, 2007.
        Since their effect would have been anti-dilutive, common stock equivalents
        of
        4,646,598 warrants and 2,351,000 stock options were excluded from the
        calculation of diluted loss per share for the year ended December 31,
        2006.
 
 **INCOME
        TAXES**
 
 The
        Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which
        requires the recognition of deferred tax assets and liabilities for the expected
        future tax consequences of events that have been included in the financial
        statements or tax returns. Under this method, deferred income taxes are
        recognized for the tax consequences in future years of differences between
        the
        tax bases of assets and liabilities and their financial reporting amounts
        at
        each year-end based on enacted tax laws and statutory tax rates applicable
        to
        the periods in which the differences are expected to affect taxable income.
        Also, the Company adopted the provisions of the Financial Accounting Standards
        Board (“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income
        Taxes-an Interpretation of FASB Statement No. 109” (“FIN 48”), effective January
        1, 2007. As a result of the implementation of FIN 48, the Company made a
        comprehensive review of its portfolio of uncertain tax positions in accordance
        with recognition standards established by FIN 48. As a result of this review,
        the Company concluded that at this time there are no uncertain tax positions
        other than an uncertain tax position relating to the limitations imposed
        on tax
        loss carryforwards by Internal Revenue Code Section 382. As a result of applying
        the provisions of FIN 48, there was no cumulative effect on retained
        earnings.
 
 In
        2007,
        the Company adopted SFAS No. 48, “Accounting for Uncertainty in Income
        Taxes” and identified an uncertain tax position relating to the limitation
        imposed on tax loss carryforwards by Internal Revenue Code Section
        382.
 
 **STOCK
        INCENTIVE PLAN**
 
 The
        Company accounts for its stock incentive plan under SFAS No. 123R,
“Share-Based Payments”, which it adopted in 2006, using the fair value based
        method. Under this method, compensation cost is measured at the grant date
        based
        on the value of the award and is recognized over the service period, which
        is
        usually the vesting period.
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued a
        revision to FASB Statement No. 123, “Share-Based Payment,” “SFAS
        No. 123(R)”. This Statement supersedes APB Opinion No. 25, Accounting
        for Stock Issued to Employees. This Statement establishes standards for the
        accounting for transactions in which an entity exchanges it equity instruments
        for goods or services. It also addresses transactions in which an entity
        incurs
        liabilities in exchange for goods or services that are based on the fair
        value
        of the entity’s equity instruments or that may be settled by the issuance of
        those equity instruments. This Statement is effective for public entities
        that
        file as small business issuers as of the beginning of the first interim or
        annual reporting period that begins after December 15, 2005. The Company
        has adopted this statement for the year ended December 31,
        2006.
 
 **ESTIMATES**
 
 The
        preparation of financial statements requires management to make estimates
        and
        assumptions that affect the reported amounts of assets and liabilities and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenue and expenses during the reporting
        period. Actual results could differ from those estimates.
  F-13
  **CONCENTRATIONS
        OF CREDIT RISK**
 
 Financial
        instruments which potentially subject the Company to concentrations of credit
        risk consist of cash and cash equivalents. The Company places its cash and
        cash
        equivalents with high credit, quality financial institutions. At times, such
        cash and cash equivalents may be in excess of the Federal Deposit Insurance
        Corporation insurance limit of $100,000. At times, cash balances are in excess
        of the insured limit.
 
 **RECLASSIFICATION**
 
 Certain
        amounts included in the prior year financial statements have been reclassified
        to conform with the current year presentation. Such reclassification did
        not
        have any effect on the reported net loss.
 
 **RECENTLY
        ISSUED ACCOUNTING PRONOUNCEMENTS**
 
 In
        February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
        Hybrid Financial Instruments” (“SFAS 155”), which amends SFAS No. 133,
“Accounting for Derivatives Instruments and Hedging Activities” (“SFAS 133”) and
        SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets
        and Extinguishment of Liabilities” (“SFAS 140”). SFAS 155 amends SFAS 133 to
        narrow the scope exception for interest-only and principal-only strips on
        debt
        instruments to include only such strips representing rights to receive a
        specified portion of the contractual interest or principle cash flows. SFAS
        155
        also amends SFAS 140 to allow qualifying special-purpose entities to hold
        a
        passive derivative financial instrument pertaining to beneficial interests
        that
        itself is a derivative instruments. The adoption of this new Standard did
        not
        have a material impact on the Company’s financial position, results of
        operations or cash flows.
 
 In
        March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
        Financial Assets” (“SFAS 156”). SFAS 156 addresses the accounting for recognized
        servicing assets and servicing liabilities related to certain transfers of
        the
        servicer’s financial assets and for acquisitions or assumptions of obligations
        to service financial assets that do not relate to the financial assets of
        the
        servicer and its related parties. SFAS 156 requires that all recognized
        servicing assets and servicing liabilities are initially measured at fair
        value,
        and subsequently measured at either fair value or by applying an amortization
        method for each class of recognized servicing assets and servicing liabilities.
        SFAS 156 is effective in fiscal years beginning after September 15, 2006.
        The adoption of SFAS 156 did not have a material impact on the Company’s
        financial position, results of operations or cash flows.
 
 In
        July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
        Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
        No. 109. FIN No. 48 clarifies the accounting for uncertainty in income
        taxes recognized in an enterprise’s financial statements in accordance with SFAS
        No. 109, Accounting for Income Taxes. It prescribes a recognition threshold
        and measurement attribute for the financial statement recognition and
        measurement of a tax position taken or expected to be taken in a tax return.
        This new standard also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition. The provisions of FIN No. 48 are to be applied to all tax
        positions upon initial adoption of this standard. Only tax positions that
        meet
        the more-likely-than-not recognition threshold at the effective date may
        be
        recognized or continue to be recognized upon adoption of FIN No. 48. The
        cumulative effect of applying the provisions of FIN No. 48 should be
        reported as an adjustment to the opening balance of retained earnings (or
        other
        appropriate components of equity or net assets in the statement of financial
        position) for that fiscal year. The provisions of FIN No. 48 are effective
        for fiscal years beginning after December 15, 2006. Earlier application is
        permitted as long as the enterprise has not yet issued financial statements,
        including interim financial statements, in the period of adoption. The adoption
        of FIN No. 48 did not have a material impact on the Company’s financial
        position, results of operations or cash flows.
 
 In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
        SFAS No. 157 clarifies the principle that fair value should be based on the
        assumptions market participants would use when pricing an asset or liability
        and
        establishes a fair value hierarchy that prioritizes the information used
        to
        develop those assumptions. Under the standard, fair value measurements would
        be
        separately disclosed by level within the fair value hierarchy. SFAS No. 157
        is effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years, with
        early adoption permitted. The Company is currently determining the effect,
        if
        any, the adoption of SFAS No. 157 will have on the Company’s financial
        statements.
 
