**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

 

**(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                 **

 

**Commissionfile number 001-33353**

** **

**INNOVATIVECARD TECHNOLOGIES, INC.**

(Name of Small BusinessIssuer in Its Charter)

 

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

 

**10880 WILSHIRE BOULEVARD, SUITE950**

**LOS ANGELES, CALIFORNIA 90024**

**(310) 312-0700**

(Address and telephonenumber of principal executive

offices and principalplace of business)

 

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

 

Securities registeredunder Section 12(g) of the Exchange Act: **CommonStock:**

**$0.001 par value**

 

Check whether theregistrant is not required to file reports pursuant to Section

13 or 15(d) of theExchange Act. o

 

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

 

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

 

Indicate by check mark whether the registrant is ashell 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-votingcommon equity held by non-affiliates of the registrant as of March 15,2008 was approximately $56,326,000 based upon the closing price reported forsuch date on the NASDAQ Capital Market For purposes of this disclosure, sharesof Common Stock held by persons who hold more than 5% of the outstanding sharesof Common Stock and shares held by executive officers and directors of theregistrant have been excluded because such persons may be deemed to beaffiliates. This determination of executive officer or affiliate status is notnecessarily a conclusive determination for other purposes.

 

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

 

Portions of the Definitive ProxyStatement to be filed for the registrant’s Annual Meeting of Shareholders for2008 are incorporated by reference into part III of this Annual Report on Form10-KSB.

 

Transitional Small Business Disclosure Format : Yes  o  No  x

 

 

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**INNOVATIVECARD TECHNOLOGIES, INC.**

 

TABLE OF CONTENTS

 
| ** **                                                                                      | **Page********Number** |
|-------------------------------------------------------------------------------------------------|------------------------|
|                                                                                            |                   |
| PART I                                                                                     |                   |
| ITEM 1 - BUSINESS                                                                               |                   |
| OUR COMPANY                                                                                     | 3                      |
| INDUSTRY BACKGROUND                                                                             | 3                      |
| OUR BUSINESS                                                                                    | 4                      |
| OUR  POWER INLAY TECHNOLOGY AND PRODUCTS                                                        | 4                      |
| STRATEGIC  RELATIONSHIPS                                                                        | 6                      |
| RESEARCH AND  DEVELOPMENT                                                                       | 7                      |
| INTELLECTUAL  PROPERTY                                                                          | 8                      |
| MANUFACTURING                                                                                   | 8                      |
| COMPETITION                                                                                     | 8                      |
| GOVERNMENTAL  REGULATION                                                                        | 9                      |
| EMPLOYEES                                                                                       | 9                      |
| RISK FACTORS                                                                                    | 9                      |
| ITEM 2 - DESCRIPTION OF PROPERTY                                                                | 15                     |
| ITEM 3 - LEGAL  PROCEEDINGS                                                                     | 15                     |
| ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                   | 15                     |
|                                                                                            |                   |
| PART II                                                                                    |                   |
| ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS                              | 16                     |
| QUARTERLY COMMON STOCK PRICE RANGES                                                             | 16                     |
| ITEM 6 -  MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS                   | 17                     |
| ITEM  7 - FINANCIAL STATEMENTS                                                                  | 22                     |
| ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURES | 22                     |
| ITEM 8A - CONTROLS AND PROCEDURES                                                               | 22                     |
| ITEM  8B - OTHER INFORMATION                                                                    | 22                     |
|                                                                                            |                   |
| PART III                                                                                   |                   |
| ITEM 9 - OFFICERS  AND DIRECTORS                                                                | 23                     |
| ITEM 10 - EXECUTIVE COMPENSATION                                                                | 23                     |
| ITEM 11 -  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                       | 23                     |
| ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                       | 24                     |
| ITEM 13  - EXHIBITS                                                                             | 24                     |
| ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                | 27                     |
|                                                                                            |                   |
| FINANCIAL STATEMENTS                                                                            | F-1                    |
|                                                                                            |                   |
| SIGNATURES                                                                                      |                   |

 

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

Forward-looking statements are not guarantees offuture performance and are subject to various risks, uncertaintie s andassumptions that are difficult to predict. Therefore, actual results may differmaterially from those expressed in forward-looking statements. They can beaffected by many factors, including, those discussed under the captions “*Business—Risk Factors*” and “*Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.*”Forward-looking statements are based on information presently available tosenior management, and we do not assume any duty to update our forward-lookingstatements.

 

**WHEREYOU CAN FIND MORE INFORMATION**

 

As a public company, we are required to file annually,quarterly and special reports, proxy statements and other information with theSecurities and Exchange Commission (the “SEC”). You may read and copy any ofour materials on file with the SEC at the SEC’s Public Reference Room at100 F Street, NE, Washington, DC 20549. Our filings are available to the publicover the Internet at the SEC’s website at http://www.sec.gov. Please call theSEC at 1-800-SEC-0330 for further information on the Public Reference Room. Wealso provide copies of our Forms 8-K, 10-KSB and 10-QSB, Proxy Statement andAnnual Report at no charge to investors upon request and make electronic copiesof our most recently filed reports available through our website at www.incardtech.compromptly after filing such material with the SEC.

 

**PART I**

 

**ITEM1.**   **BUSINESS**

 

**OUR COMPANY**

 

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

 

We develop and market secure powered cards forpayment, identification, physical and logical access applications. Our mainproduct, the ICT DisplayCard, integrates the security of a one-time passwordtoken directly into a card the size of a standard credit or debit card. A tokenis a portable physical device, typically in a key-fob form factor, thatgenerates the one-time password (also referred to as a one-time passcode). Atthe 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, thisnumber is entered into a user interface with other information (such as theuser’s static PIN and login name). This information is relayed to a backendsystem for multi-factor authentication. InCard does not provide the backendauthentication server, but rather will integrate the ICT DisplayCard intoauthentication systems provided by other companies including distributors andother resellers of the ICT DisplayCard. The ICT DisplayCard’s OTPauthentication works like tokens issued by VASCO, RSA, and ActivIdentity, butin a more convenient, wallet-sized card form factor.

 

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

 

**INDUSTRY BACKGROUND**

 

The growth in electronic banking and electroniccommerce, and the increasing use and reliance by business, government andeducational institutions upon proprietary or confidential information that isremotely accessible by many users over different networks, has made informationsecurity a paramount concern. Enterprises are seeking solutions that willcontinue to allow them to expand access to data and financial assets whilemaintaining network security, and firms such as VASCO, RSA, VeriSign, andActivIdentity are providing solutions for these enterprises. We believe thatthe tokens provided to end users by these and other network security firms aregenerally inconvenient as these tokens have to be carried outside of a walletor placed on a keychain or in a pocket. Our ICT DisplayCard offers the samefunctionality 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 enduser with a better experience and greater convenience.

 

Internet and Enterprise Security – With the advent ofpersonal computers and distributed information systems in the form of wide areanetworks, intranets, local area networks and the Internet, as well as otherdirect electronic links, many organizations have implemented applications toenable their work force and third parties, including vendors, suppliers andcustomers, to access and exchange data and perform electronic transactions. Asa result of the increased number of users having direct and remote access tosuch enterprise applications, data and financial assets have becomeincreasingly vulnerable to unauthorized access and misuse.

 

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

 

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

 

In October 2005, the US Federal FinancialInstitutions Examination Council (FFIEC) issued guidance for strongauthentication/two factor authentication in the Internet banking environment ( Seehttp://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, weexpect, will continue to have growth in their businesses, we believe that abarrier to further widespread adoption of multi-factor authentication is theend user’s experience using the tokens provided to them by the securitysolution providers. Our product, the ICT DisplayCard, is more portable and userfriendly as it can be kept in a wallet.