 In
        February 2007, the FASB issued Statement of Financial Accounting Standard
        No. 159, “The Fair Value Option for Financial Assets and Financial
        Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many
        financial instruments and certain other items at fair value. Unrealized gains
        and losses on items for which the fair value option has been elected are
        reported in earnings. SFAS 159 is effective for fiscal years beginning after
        November 15, 2007. The Company is currently evaluating the impact of
        implementing SFAS 159 on our consolidated financial statements, however the
        Company anticipates that SFAS 159 will not have a material impact on the
        Company’s financial position, results of operations or cash flows.
  F-14
  In
        December 2007 the FASB issued SFAS 160 “Non-controlling Interests in
        Consolidated Financial Statements—an amendment of ARB No. 51”. This Statement
        amends ARB 51 to establish accounting and reporting standards for the
        non-controlling interest in a subsidiary and for the deconsolidation of a
        subsidiary. It clarifies that a non-controlling interest in a subsidiary
        is an
        ownership interest in the consolidated entity that should be reported as
        equity
        in the consolidated financial statements. This Statement changes the way
        the
        consolidated income statement is presented. It requires consolidated net
        income
        to be reported at amounts that include the amounts attributable to both the
        parent and the non-controlling interest. It also requires disclosure, on
        the
        face of the consolidated statement of income, of the amounts of consolidated
        net
        income attributable to the parent and to the non-controlling interest. This
        Statement establishes disclosure requirements in the consolidated financial
        statements, which will enable users to clearly distinguish between the interests
        of the parent’s owners and the interests of the non-controlling owners of a
        subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
        those fiscal years, beginning on or after December 15, 2008; earlier adoption
        is
        prohibited. Management anticipates that the adoption of this standard will
        have
        no impact to the Company’s financial position, results of operations, or cash
        flows.
 
 In
        March
        2008 the FASB issued SFAS 161 “Disclosures about Derivative Instruments and
        Hedging Activities—an amendment of FASB Statement No. 133”. This Statement
        changes the disclosure requirements for derivative instruments and hedging
        activities. Entities are required to provide enhanced disclosures about (a)
        how
        and why an entity uses derivative instruments, (b) how derivative instruments
        and related hedged items are accounted for under Statement 133 and its related
        interpretations, and (c) how derivative instruments and related hedged items
        affect an entity’s financial position, financial performance, and cash flows.
        This Statement is effective for financial statements issued for fiscal years
        and
        interim periods beginning after November 15, 2008; earlier adoption is
        encouraged. Management has not yet determined what impact the adoption of
        this
        statement will have on the Company’s financial position, results of operations,
        or cash flows.
 
 In
        December 2007, the FASB issued No. 141 (revised 2007), “Business Combinations”,
        which replaces SFAS No. 141. SFAS 141R establishes principles and requirements
        for how an acquirer recognizes and measures in its financial statements the
        identifiable assets acquired and the liabilities assumed, any non-controlling
        interest in the acquiree and the goodwill acquired. This Statement also
        establishes disclosure requirements which will enable users to evaluate the
        nature and financial effects of the business combination. This Statement
        is
        effective for business combinations for which the acquisition date is on
        or
        after the beginning of the first annual reporting period beginning on or
        after
        December 15, 2008. Management anticipates that the adoption of this statement
        will have no impact to the Company’s financial position, results of operations,
        or cash flows.
 
 **NOTE
        3 - DEPOSITS FOR RAW MATERIALS HELD FOR PRODUCTION**
 
 **December 31,**
                **2007**
              
              **December 31,**
                **2006**Deposits
                  on raw materials held for production (display & manufacturing
                  component)
              
              $
              605,662
              
              $
              1,199,453TOTAL
              
              $
              605,662
              
              $
              1,119,453
 
 These
        deposits for raw materials are held by two vendors, are not refundable and
        are
        made pursuant to agreements as discussed in Note 2 under Major
        Suppliers.
 
 **NOTE
        4 - RAW MATERIALS AND WORK IN PROGRESS INVENTORY HELD FOR
        PRODUCTION**
 
 Raw
        materials and work in progress inventory held for production at
        December 31, 2007 and 2006 consisted of the following and are stated at the
        lower cost or market, net of inventory reserves of $99,335 and $0,
        respectively:
 
 **2007**
              
              **2006**Raw
                  materials held for production
              
              $
              1,315,960
              
              $
              —Work
                  in progress inventory
              
              
              886,259
              
              
              1,098,553TOTAL
              
              $
              2,202,219
              
              $
              1,098,553
  F-15
  **NOTE
        5 - PROPERTY AND EQUIPMENT**
 
 Property
        and equipment at December 31, 2007 and 2006 consisted of the
        following:
 
 **2007**
              
              **2006**Computer
                  equipment
              
              $
              96,451
              
              $
              55,672Office
                  equipment
              
              
              8,168
              
              
              8,168Furniture
                  and fixtures
              
              
              24,386
              
              
              19,878Production
                  equipment, capital lease
              
              
              —
              
              
              32,598Leasehold
                  improvements
              
              
              5,608
              
              
              5,610Production
                  equipment
              
              
              277,474
              
              
              473,736412,087
              
              
              595,662Less
                  accumulated depreciation and amortization
              
              
              (218,902
              )
              
              (234,742
              )TOTAL
              
              $
              193,185
              
              $
              360,920
 
 Depreciation
        and amortization expense was $779,466 and $488,390 for the years ended
        December 31, 2007 and 2006, respectively.
 
 **NOTE
        6 - INTANGIBLE ASSETS**
 
 The
        Company’s management valued the intangible assets acquired from nCryptone in
        2006 at $3,030,000. The Company also acquired a patent license fee for
        $1,000,010 from nCryptone . The $1,000,010 patent license fee, which was
        being
        amortized over the remaining life of the patent (12 years through
        November 2018), was fully impaired during the year ended December 31,
        2007. The total purchase price allocation of the DisplayCard assets of nCryptone
        is summarized as follows:
 
 Common
                  Stock:
              
              $
              3,468,405Total
                  Purchase Price:
              
              $
              3,468,405
 
 The
        Company’s allocation of the purchase price is summarized as
        follows:
 
 Assets:Intangible
                  Assets
              
              $
              3,030,000Accounts
                  Receivable
              
              
              14,830Equipment
              
              
              25,619Inventory
              
              
              397,956Total
                  Assets
              
              $
              3,468,405
 
 $2,900,000
        of acquired intangibles has been assigned to developed technologies and $130,000
        has been assigned to a non-competition agreement, which are subject to periodic
        amortization over the estimated useful lives of five and three years,
        respectively.
 
 Amortization
        expense for 2007 was $590,380. Estimated amortization expense for each of
        the
        ensuing years through December 31, 2012 is, respectively, $623,333,
        $601,667, $580,000, $290,000 and $0.
 
 **NOTE
        7 - PROVISION FOR INCOME TAXES**
 
 Income
        taxes are accounted for using an asset and liability approach that requires
        the
        recognition of deferred tax assets and liabilities for the expected future
        tax
        consequences of temporary differences between the financial statement and
        the
        tax bases of assets and liabilities at the applicable tax rates. A valuation
        allowance is provided when it is more likely than not that some portion or
        all
        of the deferred tax assets will not be realized.
  F-16
  The
        provision for income taxes consisted of the following:
 
 **Years Ended December 31,****2007**
              
              **2006**Current
                  provision:Federal
              
              
              —
              
              
              —State
              
              $
              800
              
              $
              2,400Total
                  Current Provision
              
              $
              800
              
              $
              2,400Deferred
                  provision (benefit)Federal
              
              
              
              
              
              —State
              
              
              
              
              
              —Total
                  deferred portion (benefit)
              
              
              
              
              
              —Total
                  provision for income taxes
              
              $
              800
              
              $
              2,400
 
 Reconciliations
        between the statutory federal income tax rate and the Company’s effective income
        tax rate were as follows:
 
 **Years Ended December 31,****2007**
              
              **2006**Federal
                  income tax at statutory rates
              
              
              34
              %
              
              34
              %State
                  income taxes, net of federal benefit
              
              
              6
              %
              
              6
              %Change
                  in valuation allowance
              
              
              (43
              )%
              
              (40
              )%Other
              
              
              3
              %
              
              0
              %Effective
                  income tax rate
              
              
              0
              %
              
              0
              %
 
 Deferred
        tax assets and liabilities are measured based on the difference between the
        financial statement and tax bases of assets and liabilities at the applicable
        tax rates. The significant components of the Company’s net deferred tax assets
        and (liabilities) consisted of the following:
 
 **December 31,****2007**
              
              **2006**Benefits
                  from NOL carryforwards
              
              $
              7,699,234
              
              $
              3,472,511Tax
                  credit carryforward
              
              
              170,422
              
              
              61,788Differences
                  in financial statement and tax accounting for:Stock
                  compensation
              
              
              1,457,994
              
              
              549,037Accruals
              
              
              285,149
              
              
              10,358Inventory
              
              
              42,555
              
              
              260,140Deferred
                  Revenue
              
              
              384,954
              
              
              145,660Depreciation
                  and amortization
              
              
              844,056
              
              
              237,830State
                  income tax
              
              
              (741,259
              )
              
              (331,068
              )Total
                  Deferred tax assets (gross)
              
              
              10,143,105
              
              
              4,406,526Less
                  Valuation allowance
              
              
              (10,143,105
              )
              
              (4,406,526
              )Total
                  Deferred Tax assets, net
              
              $
              —
              
              $
              —
 
 A
        valuation allowance has been established due to the uncertainty of realizing
        certain net operating loss (NOL) carryforwards and the other deferred tax
        assets. The Company had NOL carryforwards at December 31, 2007 and 2006 of
        approximately $18.6 million and $8.1 million respectively for federal income
        tax
        purposes and an aggregate of $18.6 million and $8.2 million respectively
        of
        state income tax purposes. The Company also has Federal research tax credit
        carryforward of $138,536 and $31,886 for the years ended December 31, 2007
        and 2006 respectively. The Company’s Federal and State NOL carryforwards will be
        available to offset taxes through December 31, 2019 and 2024,
        respectively.
 
 The
        Company adopted the provisions of the Financial Accounting Standards Board
        (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an
        Interpretation of FASB Statemen No. 109” (“FIN 48”), effective january 1, 2007.
        As a result of the implementation of FIN 48, the Company made a comprehensive
        review of its portfolio of uncertain tax positions in accordance with
        recognition standards established by FIN 48. As a result of this review,
        the
        Company concluded that at this time there are no uncertain tax positions
        other
        than an uncertain tax position relating to the limitations imposed on tax
        loss
        carryforwards by Internal Revenue Code Section 382. As a result of applying
        the
        provisions of FIN 48, there was no cumulative effect on retained
        earnings.
  F-17
  Utilization
        of the NOLs may be subject to a substantial annual limitation due to ownership
        change limitations that may have occurred or that could occur in the future,
        as
        required by Section 382 of the Internal Revenue Code of 1986, as amended
        (the “Code”), as well as similar state and foreign limitations. These ownership
        changes may limit the amount of NOLs that can be utilized annually to offset
        future taxable income and tax, respectively. In general, an “ownership change”
as defined by Section 382 of the Code, results from a transaction or series
        of transactions over a three-year period resulting in an ownership change
        of
        more than 50 percentage points of the outstanding stock of a company by
        certain stockholders or public groups.
 
 The
        Company has not finalized its study to assess whether an ownership change
        has
        occurred that would materially impact the utilization of NOLs. The work
        performed to date does not indicate a material limitation of any NOLs, however
        there may be additional ownership changes in the future, and any future change
        at its current market capitalization would severely limit the annual use
        of
        these NOLs going forward. Such limitation could also result in expiration
        of a
        portion of the NOLs before utilization. Further, until the study is completed
        and any limitations known, no amounts are being considered as an uncertain
        tax
        position or disclosed as an unrecognized tax benefit under FIN 48. Due to
        the existence of the valuation allowance, future changes in the Company’s
        unrecognized benefits will not impact its effective tax rate. Any NOLs that
        expire prior to utilization as a result of such limitations will be removed
        from
        deferred tax assets with a corresponding reduction of the valuation
        allowance.
 
 **NOTE
        8 - COMMITMENTS AND CONTINGENCIES**
 
 **LEASE**
 
 Until
        September 30, 2006, the Company subleased its office space under a
        non-cancelable operating lease agreement from a stockholder. The lease required
        minimum monthly payments of $2,568, and required the Company to pay 15.03%
        of any additional rents and/or charges of any kind due from Bemel &
Ross. Since May 2005, the lease became a month to month tenancy cancelable
        by either party with thirty days notice. The additional rents and/or charges
        that may be due consist of direct costs passed through the master landlord
        to
        Bemel & Ross. The direct costs are based on operating costs during the
        calendar year ending December 31, 2003, or the base year. Thereafter, if
        the direct costs in a subsequent year exceed the direct costs in the base
        year,
        the master landlord bills Bemel & Ross its proportionate share of the
        excess of direct costs, which may include tax costs related to real estate
        and/or costs and expenses incurred by the master landlord in connection with
        common areas of the building, the parking structure or the cost of operating
        the
        building. Through September 30, 2006, Bemel & Ross has charged the
        Company for additional rents and/or charges in the amount of $2,165. The
        Company
        terminated this lease on September 30, 2006.
 
 On
        September 14, 2006, the Company entered into a sublease for 6,500 square
        feet of office space with Bergman & Dacey, Inc. which commenced on
        October 1, 2006 and expires on July 31, 2009. The Company paid a
        security deposit of $71,244. The lease requires monthly payments of $16,789
        plus
        32.5% of triple net costs charged to Bergman & Dacey, such as common
        area operating expenses, taxes and insurance. The rent increases 3% on
        October 1st of each year. Total minimum lease payments will be $208,924 and
        $160,051 in calendar years 2008 and 2009, respectively.
 