 

**OUR BUSINESS**

 

We develop and market technology-based cardenhancements that can be used for both the enterprise and the on-line bankingmarkets. The enterprise market, which is served by authentication companiessuch as VASCO, ActivIdentity, Verisign, and RSA, will be able to offer the ICTDisplayCard as an alternative for end users to replace existing tokens. We alsoplan to offer the ICT DisplayCard to financial institutions to increase thesecurity of on-line banking transactions. In addition to the securityauthentication function, our ICT DisplayCard can be specified to have paymentfunctionality, enabling credit and debit card issuers to enhance anti-fraudprotection for card-not-present transactions. We do not, however, anticipateproviding ICT DisplayCards with payment functionality in the short term.

 

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

 

**PRODUCTION**

 

The ICT DisplayCard has been available for issuance ona limited quantity basis since December 2006. By late summer 2008 weexpect to be able to produce 200,000 DisplayCards per month. Theseproduction 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’swill be able to produce the necessary supply. We believe that our presentcapacity will meet our short term anticipated demand. In the event that wereceive greater interest or orders than our projections, our OEMs haveindicated to us that they will be able to increase capacity. We do notmanufacture the ICT DisplayCard; we rely on OEMs, and the ability to producethe 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) thebattery, presently available from only one supplier, Solicore, Inc., and (2) thedisplay, presently available from only one supplier, SmartDisplayer. Wecontinue to explore alternative supply arrangements, but do not expect anyalternatives to be available in the next six to twelve months.

 

**OUR POWER INLAY TECHNOLOGY ANDPRODUCTS**

 

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

 

**ONGOING PRODUCT TESTING ANDDEVELOPMENT**

 

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

 

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**OUR STRATEGY AND SALES CYCLE**

 

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

 

Presently, our sales cycle takes several months andgenerally requires negotiation and completion of a pilot program before anyorder for our cards. We are now entering into pilot programs and completingpilot programs for the ICT DisplayCard through several large commercialentities. If these pilot programs are successful, with the users in the pilotprogram having a good experience with the ICT DisplayCard and the entityhosting the pilot wanting to order larger quantities of cards, we anticipatethat the resellers will order commercial quantities of cards in greaterquantities. Depending upon the size of the purchaser, there may be severalpilot programs involving their employees or customers prior to a larger salesorder being received.

 

**RESELLERS**

 

The resellers for our ICT DisplayCard include Actividentity,Entrust, Gemalto, InfoSERVER, Inteligensa, Inex Americana, Verisign, Innet andIDENTIPHI. These companies sell a complete security solution, either by themselvesor with other providers. Although some of these resellers are required to makea deposit for the ICT DisplayCard, none of these resellers are required bythese agreements to order our products. The extent to which these resellersmarket and sell our products will depend on the reseller’s customer experiencewith the ICT DisplayCard and our ability to provide a quality product, todeliver 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 forboth the enterprise and on-line banking markets, our predecessors commencedsales of our first product, the LensCard, or a credit card embedded with asmall magnifying lens, in 1998. To date, we have generated limited revenuesfrom the LensCard pursuant to licensing agreements, most of which haveterminated. At this time, we do not intend to renew these licensing agreements,unless requested by a customer. In 1999, we began to consider the possibilityof placing power into an ISO compliant card . Since 2002, our core focus hasbeen and continues to be on research and development and marketing of our powerinlay technology that is designed to bring power-based applications for paymentand non-payment cards. The first products developed using our power inlaytechnology were LightCard and SoundCard. However, we ceased our focus of theLightCard and SoundCard due to the demand for the ICT DisplayCard. Prior to ourfocus on the ICT DisplayCard, we developed the SoundCard, LightCard, andLensCard all of which remain available for sale on a limited quantity basis. Inthe event that a customer wishes to purchase the SoundCard, LightCard and/orLensCard, we will evaluate if production of the product can be accomplishedwithout removing resources from production of the ICT DisplayCard. If suchproduction can be accomplished, we may outsource manufacturing of theSoundCard, LightCard and/or LensCard.

 

**HISTORY**

 

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

 

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

 

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**STRATEGIC RELATIONSHIPS**

 

SMARTDISPLAYER TECHNOLOGYCO.

 

On July 25, 2005, we entered into a mutuallyexclusive agreement with SmartDisplayer Technology Co. Ltd., a Taiwanesecompany that manufactures electronic paper modules used in the manufacture ofour ICT DisplayCard (the “InCard-SmartDisplayer Agreement”). SmartDisplayeragreed to sell its electronic paper modules for use in an exclusive field onlyto us, if we meet certain minimum purchase commitments. The exclusive field isdefined as powered payment, credit, debit, and gift cards and other poweredcards issued for authentication, validation, or identification purposes thatare issued under the auspices of or endorsed by Visa, MasterCard, JCB, AmericanExpress, Europay, Carte Blanche, and Diners Club, and any devices capable ofmimicking or emulating any of the forgoing or that stores information from anyof the forgoing for use in conducting a transaction. We would be relieved ofour exclusive purchase commitments under the InCard-SmartDisplayer Agreement ifSmartDisplayer breaches its exclusivity obligations or if we locate analternate vendor that provides products of comparable quality and functionalityat a lower price. We assumed a similar agreement between SmartDisplayer andnCryptone, S.A. pursuant to the asset purchase agreement we entered into withnCryptone on June 28, 2006. The exclusive field in the nCryptone agreementis the use of certain OTP cards outside the exclusive field in the InCardSmartDisplayer Agreement.

 

SmartDisplayer is bound by certain monthly productioncapability commitments through July 2008. We place a 20% down paymentwithin seven days after purchase order is confirmed with the remainder to bepaid when production is completed.

 

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

 

This Agreement was amended on May 18, 2006 (the “SmartDisplayerAmendment”) whereby the exclusivity period was extended for three yearsbeginning on May 18, 2006, and clarifications were made concerning certainimprovements to the Company’s pre-existing intellectual property rights. Allsuch improvements, whether made by us or by SmartDisplayer, shall belong solelyto us. Pursuant to the SmartDisplayer Amendment, we ordered additionalelectronic paper modules and other components used for the DisplayCard.  The exclusivity provision of theInCard-SmartDisplayer Agreement was cancelled in November 2007 due to ourfailure to meet the minimum purchase commitments.

 

NCRYPTONE

 

On July 25, 2005, we entered into a Joint DevelopmentAgreement with nCryptone (formerly AudioSmartCard) which agreement wasterminated by mutual agreement of the parties on June 28, 2006 in relationto an asset contribution agreement of equal date. Under the Joint DevelopmentAgreement, both parties agreed to establish a mutually acceptable schedule andbudget for development and pre-production engineering of the SoundCard and theDisplayCard within 30 days after execution of the agreement and to equallyshare development costs for the SoundCard and DisplayCard and to share fixedprofit-sharing percentage for sales of LightCard, SoundCard, and DisplayCardfor Visa Banking Cards, non-Visa Banking Cards, and non-banking cards. We alsowere to receive a mutually agreed upon commission percentage of nCryptoneserver products and services for customers introduced by us.

 

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Additionally, we had the exclusive right tomanufacture and sell power inlays, or cores, that consist of proprietaryelectronic components for LightCard, SoundCard, and DisplayCard. If a thirdparty vendor produced cores at a significantly lower cost, we still wouldreceive a portion of gross profits and the remainder would be shared by bothparties in equal amounts of the remainder of the gross profit. If we reachedmaximum production capacity and nCryptone was unable to fill orders, theremaining cores could be produced by a third party vendor and both partieswould share equally the entire amount of gross profits as net profits.

 

Furthermore, all intellectual property rights prior tothis agreement were to remain the sole and exclusive property of such party.All new intellectual property rights relating to physical design andconstruction of the cards were to be the sole and exclusive property of InCard.All new intellectual property rights relating to patents and outside orphysical design and construction of the cards were to be shared equally by bothparties. The term of the agreement was 10 years, unless terminated earlierpursuant to the terms of the agreement.

 

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

 

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

 

**RESEARCH AND DEVELOPMENT**

 

We conduct research and development activities bothin-house and at an outside laboratory. We retain title rights to allimprovements or enhancements to our technology developed by or worked on by theoutside laboratory. We have purchased materials and components for our productsunder development from a number of technology companies.

 

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

 

**INTELLECTUAL PROPERTY**

 

We rely on a combination of patent, trademark andtrade secret laws as well as confidentiality procedures and contractualprovisions to protect our proprietary technology. We currently own eleven U.S.patents and twenty five foreign patents. Twenty-nine of these patents apply tothe LensCard, five of these patents apply to the LightCard, one of thesepatents applies to the SoundCard and one of these patents applies toour power inlay technology. We have fifteen foreign patent applicationspending, four of which relate to the LensCard and eleven to the LightCard. Theduration of the U.S. patents generally is 20 years from the date the original applicationwas filed. At this time, we do not have patent protection on our ICTDisplayCard technology.

 

We currently have trademarks registered for InCardTechnologies and the LensCard in the United States. We also have additionalmarks for which registration is pending.

 

From time to time, we may encounter disputes overrights and obligations concerning intellectual property. Also, the efforts wehave taken to protect our proprietary rights may not be sufficient oreffective. Any significant impairment of our intellectual property rights couldharm our business, our reputation, or our ability to compete. Also, protectingour intellectual property rights could be costly and time consuming.

 

**MANUFACTURING**

 

Although we continue to develop our own manufacturingprocess for the ICT DisplayCard, the ICT DisplayCard is presently beingmanufactured by a European company, NagraID. We supply NagraID with thenecessary component parts to manufacture ICT DisplayCards using NagraID’sproprietary process.

 

Presently, we are reliant on a sole source of supplyfor two major components of the ICT DisplayCard. The display is available onlyfrom SmartDisplayer. The battery is available only from Solicore, Inc. Thebattery is attached to the display by SmartDisplayer. If we are unable toprocure batteries from Solicore, we may have production delays of up to oneyear as we seek another source for batteries. If we are unable to procuredisplays from SmartDisplayer, we may have production delays of up to one yearas we seek another source for displays. If NagraID is unable to assemble thecomponent parts, we may have production delays of up to one year as we seekanother source for assembling our components. Although we intend to purchaseour batteries from Solicore, we are working with other battery manufacturers toproduce batteries suitable to our cards so that we are not reliant on onebattery supplier. Although we intend to purchase our displays from our currentsupplier, we are working with other display manufacturers to locate displayssuitable 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, weare trying to develop our own process and are researching other processes sothat we are not reliant on one manufacturer.

 

**MARKETING AND SALES**

 

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

 

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

 

**COMPETITION**

 

We are not aware of any product that is being massproduced 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 foruse in dual-factor authentication (as an item separate from the transactioncard). For example, RSA, Vasco, and VeriSign token devices may be costcompetitive to our technology but are not in a credit card form factor. SmartCard, biometrics, and software programs can provide multi-factor authenticationcompetitive to our ICT DisplayCard.

 

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

 

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

 

**GOVERNMENTAL REGULATION**

 

The development of our products is generally notsubject to government regulation. However, because we intend to market ourproducts in countries other than the United States, importation and exportationregulations may impact our activities. A breach of these laws or regulationsmay result in the imposition of penalties or fines, suspension or revocation oflicenses. We are not currently involved in any such judicial or administrativeproceedings and believe that we are in compliance with all applicableregulations.

 

Although it is impossible to predict the effect thatadditional import and export requirements and other regulations may have onfuture earnings and operations, we are presently unaware of any futureregulations that may have a material effect on our financial position, butcannot rule out the possibility.

 

**EMPLOYEES**

 

We have fifteen full-time employees, including ourChief Executive Officer/President and Chief Financial Officer. None of ouremployees is represented by a collective bargaining agreement, and we havenever experienced any work stoppage. We consider our relationships with ouremployees to be good.

 

**RISK FACTORS**

 

You should carefully consider the risks describedbelow as well as other information provided to you in this document, includinginformation in the section of this document entitled “*Special NoteRegarding Forward Looking Statements*.” The risks and uncertaintiesdescribed below are not the only ones facing the Company. Additional risks anduncertainties not presently known to us or that we currently believe areimmaterial may also impair our business operations. If any of the followingrisks actually occur, our business, financial condition or results ofoperations could be materially adversely affected, the value of our commonstock could decline, and you may lose all or part of your investment.

 

***We are an early stage companywith an unproven business strategy. Our limited history of operations makesevaluation of our business and prospects difficult.***

 

Our business prospects aredifficult to predict because of our limited operating history, early stage ofdevelopment and unproven business strategy. Since our incorporation on November 22,2002, we have primarily been and continue to be involved in development ofproducts using our power inlay technology and marketing these products toindustry partners. In 1998, Alan Finkelstein commenced commercialization of ourfirst product, the LensCard, and entered into license agreements with banks andcredit card issuers, most of which have terminated. After discovering thepossibility of placing power into an International Organization of Standards(ISO) compliant card, we began to focus our efforts on the development of ourpower inlay technology and not on the marketing of the LensCard. For thesereasons, we expect that future orders for the LensCard will be insignificant.We closed our first commercial sale of our ICT DisplayCard, which uses ourpower inlay technology, in the fourth quarter of 2007. Although managementbelieves that our power inlay technology and products under development havesignificant profit potential, we may not attain profitable operations and ourmanagement 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 significantnet losses every year since our inception, including net losses of $14,333,622and $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 inour research and development programs and general and administrative expenses.To date we have not generated significant revenues. We have used capital raisedin October 2005, May 2006 and January 2008 to sustain operationsthrough the date of this report. We anticipate that we will continue to incursubstantial operating losses based on projected sales revenues less manufacturing,general and administrative and other operating costs for an indefinite periodof time. However, we cannot assure you that we will ever be profitable.

 

9

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

 

We expect that our currentresources, including anticipated revenues, will be insufficient to sustain ouroperations past April 2008. Assuming that we continue to operate at our existing cost structure, ourcurrent resources will not be sufficient to fund operations for the next twelvemonths. As we are in the early stage of manufacturing and have not soldsubstantial quantities of our products, we are unable to determine the amountof additional capital we will need to become successful. Unless we are able togenerate significant sales from the ICT DisplayCard that cover themanufacturing costs and operating overhead, we will continue to incur netlosses that exceed our revenue. We currently do not have any bindingcommitments for, or readily available sources of, additional financing, and wecannot assure that such funding will be available at all or available on termsacceptable to us.

 

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

 

We obtain the battery, a keycomponent for our power inlay technology, from a single source on a purchaseorder basis from Solicore, Inc. In the event of a disruption ordiscontinuation in supply, we could not obtain replacement batteries on atimely basis, which would disrupt our operations, delay production for up to oneyear and impair our ability to manufacture and sell our products.

 

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

 

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

 

Our dependence upon outsidesuppliers exposes us to risks, including:

 

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

·                  the solvency ofour suppliers and the potential that our suppliers will be solely dependentupon us;

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

·                  reduced controlover pricing, quality and timely delivery, due to the difficulties in switchingto alternative suppliers;

·                  the potentialdelays and expense of seeking alternative sources of suppliers; and

·                  increases inprices of key components.

 

***If we are not able to devoteadequate resources to product development and commercialization, we may not beable to develop our products.***

 

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

 

·                  continuing tofund research and development endeavors;

·                  completedevelopment of new products; and

·                  successfullyintroduce and commercialize new products.