 Rent
        expense was $252,530 and $77,524 for the years ended December 31, 2007 and
        2006, respectively.
 
 **PATENT
        AND TRADEMARK LICENSE AGREEMENTS**
 
 The
        Company has entered into various Patent and Trademark License Agreements
        with
        financial institutions granting a limited, non-exclusive right and license
        to
        make, distribute, market, sell, and use credit cards or debit cards containing
        a
        magnifying lens (the “Licensed Products”). These agreements are as
        follows:
 
 ·
              
              An
                  agreement dated July 9, 2001, providing for royalties to the Company
                  at the rate of $1.20 per LensCard issued to a customer. Royalties
                  will be
                  due and payable quarterly within 30 days after the last day of
                  each
                  calendar quarter. The Company receives sales reports within thirty
                  days
                  following the end of a calendar quarter from the customer. The
                  agreement
                  terminated July 9, 2006.·
              
              An
                  agreement dated January 16, 2002 and expiring on March 31, 2004,
                  providing for royalties to the Company at the rate of $1.50 per
                  LensCard
                  issued to a customer. Royalties were due and payable quarterly
                  within 30
                  days after the last day of each calendar quarter. The Company receives
                  sales reports within thirty days following the end of a calendar
                  quarter
                  from this customer. On April 1, 2004, the agreement was extended
                  requiring a $12,500 payment by the customer with the Company receiving
                  a
                  royalty of $0.25 per licensed product and $0.50 for each additional
                  LensCard sold thereafter. The revised agreement is effective until
                  April 1, 2008.
  F-18
  **EMPLOYMENT
        AGREEMENT**
 
 The
        Company entered into an Employment Agreement with Alan Finkelstein, its former
        Director and former President; the initial term of three years began
        January 1, 1998 and has, since January 1, 2000, renewed for successive
        one year terms. The agreement was terminated in December 2007.
 
 **LITIGATION**
 
 To
        date,
        the Company has never been a party to and has never been involved with any
        litigation. However, in the future, the Company, like any other business
        or
        individual, may become subject to litigation some of which the Company can
        control and other litigation that the Company cannot control. If the Company
        were to become involved in any litigation, management would have to assess
        whether or not such litigation would likely have a material adverse effect
        on
        the Company’s consolidated financial condition or results of
        operations.
 
 **NOTE
        9 - STOCKHOLDER’S EQUITY**
 
 **PREFERRED
        STOCK**
 
 The
        Company has 5,000,000 authorized shares of $0.001 par value preferred stock.
        The
        preferred stock may be issued in series, from time to time, with such
        designations, rights, preferences, and limitations as the Board of Directors
        may
        determine by resolution.
 
 **COMMON
        STOCK**
 
 During
        the year ended December 31, 2006, the Company completed the
        following:
 
 On
        May 30, 2006, the Company issued 3,785,500 shares of common stock at a
        price of $3.00 per share to accredited investors pursuant to a private placement
        for total gross proceeds of $11,356,500. The Company paid offering costs
        of
        $582,825 and a warrant to purchase 113,565 shares of our common stock at
        an
        exercise price of $3.30 per share valued at $444,493 that expires on
        May 30, 2011.
 
 On
        June 28, 2006 the Company exchanged 4,500,000 shares of its common stock
        for certain assets of nCryptone. The assets acquired were intangible assets
        of
        $3,030,000, accounts receivable of $14,830, fixed assets of $25,619, and
        deposits on raw materials inventory of $397,956.
 
 **WARRANTS**
 
 The
        following summarizes the warrant transactions:
 
 **Warrants**
                **Outstanding**
              
              **Weighted-Average**
                **Exercise Price**Outstanding,December 31,
                  2005
              
              
              6,833,133
              
              $
              1.16Granted
              
              
              363,565
              
              $
              3.51Exercised
              
              
              (2,550,100
              )
              $
              1.00Outstanding,December 31,
                  2006
              
              
              4,646,598
              
              $
              1.43GrantedExercised
              
              
              (32,000
              )
              $
              1.25Outstanding,
                  December 31, 2007
              
              
              4,614,598
              
              $
              1.43Exercisable,
                  December 31, 2007
              
              
              4,614,598
              
              $
              1.43
 
 No
        warrants were granted during the year ended December 31, 2007. The
        weighted-average fair value of the warrants granted during the twelve months
        ended December 31, 2006 for which the exercise price equals the market
        price on the grant date was $3.45, and the weighted-average exercise price
        was
        $3.51. No warrants were granted during the twelve months ended December 31,
        2006 for which the exercise price was less than or greater than the market
        price
        on the grant date. The weighted-average remaining contractual life of the
        4,614,598 warrants with a weighted average exercise price of $1.43 as of
        December 31, 2007 is 33 months.
  F-19
  **2004
        STOCK INCENTIVE PLAN**
 
 The
        Company’s Board of Directors and stockholders approved the 2004 Stock Incentive
        Plan in August 2004. The 2004 Stock Incentive Plan provides for the grant
        of incentive stock options to the Company’s employees, and for the grant of
        non-statutory stock options, restricted stock, stock appreciation rights
        and
        performance shares to the Company’s employees, directors and
        consultants.
 
 The
        Company reserved a total of 2,351,000 shares of its common stock for issuance
        pursuant to the 2004 Stock Incentive Plan. The board of directors, or a
        committee of the board, administers the 2004 Stock Incentive Plan. Stock
        options
        are generally granted with terms of up to ten years and vest over a period
        of
        five years under the 2004 Stock Incentive Plan. The administrator determines
        the
        exercise price of options granted under the 2004 Stock Incentive Plan, but
        the
        exercise price must not be less than 85% of the fair market value of the
        Company’s common stock on the date of grant. In the event the participant owns
        10% or more of the voting power of all classes of the Company’s stock, the
        exercise price must not be less than 110% of the fair market value per share
        of
        the Company’s common stock on the date of grant. With respect to all incentive
        stock options, the exercise price must at least be equal to the fair market
        value of the Company’s common stock on the date of grant. The term of an
        incentive stock option may not exceed 10 years, except that with respect
        to any
        participant who owns 10% of the voting power of all classes of the Company’s
        outstanding stock or the outstanding stock of any parent or subsidiary of
        the
        Company, the term must not exceed five years and the exercise price must
        equal
        at least 110% of the fair market value on the grant date. The administrator
        determines the term of all other options; however, no option will have a
        term in
        excess of 10 years from the date of grant.
 
 The
        2004
        Stock Incentive Plan was terminated concurrent with the approval of the 2007
        Equity Incentive Plan in December 2007. No further grants will be made from
        the 2004 Stock Incentive Plan. The termination does not affect the rights
        of
        holders of options previously granted and outstanding under the 2004 Stock
        Incentive Plan.
 