 

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

 

***If we or our suppliers fail to adequatelyprotect our proprietary rights, third parties could use our technology, or verysimilar technology, and could reduce our ability to compete in the market, andany proprietary rights litigation could be time-consuming and expensive toprosecute and defend.***

 

Establishment of patents and other proprietary rightsby us and our suppliers is important to our success and our competitiveposition. Performance in the payment card industry can depend, among otherfactors, on patent protection. Our policy is to identify patentable inventionsdeveloped by our company, and to seek to acquire patent rights for suchinventions. We mainly develop and patent technology in the fields of cardenhancements and methods of card manufacturing. We seek to obtain a reasonablybroad territorial protection for our patented technologies. We usually fileinitial patent applications in the United States, and subsequently filecorresponding applications in  foreign countries depending on the relevantcircumstances. We may elect to forego patent protection for some of ourproprietary technologies 

 

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and treat such technologies as trade secrets. Despiteour efforts to establish and protect our patents, trade secrets or other proprietaryrights, unauthorized parties may attempt to copy aspects of our technology orto obtain and use information that we regard as proprietary. In addition, thelaws of some foreign countries do not protect our proprietary rights as much asthe laws of the United States protect them. Our means of establishing andprotecting our proprietary rights may not be adequate, and our competitors mayindependently develop similar technology, duplicate our products or designaround our patents or our other proprietary rights.  We do not have patent protection for our ICTDisplayCard.

 

Due to the importance ofproprietary technology in the payment card industry, our business involves arisk of overlap with third party patents and subsequent litigation withcompetitors or patent-holders. Any claims, with or without merit, could betime-consuming, result in costly litigation, or cause us to enter intolicensing agreements

 

***We depend on key personnel in acompetitive market for skilled employees, and failure to retain and attractqualified personnel could substantially harm our business.***

 

We rely to a substantialextent on the management, marketing and product development skills of our keyemployees and consultants, particularly Steven Delcarson, our President andChief Executive Officer, Charles Caporale, our ChiefFinancial Officer, and Craig Nelson, who supervises the manufacturing andtesting of the ICT DisplayCard, to formulate and implement our business plan,including the development of our power inlay technology. Our success depends toa significant extent upon our ability to retain and attract key personnel.Competition for employees can be intense in the payment card industry, and theprocess of locating key personnel with the right combination of skills is oftenlengthy. The loss of the services of our key personnel may significantly delayor prevent the achievement of product development and could have a materialadverse effect on us.

 

***If our future products do notachieve a significant level of market acceptance, it is highly unlikely that weever will become profitable.***

 

To our knowledge, noenterprise or on-line banking token issuers have adopted power-based cardenhancements to date using our power inlay technology on a mass quantity basis.As a result, our ability to enable enterprises to improve and add cardfunctionality, reduce attrition and increase acquisition rates, and enhancesecurity and anti-fraud protection for customers through power-based cardenhancements has yet to be proven. The commercial success of our futureproducts will depend upon the adoption of our power inlay technology as apreferred method of applying card enhancements to payment cards. In order to besuccessful, our future products must meet the technical and cost requirementsfor card enhancements within the payment card industry. Market acceptance willdepend on many factors, including:

 

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

·                  the willingnessand ability of prospective strategic partners and customers to adopt ourproducts; and

·                  our ability tosell and service sufficient quantities of our products.

 

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

 

***We have granted third partiessubstantial marketing rights to certain of our products and products underdevelopment. 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 marketingpartners contain no minimum purchase requirements in order for them to maintaintheir exclusive marketing rights. In the future, third-party marketingassistance may not be available on reasonable terms, if at all. If marketingpartners do not order adequate quantities of our products or if we are unableto procure third-party marketing assistance on reasonable terms, we may not beable to commercialize our products, which could negatively impact our resultsof operations or substantially limit our ability to execute our businessstrategy.

 

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

 

Until and unless we securemultiple customer relationships in the enterprise and on-line bankingmarketplaces, we may experience periods during which we will be highlydependent on one or a limited number of customers. Dependence on a single or afew customers will make it difficult to satisfactorily negotiate attractiveprices for our products and will expose us to the risk of substantial losses ifa single dominant customer stops conducting business with us. Moreover, to theextent that we may be dependent on any single customer, we could be subject tothe risks faced by that customer to the extent that such risks impede thecustomer’s ability to stay in business and make timely payments to us.

 

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*** ***

***The power inlay technology hasnot been proven in full scale production. Failure to develop the prototypescale into mass production may have a material negative effect on our businessstrategy and operations***.

 

Our power inlay technologyhas been proven solely during the manufacture of cards in prototype quantities.We have developed an automated process in our laboratory and are now working onmass production. However, our product has yet to be proven to be manufacturedin full scale mass production. We are applying our own resources and working incooperation with other companies that have specialized technical expertiserelated to the power inlay technology for thin, flexible non-payment cards. Weexpect to enter into agreements that will grant us ownership or exclusivelicense rights to the manufacturing process of the power inlay technology foruse in credit and other information-bearing plastic cards. Failure to secure ormaintain exclusive rights or failure of the prototype technology tosuccessfully transfer to full scale production, without the use of proprietarytechnology of others, may have a material negative effect on our businessstrategy and operations.

 

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

 

To be successful, we mustmanufacture, or contract for the manufacture of, our future products incompliance with industry standards and on a timely basis, while maintainingproduct quality and acceptable manufacturing costs. As discussed in the riskfactor above, we are working in cooperation with other companies that havespecialized technical expertise related to the manufacturing process of ourpower inlay technology for the ICT DisplayCard. We also currently use a limitednumber of sources for most of the supplies and services that we use in themanufacturing of our power inlay technology and prototypes. Our manufacturingstrategy presents the following risks:

 

·                  delays in thequantities needed for product development could delay commercialization of ourproducts in development;

·                  if we need tochange to other commercial manufacturers, any new manufacturer would have to beeducated in, or develop substantially equivalent processes necessary for, theproduction of our products;

·                  if marketdemand for our products increases suddenly, our current manufacturers might notbe able to fulfill our commercial needs, which would require us to seek newmanufacturing arrangements and may result in substantial delays in meetingmarket demand; and

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

 

Any of these factors coulddelay commercialization of our products under development, entail higher costsand result in our being unable to effectively sell our products.

 

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

 

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

 

We believe that theprincipal competitive factors that affect the market for tokens includeconvenience, price, quality/reliability, ease of use, and distribution cost. Wecannot assure you that we will be able to maintain our competitive positionagainst current and potential competitors, especially those with significantmarketing, service, support, technical and other competitive resources.

 

Some of our present andpotential competitors have significantly greater financial, technical,marketing, purchasing and other resources than we do, and as a result, may beable to respond more quickly to new or emerging technologies and changes incustomer requirements, or to devote greater resources to the development,promotion and sale of products, or to deliver competitive products at a lowerend-user price. Current and potential competitors have established or mayestablish cooperative relationships among themselves or with third parties toincrease the ability of their products to address the needs of our prospectivecustomers. It is possible that new competitors or alliances may emerge andrapidly acquire significant market share. We cannot guarantee that we will beable to compete successfully against present or future competitors or thatcompetitive 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 totrading restrictions as a “penny stock,” which could adversely affect theliquidity and price of such stock.***

 

As long as the trading priceof our common stock is below $5.00 per share, the open-market trading of ourcommon stock will be a “low-priced” security under the “penny stock” rules promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”). The “penny 

 

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stock” rules imposeadditional sales practice requirements on broker-dealers who sell securities topersons other than established customers and accredited investors (generallythose with assets in excess of $1,000,000 or annual income exceeding $200,000or $300,000 together with their spouse). In accordance with these rules,broker-dealers participating in transactions in low-priced securities mustfirst deliver a risk disclosure document that describes the risks associatedwith such stocks, the broker-dealer’s duties in selling the stock, the customer’srights and remedies and certain market and other information. Furthermore, thebroker-dealer must make a suitability determination approving the customer forlow-priced stock transactions based on the customer’s financial situation,investment experience and objectives. Broker-dealers must also disclose theserestrictions in writing to the customer, obtain specific written consent fromthe customer, and provide monthly account statements to the customer. Theserestrictions will probably decrease the willingness of broker-dealers to make amarket in our common stock, decrease liquidity of our common stock and increasetransaction costs for sales and purchases of our common stock as compared toother securities, which could reduce the price of our common stock and thevalue of any investment you make in our shares. We make no guarantee that our market-makers will makea market in our common stock, or that any market for our common stock willcontinue.