 A
        summary
        of stock option activity and weighted average exercise prices for the years
        ended December 31, 2007 and 2006 is as follows:
 
 **2007**
              
              **2006****ALL OPTIONS**
              
              
              
              **WEIGHTED**
                **AVERAGE**
                **EXERCISE**
                **PRICE**
              
              
              
              **WEIGHTED**
                **AVERAGE**
                **EXERCISE**
                **PRICE**Outstanding
                  at beginning of period
              
              
              2,351,000
              
              $
              2.10
              
              
              1,585,000
              
              $
              1.00Options
                  granted
              
              
              —
              
              
              —
              
              $
              766,000
              
              $
              4.39Options
                  forfeited
              
              
              (131,500
              )
              $
              4.60
              
              
              —
              
              
              —Options
                  expired
              
              
              —
              
              
              —
              
              
              —
              
              
              —Options
                  exercised
              
              
              (35,002
              )
              $
              1.00
              
              
              —
              
              
              —Outstanding
                  at end of period
              
              
              2,184,498
              
              $
              1.97
              
              
              2,351,000
              
              $
              2.10Exercisable
                  at end of period
              
              
              1,557,349
              
              $
              1.34
              
              
              835,000
              
              $
              1.06
 **2007**
                
                **2006****NON
                    VESTED OPTIONS**
                
                
                
                **WEIGHTED**
                  **AVERAGE**
                  **EXERCISE**
                  **PRICE**
                
                
                
                **WEIGHTED**
                  **AVERAGE**
                  **EXERCISE**
                  **PRICE**Non-
                    vested at beginning of period
                
                
                1,516,000
                
                $
                2.68
                
                
                1,075,000
                
                $
                1.00Options
                    granted
                
                
                —
                
                
                —
                
                
                766,000
                
                $
                4.39Options
                    forfeited
                
                
                (119,049
                )
                $
                4.90
                
                
                —
                
                
                —Options
                    expired
                
                
                —
                
                
                —
                
                
                —
                
                
                —Options
                    vested
                
                
                (769,802
                )
                $
                1.63
                
                
                (325,000
                )
                $
                1.14Non-
                    vested at end of period
                
                
                627,149
                
                $
                3.55
                
                
                1,516,000
                
                $
                2.68
  No
        options were granted during the year ended December 31, 2007. The weighted
        average grant-date fair value of options granted during the year ended
        December 31, 2006 was $4.84.
  F-20
  In
        the
        fourth quarter of 2007, as part of the separation agreements with three former
        officers and directors, the Company modified existing option grants by vesting
        all of the options that at the date of termination were unvested and would
        normally be forfeited at termination. In addition, the Company extended the
        exercise period beyond 90 days (the standard exercise period for terminated
        officers/directors). The modifications resulted in a charge of $727,670 in
        the
        2007 income statement. The amount was calculated using the stock price of
        the
        Company’s common stock on the date of modification, a risk-free interest rate of
        4.55% and volatility of 118%.
 
 The
        weighted average remaining contractual lives of the options outstanding and
        options exercisable were as follows:
 
 **Options**
                **outstanding**
              
              **Options**
                **exercisable**December 31,
                  2006
              
              
              8.12
                  years
              
              
              7.18
                  yearsDecember 31,
                  2007
              
              
              7.05
                  years
              
              
              6.66years
 
 **2007
        EQUITY INCENTIVE PLAN**
 
 The
        Company’s Board of Directors approved the 2007 Equity Incentive Plan in
        September 2007 and stockholders approved the 2007 Equity Incentive Plan in
        December 2007. The 2007 Equity Incentive Plan provides for the grant of
        incentive stock options to the Company’s employees, and for the grant of
        non-statutory stock options, restricted stock, stock appreciation rights,
        performance units and performance shares to the Company’s employees, directors
        and consultants.
 
 The
        Company reserved a total of 4,000,000 shares of its common stock for issuance
        pursuant to the 2007 Equity Incentive Plan. A committee of the board of
        directors administers the 2007 Equity Incentive Plan. Stock options are
        generally granted with terms of up to ten years and vest over a period of
        five
        years under the 2007 Equity Incentive Plan. The administrator determines
        the
        exercise price of options granted under the 2007 Equity Incentive Plan, but
        the
        exercise price must not be less than 85% of the fair market value of the
        Company’s common stock on the date of grant. In the event the participant owns
        10% or more of the voting power of all classes of the Company’s stock, the
        exercise price must not be less than 110% of the fair market value per share
        of
        the Company’s common stock on the date of grant. With respect to all incentive
        stock options, the exercise price must at least be equal to the fair market
        value of the Company’s common stock on the date of grant. The term of an
        incentive stock option may not exceed 10 years, except that with respect
        to any
        participant who owns 10% of the voting power of all classes of the Company’s
        outstanding stock or the outstanding stock of any parent or subsidiary of
        the
        Company, the term must not exceed five years and the exercise price must
        equal
        at least 110% of the fair market value on the grant date. The administrator
        determines the term of all other options; however, no option will have a
        term in
        excess of 10 years from the date of grant.
 
 Without
        further stockholder approval, the 2007 Equity Incentive Plan may not issue
        incentive stock options after September 2017.
 A
        summary
        of stock option activity and weighted average exercise prices for the years
        ended December 31, 2007 is as follows:
 
 **2007****ALL
                  OPTIONS**
              
              
              
              **WEIGHTED**
                **AVERAGE**
                **EXERCISE**
                **PRICE**Outstanding
                  at beginning of period
              
              
              —
              
              
              —Options
                  granted
              
              
              68,511
              
              $
              2.76Options
                  forfeited
              
              
              —
              
              
              —Options
                  expired
              
              
              —
              
              
              —Options
                  exercised
              
              
              —
              
              
              —Outstanding
                  at end of period
              
              
              68,511
              
              $
              2.76Exercisable
                  at end of period
              
              
              —
              
              
              —
  F-21
 
 **2007****NON
                  VESTED OPTIONS**
              
              
              
              **WEIGHTED**
                **AVERAGE**
                **EXERCISE**
                **PRICE**Non-
                  vested at beginning of period
              
              
              —
              
              
              —Options
                  granted
              
              
              68,511
              
              $
              2.76Options
                  forfeited
              
              
              —
              
              
              —Options
                  expired
              
              
              —
              
              
              —Options
                  vested
              
              
              —
              
              
              —Non-
                  vested at end of period
              
              
              68,511
              
              $
              2.76
 
 The
        weighted average remaining contractual lives of the options outstanding at
        December 31, 2007 was 9.83 years.
 
 The
        Company recorded $2,121,751 and $472,598 of compensation expense for employee
        stock options during the years ending December 31, 2007 and 2006
        respectively, which is included in the administrative expense category. At
        December 31, 2007 and 2006, there was a total of $4,650,764 and $3,328,840,
        respectively, of unrecognized compensation costs related to the non-vested
        share-based compensation arrangements under the 2004 and 2007 Plans. The
        cost is
        expected to be recognized over a weighted average period of 1.7 years. The
        total
        fair value of options vested during the years ended December 31, 2007 and
        2006 was $1,255,092 and $371,500 respectively. The aggregate intrinsic value
        of
        total outstanding options and total exercisable options was $3,392,007 and
        $2,194,497, respectively, as of December 31, 2007.
 
 Since
        January 1, 2006, the Company is recognizing the cost of all employee stock
        options on a straight-line attribution basis over their respective vesting
        periods, net of estimated forfeitures. The Company has selected the modified
        prospective method of transition; accordingly, prior periods have not been
        restated. Prior to the adoptions of SFAS No. 123(R), the Company applied
        APB Opinion No. 25 and related Interpretations in accounting for its
        stock-based compensation plans; all employee stock options were granted at
        or
        above the grant date market price; and accordingly, no compensation cost
        was
        recognized for fixed stock option grants in prior periods.
 The
        Black
        Scholes assumptions used are listed below:
 
 **2007**
              
              **2006**Risk
                  free interest rate
              
              
              4.55
              %
              
              4.97
              %Dividends
              
              
              —
              
              
              —Volatility
                  factor
              
              
              200
              %
              
              200
              %Expected
                  life
              
              
              10
                  years
              
              
              10
                  yearsAnnual
                  forfeiture rate
              
              
              0
              %
              
              0
              %
 
 **NOTE
        11 - RELATED PARTY TRANSACTIONS**
 
 **ACCOUNTS
        PAYABLE - RELATED PARTIES**
 
 Accounts
        payable – related parties at December 31, 2007 is comprised of
        $657,254 due to nCryptone, SA, $600,000 of which is due in January 2009,
        and $14,521 due to Blakely, Sokoloff, Taylor & Zafman, LLP (BSTZ), a
        law firm in which former director George Hoover is a partner, for legal services
        related to our intellectual property. Accounts payable - related parties
        at
        December 31, 2006 consisted of amounts due for legal, expense
        reimbursement, and for a licensing fee and were $1,322,159. As of
        December 31, 2006, $61,173 is owed to BSTZ and $1,260,987 is owed to
        nCryptone, S.A., respectively.
 
 **CONSULTING
        AGREEMENTS**
 
 In
        connection with his resignation as Chief Financial Officer in October 2007,
        Bennet Tchaikovsky and the Company entered into three separate agreements:
        an
        Indemnification Agreement, a Consulting Agreement, and a Separation Agreement.
        Beginning October 29, 2007 and ending on June 29, 2008,
        Mr. Tchaikovsky will be paid $12,270 per month plus certain other
        reimbursements for assisting us with transitioning our new Chief Financial
        Officer. However, if Mr. Tchaikovsky obtains full-time employment during
        the term of the Consulting Agreement, the Consulting Agreement will
        automatically terminate and no further payments will be due from the Company
        to
        Mr. Tchaikovsky. The Company entered into a Separation Agreement with
        Mr. Tchaikovsky whereby Mr. Tchaikovsky fully released the Company in
        consideration for Mr. Tchaikovsky becoming vested in his remaining 60,000
        unvested options and waiving the termination period for all of his
        options.
  F-22
  The
        Company was a party to a Consulting Agreement with Forest Finkelstein, the
        son
        of Alan Finklestein during the years ended December 31, 2007, 2006 and
        2005. The agreement was cancelled in December 2007. The Company paid Mr.
        Finklestein $85,000 and $85,000 , respectively, during the years ended
        December 31, 2007 and 2006.
 
 **LEGAL
        SERVICES**
 
 The
        Company receives legal services from Blakely, Sokoloff, Taylor and Zafman,
        LLP,
        a law firm in which George Hoover, a former director of the Company, is a
        partner. During the years ended December 31, 2007 and 2006, the Company
        paid $95,654 and $175,822 respectively, to this entity for legal services
        rendered.
 
 **NOTE
        13 - SUBSEQUENT EVENTS**
 
 On
        January 8, 2008, the Company entered into a Securities Purchase Agreement
        (the “Purchase Agreement”) with 13 institutional and accredited investors (the
“Purchasers”). Pursuant to the terms of the Purchase Agreement, the Purchasers
        purchased $3.5 million of the Company’s 8% Senior Secured Convertible Debenture
        (“Debenture”). The Debenture: (i) bears interest at 8% per year, paid
        quarterly in cash or registered common stock, at the Company’s discretion;
        (ii) has a maturity of January 8, 2011, (iii) is convertible at
        the holder’s option into shares of common stock at $2.50 per share, (iv) is
        secured by all of the Company’s and its subsidiary’s assets including inventory,
        receivables, unencumbered equipment and intellectual property under the terms
        of
        a Security Agreement, and (v) has a forced conversion feature which allows
        the Company to force the conversion of the Debenture if the Company’s common
        stock trades above $5.00 for 20 consecutive trading days and certain other
        conditions are met. The Company also issued to the Purchasers five-year common
        stock purchase warrants to purchase 700,000 shares of common stock at an
        exercise price of $2.75 per share (the “Warrants”). The Company expects to use
        the net proceeds of the financing for working capital requirements and to
        pay
        down certain obligations. The Debenture also contains customary events of
        default provisions. As part of the transaction, the Company agreed to:
        (i) cut our monthly burn rate to $600,000 (ii) be compliant with
        NASDAQ listing requirements; and (iii) obtain shareholder approval prior to
        effectuating a reverse stock split.
 
 Both
        the
        conversion price under the Debenture and the exercise price under the Warrants
        are subject to “full-ratchet” price protection in the event of stock issuances
        below their respective conversion or exercise prices, except for specified
        exempted issuances including grants of stock options and stock issuances
        to
        officers, directors, employees and consultants.
 
 The
        Company agreed to grant registration rights to the investors, by filing a
        registration statement covering the shares of common stock issuable upon
        the
        conversion of the Debenture, exercise of the Warrants, and issuable as interest
        payments, within 30 days of the closing, and obtaining effectiveness of the
        registration statement within 90 days after the closing. An amendment to
        the
        registration rights agreement gives the Company until June 7, 2008 to file
        the initial registration statement.
 