 

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

 

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

 

***We do not anticipate paying anycash dividends in the foreseeable future, which may reduce your return on aninvestment in our common stock.***

 

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

 

***Substantial future sales of ourcommon stock in the public market may depress our stock price, which couldresult in significant losses to you and could limit our ability to raisecapital.***

 

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 pursuantto Rule 144 under the Securities Act of 1933. Of our 5,302,098 warrantsoutstanding, 4,500,223 have been registered and common stock issued on exercisecan be sold pursuant to a prospectus. 2,194,498 shares issuable upon exerciseof options issued under our 2004 Stock Incentive Plan were registered as well.

 

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

 

***We may raise additional capitalthrough a securities offering that could dilute your ownership interest andvoting rights.***

 

Our certificate ofincorporation currently authorizes our board of directors to issue up to75,000,000 shares of common stock and 5,000,000 shares of preferred stock. Asof March 12, 2008, after taking into consideration our outstanding commonand preferred shares, our board of directors will be entitled to issue up to46,566,884 additional common shares and 5,000,000 preferred shares. The powerof the board of directors to issue these shares of common stock, preferredstock or warrants or options to purchase shares of our stock is generally notsubject to stockholder approval.

 

We may require additionalworking capital to fund our business. If we raise additional funds through theissuance of equity, equity-related or convertible debt securities, thesesecurities may have rights, preferences or privileges senior to those of theholders of our common stock. The issuance of additional common stock orsecurities convertible into common stock by our board of directors will alsohave the effect of diluting the proportionate equity interest and voting powerof holders of our common stock.  Wecannot assure you that we will be able to raise additional capital on termsthat are acceptable to us, or at all.

 

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*** ***

***Our ownership is highlyconcentrated in a few individuals, and as a result, the trading price for ourshares may be depressed and these stockholders can take actions that may beadverse to your interests.***

 

Our principal stockholders,executive officers and directors, in the aggregate, beneficially ownapproximately 35% of our common stock including options held by each principalstockholder, executive officer and director that are exercisable within 60 daysof March 12, 2008. These stockholders, acting together, will have theability to exert substantial influence over all matters requiring approval byour stockholders, including the election and removal of directors and anyproposed merger, consolidation or sale of all or substantially all of ourassets. In addition, they could dictate the management of our business andaffairs. 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. Thissignificant concentration of share ownership may also adversely affect thetrading price for our common stock because investors may perceive disadvantagesin owning stock in companies with controlling stockholders. An adverse effecton the trading price of our common stock could cause you to incur a significantloss on any investment you make in our common stock.

 

***Our incorporation documents andDelaware law may inhibit a takeover that stockholders consider favorable andcould also limit the market price of your stock, which may inhibit an attemptby our stockholders to change our direction or management.***

 

Our amended and restatedcertificate of incorporation and bylaws contain provisions that could delay orprevent a change in control of our company. Some of these provisions:

 

·                  authorize ourboard of directors to determine the rights, preferences, privileges andrestrictions granted to, or imposed upon, the preferred stock and to fix thenumber of shares constituting any series and the designation of such serieswithout further action by our stockholders;

·                  prohibitstockholders from calling special meetings;

·                  prohibitcumulative voting in the election of directors, which would otherwise allowless than a majority of stockholders to elect director candidates;

·                  establishadvance notice requirements for submitting nominations for election to theboard of directors and for proposing matters that can be acted upon by stockholdersat a meeting; and

·                  prohibitstockholder action by written consent, requiring all stockholder actions to betaken at a meeting of our stockholders.

 

In addition, we are governedby the provisions of Section 203 of the Delaware General Corporate Law.These provisions may prohibit large stockholders, in particular those owning15% 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 ourmanagement or the direction in which we are heading. These and other provisionsin our amended and restated certificate of incorporation and bylaws and underDelaware law could reduce the price that investors might be willing to pay forshares of our common stock in the future and result in the market price beinglower than it would be without these provisions.

 

***New rules, including thosecontained in and issued under the Sarbanes-Oxley act of 2002, may make itdifficult for us to retain or attract qualified officers and directors, whichcould adversely affect the management of our business and our ability to obtainor retain listing of our common stock.***

 

We may be unable to attractand retain qualified officers, directors and members of board committeesrequired to provide for our effective management as a result of the recent andcurrently proposed changes in the rules and regulations that governpublicly held companies, including, but not limited to, certifications fromexecutive officers and requirements for financial experts on the board ofdirectors. The perceived increased personal risk associated with these recentchanges may deter qualified individuals from accepting these roles. Theenactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of aseries of new rules and regulations and the strengthening of existing rules andregulations by the Securities and Exchange Commission (the “SEC”). Further,certain of these recent and proposed changes heighten the requirements forboard or committee membership, particularly with respect to an individual’sindependence from the corporation and level of experience in finance andaccounting matters. We may have difficulty attracting and retaining directorswith the requisite qualifications. If we are unable to attract and retainqualified officers and directors, the management of our business could beadversely affected.

 

***If we are unable to complete ourassessment as to the adequacy of our internal control over financial reportingwithin the required time periods as required by Section 404 of theSarbanes-Oxley Act of 2002, or in the course of such assessments identify andreport material weaknesses in our controls, investors could lose confidence inthe reliability of our financial statements, which could result in a decreasein the value of our common stock.***

 

As directed by Section 404 of the Sarbanes-OxleyAct of 2002, the SEC adopted rules requiring public companies to include areport of management on internal control over financial reporting in theirAnnual Reports on Form 10-K. This report is required to contain anassessment by management of the effectiveness of a company’s internal controlover financial reporting. Our non-affiliated market 

capitalization qualified us as a non-accelerated fileruntil the end of the 2007 fiscal year. As a result, we are required to includeour management’s report on internal control over financial reporting in thisAnnual Report on Form 10-KSB for the 2007 fiscal year and will not berequired to include our auditors’ attestation report on our internal controlover financial reporting until we file our Annual Report on Form 10-K forthe 2008 fiscal year. As discussed in detail below in the section entitled“Controls and Procedures – Internal Control over Financial Reporting,” we haveconcluded that, as of December 31, 2007, our internal control over financialreporting was not effective and have identified a number of material weaknessesin our internal control over financial reporting. While we intend to remedythese weaknesses during the current fiscal year, we may be unable to do so. Ifwe fail to implement required new or improved controls, or if our auditors areunable to attest to the effectiveness of our internal control over financialreporting when we file our Annual Report on Form 10-K for the 2008 fiscal year,there may be

 

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an adverse reaction in the financial markets due to aloss of confidence in the reliability of our financial statements, which couldcause the market price of our common stock to decline.

 

***If we trigger an “event ofdefault” under our debt agreement, the debt holders could require us to repaythe loan in full and force a sale of all of our assets to do so, which couldcause 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 ofdefault.” Failure to remain in compliance could prompt investors to call thedebt and demand immediate repayment. We could be forced to seek bankruptcyprotection 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 thedisposal of our assets are insufficient to repay the loan in full, commonshareholders will receive nothing for their stock and suffer a total loss ontheir investments in us.

 

**ITEM 2 - DESCRIPTION OF PROPERTY**

 

We do not own any real property. Our corporate officeis 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. Wehave agreed under the terms of the sublease to pay 32.5% of any additionalrents or charges due from our sublandlord to the master landlord. This subleaseexpires on July 31, 2009.  We expectthat this property will be adequate for our needs for the near to medium term.