 On
        March
        27, 2008, the Company entered into employment agreements with Steven R.
        Delcarson, its chief executive officer and president, and Charles M. Caporale,
        its chief financial officer. The material terms of Mr. Delcarson’s agreement are
        as follows: The term is for one year but may be extended for additional one
        year
        terms. Mr. Delcarson’s annual base compensation of $300,000 per year was
        increased to $335,000 per year. He is eligible for a bonus up to the amount
        of
        his base compensation upon the attainment of certain milestones. Mr. Delcarson
        was granted 1,000,000 options priced at the closing price on the date of
        grant
        which shall vest pursuant to a schedule associated with the achievement of
        certain milestones. In the event of a termination by the Company without
        cause
        or a change in control of the Company, all options issued would vest upon
        the
        occurrence of such event. The terms of Mr. Caporale’s agreement are essentially
        the same as those for Mr. Delcarson except that Mr. Caporale’s annual salary of
        $180,000 was increased to $200,000 and the number of options granted was
        200,000.
  F-23
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Securities Exchange Act of
        1934, the registrant caused this report to be signed on its behalf by the
        undersigned, thereunto duly authorized.
  **INNOVATIVE
                  CARD TECHNOLOGIES, INC.***By:*
              */s/
                  Charles M. Caporale**Charles
                  M. Caporale**Chief
                  Financial Officer**Dated:
                  June
                  16, 2008*
 
 **POWER
        OF ATTORNEY**
 
 KNOW
        ALL
        THESE PERSONS BY THESE PRESENTS, that each person whose signature appears
        below
        constitutes and appoints Steven R. Delcarson and Charles M. Caporale and
        each of
        them, jointly and severally, his attorneys-in-fact, each with full power
        of
        substitution, for him or her in any and all capacities, to sign any and all
        amendments to this Form 10-KSB, and to file the same, with exhibits thereto
        and other documents in connection therewith, with the Securities and Exchange
        Commission, hereby ratifying and confirming all that each said attorneys-in-fact
        or his substitute or substitutes, may do or cause to be done by virtue
        hereof.
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this
        Form 10-KSB has been signed below by the following persons on behalf of the
        Registrant and in the capacities and on the dates indicated:
 
 **Name**
              
              **Title**
              
              **Date**/s/
                  Donald Joyce
              
              Chairman
                  of the Board
              
              June
                  16, 2008Donald
                  Joyce/s/
                  Steven R. Delcarson
              
              Chief
                  Executive Officer, President (Principal Executive Officer)
              
              June
                    16, 2008Steven
                  R. Delcarson/s/
                  Charles M. Caporale
              
              Chief
                  Financial Officer (Principal Accounting Officer)
              
              June
                    16, 2008Charles
                  M. Caporale/s/
                  Richard Nathan
              
              Director
              
              June
                    16, 2008Richard
                  Nathan/s/
                  Scott Ogilvie
              
              Director
              
              June
                    16, 2008Scott
                  Ogilvie/s/
                  W. Robert Ramsdell
              
              Director
              
              June
                    16, 2008W.
                  Robert Ramsdell/s/
                  Harry L. Tredennick
              
              Director
              
              June
                    16, 2008Harry
                  L. Tredennick
  
  **EXHIBIT
        INDEX**
 2.1(2)
                  
                  Exchange
                      agreement by and among the registrant, LensCard US, LLC, Alan
                      Finkelstein,
                      Forest Finkelstein, Bradley Ross and Luc Berthoud, dated April 1,
                      20042.2(2)
                  
                  Exchange
                      agreement by and among the registrant, Alan Finkelstein,  Bradley
                      Ross and Michael Paradise, dated April 1, 20042.3(2)
                  
                  Exchange
                      agreement between the registrant and its wholly-owned subsidiary,
                      PSACo, Inc., dated April 1, 20042.4(2)
                  
                  Merger
                      agreement between the registrant and LensCard International
                      Limited, a
                      British Virgin Islands International Business Company, dated
                      April 6,
                      20043.1(2)
                  
                  Amended
                      and Restated Certificate of incorporation of the registrant,
                      as currently
                      in effect3.2(2)
                  
                  Amended
                      and Restated Bylaws of the registrant, as currently in
                      effect3.3(12)
                  
                  Certificate
                      of Amendment of Amended and Restated Certificate of
                      incorporation10.1(2)
                  
                  2004
                      Stock Incentive Plan10.2(2)
                  
                  Sublease
                      agreement between registrant and Bemel & Ross for premises at
                      11601 Wilshire Blvd.,#2160, Los Angeles, California 90025,
                      dated
                      January 5, 200310.3(2)
                  
                  Guaranty
                      of lease between Alan Finkelstein and Bemel & Ross, dated
                      January 5, 200310.4(3)
                  
                  Form of
                      common stock warrant, as amended on September 7,
                      2005.10.5(2)
                  
                  Securities
                      purchase agreement between registrant and Bristol Capital,
                      LLC dated
                      December 23, 200310.5(a) (2)
                  
                  Waiver
                      of section 2.3 of the securities purchase agreement between
                      registrant and
                      Bristol Capital, LLC10.6(2)
                  
                  Shares
                      for debt agreement between registrant and Alan Finkelstein,
                      dated
                      June 22, 200410.7(2)
                  
                  Shares
                      for debt agreement between registrant and Bradley Ross, dated
                      June 22, 200410.8(2)
                  
                  Shares
                      for debt agreement between registrant and Luc Berthoud, dated
                      June 22, 200410.9(2)
                  
                  Promissory
                      note (loan no. 00003) between registrant and City National
                      Bank, dated
                      May 24, 200410.10(2)
                  
                  Promissory
                      note (loan no. 00005) between registrant and City National
                      Bank, dated
                      May 24, 200410.11(2)
                  
                  Promissory
                      note (loan no. 00004) between registrant and City National
                      Bank, dated
                      May 24, 200410.12(2)
                  
                  Promissory
                      note (loan no. 00006) between registrant and City National
                      Bank, dated
                      May 24 ,200410.13(2)
                  
                  Commercial
                      guaranty between Alan Finkelstein and City National Bank dated
                      May 24, 200410.14(2)
                  
                  Commercial
                      guaranty between Bradley Ross and City National Bank dated
                      May 24,
                      200410.15(2)
                  
                  Commercial
                      guaranty between Luc Berthoud and City National Bank dated
                      May 24,
                      200410.16(2)
                  
                  Offer
                      letter between registrant and Murdoch Henretty dated July 28,
                      200410.17(2)
                  
                  Employment
                      agreement between registrant and Alan Finkelstein dated
                      January 199810.18(2)
                  
                  Strategic
                      Alliance Agreement between registrant and Visa International
                      Service
                      Association dated May 26, 2004
  
  10.19(2)
                  
                  Secured
                      Demand Promissory Note between registrant and Union Finance
                      International
                      Corp. dated March 31, 200510.20(2)
                  
                  Secured
                      Demand Promissory Note between registrant and Bristol Investment
                      Fund,
                      Ltd. dated March 30, 200510.21(2)
                  
                  Capital
                      Lease Agreement between registrant and CNC Associates, Inc. dated
                      November 30, 200410.22(2)
                  
                  Guaranty
                      between Alan Finkelstein and CNC Associates, Inc. dated
                      November 30, 200410.23(2)
                  
                  Security
                      Agreement between registrant and Union Finance International
                      Corp. dated
                      March 31, 2005 (See Exhibit 10.19)10.24(2)
                  
                  Security
                      Agreement between registrant and Bristol Investment Fund, Ltd.
                      dated
                      March 30, 2005 (See Exhibit 10.20)10.25(2)
                  
                  Secured
                      Demand Promissory Note between registrant and Bradley Ross
                      dated
                      August 31, 200510.26(2)
                  
                  Secured
                      Demand Promissory Note between registrant and Rodger Bemel
                      dated
                      August 31, 200510.27(2)
                  
                  Joint
                      Development Agreement between registrant and nCryptone dated
                      July 25,
                      200510.28(2)
                  
                  Agreement
                      between registrant and SmartDisplayer Technology, Inc. dated
                      July 25, 200510.29(5)
                  
                  Form of
                      Lock-Up agreement by and between registrant’s directors and executive
                      officers pursuant to the private placement dated October 19,
                      200510.30(4)
                  
                  Form of
                      Warrant pursuant to private placement dated October 19,
                      200510.31(4)
                  
                  Registration
                      Rights Agreement by and between the registrant and each investor
                      pursuant
                      to the private placement dated October 19, 200510.32(4)
                  
                  Side
                      Letter Agreement between the registrant, T.R. Winston & Company
                      and investors pursuant to the private placement dated October 19,
                      200510.33(6)
                  
                  Letter
                      of Intent by and between VASCO Data Security, nCryptone and
                      Registrant,
                      dated October 28, 2005.10.34(9)
                  
                  Form of
                      Warrant to TR Winston dated as of May 30, 2006.10.35(9)
                  
                  Form of
                      Securities Purchase Agreement dated May 30, 2006.10.36(9)
                  
                  Form of
                      Registration Rights Agreement dated May 30, 2006.10.37(10)
                  
                  Asset
                      Agreement dated June 28, 2006 by and between Registrant NCryptone, SA
                      and its shareholders.10.38(10)
                  
                  Registration
                      Rights Agreement dated June 28, 2006 by and between Registrant and
                      NCrytone, SA10.39(10)
                  
                  License
                      Agreement dated June 28, 2006 by and between Registrant as licensor
                      and NCryptone, SA as licensee10.40(10)
                  
                  License
                      Agreement dated June 28, 2006 by and between NCryptone, SA as
                      licensor and Registrant as licensee.10.41(11)
                  
                  Sublease
                      between Registrant as sublessee and Bergman and Dacey, Inc. as
                      sublessor.10.42(8)
                  
                  Indemnification
                      Agreement
  
  10.43(7)
                  
                  Code
                      of Ethics10.44(13)
                  
                  Separation
                      and Release Agreement dated October 29, 2007 between Bennet
                      P. Tchaikovsky
                      and Registrant10.45(13)
                  
                  Consulting
                      Services Agreement dated October 29, 2007 between Registrant
                      and Bennet P.
                      Tchaikovsky10.46(13)
                  
                  Indemnity
                      Agreement dated October 29, 2007 between Registrant and Bennet
                      P.
                      Tchaikovsky10.47(14)
                  
                  2007
                      Equity Incentive Plan10.48(15)
                  
                  Form
                      of Indemnity Agreement10.49(16)
                  
                  Alan
                      Finkelstein Severance and Resignation Letter10.50(17)
                  
                  Form
                      of Securities Purchase Agreement, dated as of January 8,
                      200810.51(17)
                  
                  Form
                      of 8% Senior Secured Convertible Debenture issued January 8,
                      200810.52(17)
                  
                  Form
                      of Common Stock Purchase Warrant issued January 8, 200810.53(17)
                  
                  Form
                      of Registration Rights Agreement, dated as of January 8,
                      200810.54(17)
                  
                  Form
                      of Security Agreement, dated as of January 8, 200810.55(17)
                  
                  Form
                      of Subsidiary Guarantee, dated as of January 8, 200810.56(17)
                  
                  Form
                      of Voting Agreement, dated as of January 8, 200810.57(17)
                  
                  Form
                      of Lock-Up Agreement, dated as of January 8, 200821.1(2)
                  
                  List
                      of subsidiaries23.2(1)
                  
                  Consent
                      of Independent Registered Public Accounting Firm for Registration
                      Statements (No. 333-137033 and No. 333-149844) on Form S-8 and (No.
                      333-151256) on Form S-3.31.1(1)
                  
                  Certification
                      of Chief Executive Officer, as required by Rule 13a-14(a) or
                      Rule 15d-14(a) of the Securities Exchange Act of
                      193431.2(1)
                  
                  Certification
                      of Chief Financial Officer, as required by Rule 13a-14(a) or
                      Rule 15d-14(a) of the Securities Exchange Act of
                      193432(1)
                  
                  Certification
                      of Chief Executive Officer and Chief Financial Officer, as
                      required by
                      Section 1350 of Chapter 63 of Title 18 of the United States Code (18
                      U.S.C. 1350)
  
 (1)
              
              Filed
                  herewith.(2)
              
              Previously
                  filed by the registrant on Form SB-2 (File No. 333-119814), as
                  amended, with the Securities and Exchange Commission.(3)
              
              Previously
                  filed by the registrant on Form 8-K with the Securities and Exchange
                  Commission on September 7, 2005.(4)
              
              Previously
                  filed by the registrant on Form 8-K, as amended, with the Securities
                  and Exchange Commission on October 25, 2005.(5)
              
              Previously
                  filed by the registrant on Form SB-2 (File No. 333-129564) with
                  the Securities and Exchange Commission on November 8,
                  2005.(6)
              
              Previously
                  filed by the registrant on Form 8-K with the Securities and Exchange
                  Commission on November 18, 2005.(7)
              
              Previously
                  filed by the registrant on Form 10-KSB with the Securities and
                  Exchange Commission on March 20, 2006.(8)
              
              Previously
                  filed by the registrant on Form 8-K with the Securities and Exchange
                  Commission on March 23, 2007.(9)
              
              Previously
                  filed by the registrant on Form 8-K filed with the Securities and
                  Exchange Commission on May 31, 2006.(10)
              
              Previously
                  filed by the registrant on Form SB-2 (File No. 333-135715) with
                  the S EC on July 12, 2006.(11)
              
              Previously
                  filed by the registrant on Form 10QSB with the S EC on
                  November 13, 2006.(12)
              
              Previously
                  filed by the registrant on Form 8-K with the SEC on January 2,
                  2008(13)
              
              Previously
                  filed by the registrant on Form 8-K with the SEC on November 1,
                  2007(14)
              
              Previously
                  filed by the registrant on Form 10-QSB with the SEC on November
                  19,
                  2007(15)
              
              Previously
                  filed by the registrant on Form 8-K with the SEC on November 29,
                  2007(16)
              
              Previously
                  filed by the registrant on Form 8-K with the SEC on December 20,
                  2007(17)
              
              Previously
                  filed by the registrant on Form 8-K with the SEC on January 9,
                  2008