 

**ITEM 3 - LEGAL PROCEEDINGS**

 

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

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

The following matters were voted on and approved bystockholders 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 2008annual meeting of stockholders.

**2.**The ratification of the appointment of Singer LewakGreenbaum & Goldstein LLP as the Company’s independent registeredpublic accounting firm for the 2007 fiscal year.

**3.**The approval of an amendment to the Company’sCertificate of Incorporation to increase the total number of shares of commonstock which the Company is authorized to issue from 50,000,000 shares to75,000,000 shares.

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

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

 The number of votes cast at the annual meetingfor 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 |       | 16,652               |       |                              |       |
| Election of W. Robert Ramsdell                                                                      |       | 20,920,394 |       | 16,652               |       |                              |       |
| Election of Maoshing Ni                                                                             |       | 20,918,234 |       | 18,812               |       |                              |       |
| Election of Richard Nathan                                                                          |       | 20,917,294 |       | 19,752               |       |                              |       |
| Election of Scott V. Ogilvie                                                                        |       | 20,917,294 |       | 19,752               |       |                              |       |
| Election of Henry L. Treddenick III                                                                 |       | 20,918,294 |       | 18,752               |       |                              |       |
| Ratification of appointment of Singer Lewak Greenbaum &  Goldstein LLP                     |       | 20,859,360 |       | 14,441               |       | 63,244                            |       |
| Approval of amendment to Certificate of Incorporation to increase  authorized common stock          |       | 20,824,937 |       | 96,708               |       | 15,400                            |       |
| Approval of amendment to increase shares of common stock available  under 2004 Stock Incentive Plan |       | 10,109,571 |       | 131,076              |       | 10,696,399                        |       |
| Approval of 2007 Equity Incentive Plan                                                              |       | 10,124,326 |       | 126,931              |       | 10,685,789                        |       |

 

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**PART II**

 

**ITEM 5 - MARKET FOR COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

On March 9, 2007, we were listed on the NASDAQCapital Market and trade under the symbol “INVC”. From October 18, 2005 toMarch 8, 2007, our common stock traded on the OTC Bulletin Board under thesymbol “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 andoutstanding. The following table sets forth the high and low close informationas reported by Nasdaq Capital Market and includes the high and low bidinformation for our common stock as reported by the OTC Bulletin Board withrespect to prices preceding the listing of our stock on the Nasdaq CapitalMarket:

 

**QUARTERLYCOMMON STOCK PRICE RANGES**

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

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

 

The OTC Bulletin Board quotations reflect inter-dealerprices, without retail mark-up, mark-down or commission and may not representactual transactions. As of March 15, 2008, there were approximately40       stockholders of record of our commonstock 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 ofour business and do not anticipate paying any dividends on our stock in theforeseeable future.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 

Our board of directors and stockholders approved our2004 Stock Incentive Plan in August 2004. Our 2007 Equity Incentive Plan was approved by our board of directors inSeptember 2007 and by our stockholders in December 2007.  The following table provides information asof December 31, 2007 about common stock that may be issued upon theexercise of options, warrants and rights under our 2004 Stock Incentive Planand 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       |                                                                                                                                                  | 2,741,489  |   |
|                                                    |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Equity compensation plans  not approved by stockholders |       | N/A                                                                                                 |       | $                                                                                  | N/A        |                                                                                                                                                  | N/A        |   |
|                                                    |       |                                                                                                |       |                                                                               |       |                                                                                                                                                  |       |
| Total                                                   |       | 3,488,011                                                                                           |       | $                                                                                  | 2.10       |                                                                                                                                                  | 2,741,489  |   |

 

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

 

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

 

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

 

**OVERVIEW**

 

Since 2002, we have continued to develop our powerinlay technology that is designed to bring power-based applications to theenterprise market and on-line banking market. Our present focus is the ICTDisplayCard power inlay technology which consists of a battery, circuit, andswitch that can power applications on credit card sized cards and otherinformation-bearing plastic cards. We have devoted a majority of our efforts tocompleting the development of our power inlay technology, initiating marketingand raising the financing required to do so and fund our expenses. We havegenerated limited revenues that derive from licensing agreements of ourLensCard product, most of which have terminated. At this time, we have no plansto renew the LensCard licensing agreements or to further market or sell theLensCard, unless requested by a customer.

 

Since inception, we have been unprofitable. We incurrednet 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 anaccumulated deficit of $28,067,183. Our continued existence is dependent uponour ability to obtain additional financing, as we have not been able tosuccessfully sell the ICT DisplayCard in substantial quantities. We furtheranticipate that after such introduction of the ICT DisplayCard in 2008, we willcontinue to incur net losses due to our costs exceeding our revenues for anindefinite period of time. Our capital requirements for the next 12 months forretention and hiring of key personnel, implementation of a sales force for ourproducts, and further research and development relating to the production ofour power inlay technology will continue to be significant. To date, ouroperations have been funded primarily through equity and debt financingstotaling $25,303,691.

 

We believe that we currentlyhave enough cash to meet our short term needs and continue our currentoperations through early spring 2008. We anticipate that we will not be able togenerate sales of the ICT DisplayCard in substantial quantities until thesecond half of 2008 to support our cash needs since the sales cycle for thatproduct is longer than originally anticipated. To maintain exclusivity undersome of our agreements, we purchased inventory and made deposits prior toorders being received from customers. These inventory purchases and depositsalong with our operating expenses have collectively reduced the Company’s cashresources since we have not been able to sell our acquired inventory or utilizeour deposits with suppliers or otherwise replenish such cash. As such, we willbe required to raise operating capital in order to continue our currentoperations. We have engaged an investment advisor to explore capital raisingopportunities.

 

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

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

Revenue recognition. We recognize revenues inaccordance 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 anddeterminable and collectability is reasonably assured. We recognize certainlong-term contracts using the complete-contract method in accordance with SOP81-1, “Accounting for Performance of Construction-Type and CertainProduction-Type of Contracts.”

 

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

 

We anticipate that the majority of our revenues in thecoming year will come from the ICT DisplayCard. We intend to sell these cardsthrough resellers.  We do not recognizerevenue when we sell the ICT DisplayCard in small quantities under a test orpilot program.  Cash receipts from thesetransactions are used to offset research and development expenses.

 

The revenue generated from the LensCard and LightCardis negligible, and we expect that the sales of these products will have noimpact on our results of operations.

 

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

 

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

 

Inventory. Our inventories are valued at the lower ofcost or market. We use estimates and judgments regarding the valuation ofinventory to properly value inventory. Inventory adjustments are made for thedifference between the cost of the inventory and the estimated market value andcharged to operations in the period in which the facts that give rise to theadjustments become known.

 

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Research and Development. Costs of research anddevelopment, principally the design and development of hardware and softwareprior to the determination of technological feasibility, are expensed asincurred.

 

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

 

We assess the carrying value of long-lived assets inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.” During the year ended December 31, 2007, weincurred an impairment charge of $1,000,010 for the write down of our buzzerpatent.  During the year ended December 31,2006, we did not recognize any impairment to intangible assets or property andequipment.

 

Stock Based Compensation. On January 1, 2006, weadopted SFAS No. 123 (R), “Share Based Payment,” which establishesstandards for the accounting of transactions in which an entity exchanges itsequity instruments for goods or services, primarily focusing on accounting fortransactions where an entity obtains employee services in share-based paymenttransactions. SFAS No.123(R) requires a public entity to measure the costof 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 torecognize it as compensation expense over the period the employee is requiredto provide service in exchange for the award, usually the vesting period. TheCompany has selected the modified prospective method of transition. SFAS No.123(R) supersedesthe Company’s previous accounting under Accounting Principles Board (APB)Opinion No. 25, *Accounting for StockIssued 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 AND2006**

 

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 saleof the ICT DisplayCard.  In the 2006period, revenue was from recognition of deferred revenue on LensCard royaltiesreceived from a terminated licensing agreement. We believe that future revenuewill be primarily from the sales of the ICT DisplayCard; revenue from LensCardroyalties is expected to be negligible.

 

Cost of Goods Sold consists of costs to manufacturethe ICT DisplayCard in 2007.  There wasno cost of goods associated with the royalty revenue recognized in 2006.  Total cost of goods sold increased from $0for the year ended December 31, 2006 to $276,620 for the year ended December 31,2007. We believe that future cost of goods sold will be primarily from the ICTDisplayCard.

 

Administrative expense consists of travel andmarketing expenses, compensation expense, administrative fees and depreciationand 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 theyear ended December 31, 2007. The increase is primarily due to the hiringof additional employees, insurance costs, compensation expenses relating tovesting of employee and director’s stock options of $2,121,751, and travelexpenses relating to business development. We anticipate that administrativeexpenses will increase in 2008 as we incur increased costs associated withestablishing our operations.

 

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

 

Professional fees consist of amounts paid to ouroutside counsel, auditors and to providers of other outside services renderedto the Company.  Professional feesexpense 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 expenseincreased due to legal fees for the maintenance and establishment of theCompany’s intellectual property rights, costs relating to the acquisition ofcertain assets of nCryptone, due diligence costs related to the potentialacquisition by us of one of our suppliers, and the legal and accounting feescosts associated with being a public company. We anticipate that professionalfees will continue to increase as we will have to assess our internal controlspursuant to Sarbanes-Oxley and the related legal costs associated with being apublic company.

 

Research and development expense consists primarily ofcosts relating to the continued testing and quality control analysis of the ICTDisplayCard. Research and development costs decreased from $1,896,499 for theyear ended December 31, 2006 to $1,352,413 for the year ended December 31,2007, a decrease of $544,086, or 29%, due to increased testing expenses at oneof our major suppliers offset by a reduction of expenses related to priorproducts.  We expect our research and developmentexpenses to increase as we continue to invest in developing enhancements of ourICT DisplayCard with one time password.

 

During the year ended December 31, 2007 ouranalysis of long lived intangible assets determined that the value we hadassigned to a buzzer patent acquired from nCryptone in June 2006 was notrecoverable.  Accordingly, we impairedthe full value of the asset during the year ended December 31, 2007.

 

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

 

Inventory Writeoffs and Reserves. Inventory writeoffsand reserves consist of expenses to record obsolete inventory.  Inventory writeoffs and reserves decreasedfrom $791,818 for the year ended December 31, 2006 to $575,017 for theyear ended December 31, 2007. The reduction is due to a decreased amountof battery write-offs in 2007. In 2006, the reduced shelf lives of batteries onhand rendered them unusable. We anticipate that inventory writeoffs andreserves will decrease as we anticipate that our projected sales during thefirst part of 2008 will utilize our standing inventory.

 

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

 

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Interest expense increased from $1,239 for the yearended 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 notbeen settled.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

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

 

Net cash used in operating activities was $7,945,470for the year ended December 31, 2007 as compared with $5,990,620 for theyear ended December 31, 2006. The increase in cash used was due primarilyto the cost of increased personnel, increased professional fees, deposits madefor raw materials inventory, and purchase of raw materials for production.

 

Net cash used in investing activities was $21,351 forthe 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 ofproduction equipment purchased during the year ended December 31, 2007.

 

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

 

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

 

Our auditors have included a “going concern” caveat intheir unqualified opinion of our 2007 financial statements signifying thatwithout additional capital doubt exists concerning our ability to survive untilyear-end 2008.

 

**EQUITY AND DEBT FINANCINGS ANDACCOUNTS PAYABLE**

 

On December 23, 2003, we entered into aSecurities Purchase Agreement with Bristol Capital, LLC under which we were tosell a unit that consisted of 500,000 shares of our common stock and warrantsto purchase 2,400,000 shares of our common stock at an exercise price of $1.00per share in exchange for $50,000. On May 5, 2004, we received $50,000from Bristol Capital, LLC and issued 500,000 shares of our common stock andwarrants 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 privateequity financing pursuant to which we raised gross proceeds of $6,500,000 andconverted $571,066 of indebtedness. The transaction was a unit offering,pursuant to which each investor or debt holder received a unit comprised of oneshare of restricted common stock and warrants convertible into 0.50 shares ofrestricted common stock, resulting in the placement of an aggregate 7,071,066shares of restricted common stock and warrants convertible into an additional3,535,533 shares of restricted common stock. The warrants have an exerciseprice of $1.25 per share and expire on October 19, 2010. The financing wasarranged by TR Winston & Company, a fund manager, which received a netcommission of 6% of the total gross proceeds and a warrant to purchase 780,000shares of the Company’s common stock at an exercise price of $1.25 per sharethat expires on October 19, 2010. Additionally, we issued a warrant topurchase 117,600 shares of our common stock at an exercise price of $1.25 pershare that expires on October 19, 2010 to C.E. Unterberg, Towbin, LLCpursuant 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 resultof 14,500 warrants being exercised by a warrant holder. On June 26, 2006we received $6,250 as a result of 5,000 warrants being exercised by a warrantholder. On July 24, 2006, we received $6,250 as a result of 5,000 warrantsbeing exercised by a warrant holder.

 

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On May 30, 2006, we issued 3,785,500 shares ofcommon stock at a price of $3.00 per share to accredited investors pursuant toa private placement for total gross proceeds of $11,356,500. T.R. Winston &Company served as placement agent for the securities sold in this transactionand received a net commission of 5% of the total gross proceeds and a warrantto purchase 113,565 shares of our common stock at an exercise price of $3.30per share that expire on May 30, 2011. The shares of common stock weissued and the shares of common stock underlying warrants issued on May 30,2006 have full ratchet anti-dilution protection for 12 months. If during 12months following May 30, 2006, we obtain additional capital through theissuance of equity securities, other than the issuance of shares of commonstock or securities convertible into or exchangeable for common stock of InCardin connection with (i) any mergers or acquisitions of securities,business, property or other assets (ii) joint ventures or other strategiccorporate transactions, (iii) any other transaction, the primary purposeof which is not to raise capital for the company, (iv) the exercise of anoption 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 boardand our stockholders, the holders of these then-existing shares will receivefull ratchet anti-dilution protection.

 

On June 28, 2006, we purchased rights relating tothe ICT DisplayCard from nCryptone for 4,500,000 shares of our common stock andacquired 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 duringthe year ended December 31, 2007.

 

On January 8, 2008, we entered into a SecuritiesPurchase Agreement (the “Purchase Agreement”) with 13 institutional andaccredited investors (the “Purchasers”). Pursuant to the terms of the PurchaseAgreement, the Purchasers purchased $3.5 million of our 8% Senior SecuredConvertible Debenture (“Debenture”). The Debenture: (i) bears interest at8% per year, paid quarterly in cash or registered common stock, at ourdiscretion; (ii) has a maturity of January 8, 2011, (iii) isconvertible at the holder’s option into shares of our common stock at $2.50 pershare, (iv) is secured by all of our and our subsidiary’s assets includinginventory, receivables, unencumbered equipment and intellectual property underthe terms of a Security Agreement, and (v) has a forced conversion featurewhich allows us to force the conversion of the Debenture if our common stocktrades above $5.00 for 20 consecutive trading days and certain other conditionsare met. We also issued to the Purchasers five-year common stock purchasewarrants 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 thefinancing for our working capital requirements and to pay down certainobligations.

 

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

 

We agreed to grant registration rights to theinvestors, by filing a registration statement covering the shares of commonstock issuable upon the conversion of the Debenture, exercise of the Warrants,and issuable as interest payments, within 30 days of the closing, and obtainingeffectiveness of the registration statement within 90 days after the closing.These dates have been extended to June 7, 2008.  Our officers, directors, and 10% stockholdersalso agreed to execute lock-up letter agreements prohibiting sales of ourcommon stock by them until July 30, 2008. In connection with thetransaction, we also secured voting agreements from our officers, directors and10% stockholders approving the transaction in the event that we are required toseek such approval pursuant to the rules of the NASDAQ.

 

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

 

The securities offered in the financing have not beenregistered under the Securities Act of 1933, as amended, and may not be offeredor sold in the United States absent registration or an applicable exemptionfrom registration requirements. We relied upon the exemption from securitiesregistration afforded by Rule 506 of Regulation D as promulgated by theUnited States Securities and Exchange Commission under the Securities Act of1933, as amended (the “Securities Act”) and/or Section 4(2) of theSecurities Act. No advertising or general solicitation was employed in offeringthe securities. The offerings and sales were made to a limited number ofpersons, all of whom were accredited investors, and transfer was restricted byour company in accordance with the requirements of the Securities Act of 1933.In addition to representations by the above-referenced persons, we made independentdeterminations that all of the above-referenced persons were accredited orsophisticated investors, and that they were capable of analyzing the merits andrisks of their investment, and that they understood the speculative nature oftheir investment. Furthermore, all of the above-referenced persons wereprovided 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 throughthe early spring of 2008.  We will needadditional capital and we do not have any binding commitments for, or readilyavailable sources of, additional financing. Additional financing, whetherthrough public or private equity or debt financing, arrangements withstockholders or other sources to fund operations, may not be available, or ifavailable, may be on terms unacceptable to us. Our ability to maintainsufficient liquidity is dependent on our ability to raise additional capital.If we issue additional equity securities to raise funds, the ownershippercentage of our existing stockholders would be reduced. New investors maydemand rights, preferences or privileges senior to those of existing holders ofour common stock. Debt incurred by us would be senior to equity in the abilityof debt holders to make claims on our assets. The terms of any debt issuedcould impose restrictions on our operations. If adequate funds are notavailable to satisfy our capital requirements, our operations and liquiditycould be materially adversely affected.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

We do not have any off-balance sheet transactions.

 

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**NEW ACCOUNTING PRONOUNCEMENTS**

 

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), whichamends SFAS No. 133, “Accounting for Derivatives Instruments and HedgingActivities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”).SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only andprincipal-only strips on debt instruments to include only such stripsrepresenting rights to receive a specified portion of the contractual interestor principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifyingspecial-purpose entities to hold a passive derivative financial instrumentpertaining to beneficial interests that itself is a derivative instrument. Theadoption of   this new Standard did nothave a material impact on the Company’s financial position, results ofoperations or cash flows.

 

In July 2006, the FASB issued FASB Interpretation(“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—An Interpretationof FASB Statement No. 109. FIN No. 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, Accounting for Income Taxes. Itprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This new standard also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. The provisions of FIN No. 48 are tobe applied to all tax positions upon initial adoption of this standard. Onlytax positions that meet the more-likely-than-not recognition threshold at theeffective date may be recognized or continue to be recognized upon adoption ofFIN No. 48. The cumulative effect of applying the provisions of FIN No. 48should be reported as an adjustment to the opening balance of retained earnings(or other appropriate components of equity or net assets in the statement offinancial position) for that fiscal year. The provisions of FIN No. 48 areeffective for fiscal years beginning after December 15, 2006. Earlierapplication is permitted as long as the enterprise has not yet issued financialstatements, including interim financial statements, in the period of adoption.The adoption of FIN No. 48 did not have a material impact on the Company’sfinancial 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 fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy. SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years, with early adoption permitted. TheCompany is currently determining the effect, if any, the adoption of SFAS No. 157will have on the Company’s financial statements.

 

In February 2007, the FASB issued Statement ofFinancial Accounting Standard No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. Unrealized gains and losses on items for which the fairvalue option has been elected are reported in earnings. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. We are currentlyevaluating the impact of implementing SFAS 159 on our consolidated financialstatements; however we anticipate that SFAS 159 will not have a material impacton 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 AdvancePayments for Goods or Services To Be Used in Future Research and DevelopmentActivities (EITF 07-3) which concluded that nonrefundable advance payments forgoods and services to be received in the future for use in research anddevelopment should be deferred and capitalized. The capitalized amounts should be expensed as the related goods aredelivered or services are performed. Such capitalized amounts should be charged to expense if expectationschange such that the goods will not be delivered or services will not beperformed.  The provisions of EITF 07-3are effective for new contracts entered into during fiscal years beginningafter December 15, 2007.  Theconsensus may not be applied to earlier periods and early adoption is notpermitted.  The adoption of this standardhad no impact on the Company’s financial position, results of operations, orcash flows.

 

In December 2007 the FASBissued SFAS 160 “Non-controlling Interests in Consolidated Financial Statements—anamendment of ARB No. 51”.  This Statementamends ARB 51 to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a non-controlling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements. This Statement changes the way the consolidated income statement ispresented. It requires consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the non-controllinginterest. It also requires disclosure, on the face of the consolidatedstatement of income, of the amounts of consolidated net income attributable tothe parent and to the non-controlling interest. This Statement establishesdisclosure requirements in the consolidated financial statements, which willenable users to clearly distinguish between the interests of the parent’sowners and the interests of the non-controlling owners of a subsidiary. SFAS160 is effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2008; earlier adoption is prohibited.Management anticipates that the adoption of this standard will have no impactto the Company’s financial position, results of operations, or cash flows.

 

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

 

In December 2007, the FASBissued No. 141 (revised 2007), “Business Combinations”, which replaces SFAS No.141. SFAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired and the liabilities assumed, any non-controlling interest in theacquiree and the goodwill acquired. This Statement also establishes disclosurerequirements which will enable users to evaluate the nature and financialeffects of the business combination. This Statement is effective for business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. Management anticipates that theadoption of this statement will have no impact to the Company’s financialposition, results of operations, or cash flows.

 

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**ITEM 7 - FINANCIAL STATEMENTS**

 

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

 

**ITEM 8 - CHANGES IN AND DISAGREEMENTSWITH 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 ofthe Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisreport (December 31, 2007).  Based onsuch evaluation, our CEO and CFO have concluded that, as of the end of such period,the Company’s disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by the Company in the reports that it files or submits underthe Exchange Act and are effective in ensuring that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is accumulated and communicated to the Company’s management,including the Company’s CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure. 

 

**Internal Control over FinancialReporting**

 

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

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting.  Ourinternal control over financial reporting has been designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles generally accepted in the UnitedStates of America.

 

Our internal control over financial reporting includes policies andprocedures that pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect transactions and dispositions of assetsof the Company; provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withaccounting principles generally accepted in the United States of America, andthat receipts and expenditures are being made only in accordance withauthorization of our management and directors; and provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on our financialstatements.

 

Because of its inherentlimitations, our internal control over financial reporting may not prevent ordetect misstatements. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation. Projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

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

 

Based on our assessment,management believes that, as of December 31, 2007, our internal controlover financial reporting was not effective based on those criteria.  The following material weaknesses wereidentified in our internal control over financial reporting:

 

22

----

 

·                  We performed a financial close on a quarterly basisonly.  The analysis of actual to budgetedresults was either done marginally or not at all and there was no mechanism inplace to evaluate variances, investigate unusual activity or communicatefindings to senior management or the board of directors. The financial closeprocess is not formally documented.

·                  During the quarterly financial close we did notutilize a financial closing checklist to ensure that all items had beenconsidered for inclusion in the three quarterly filings of Form 10-QSB.

·                  We are unable to maintain the proper segregation ofvarious accounting and finance duties because of our small size and limitedresources.   At risk areas include cashreceipts and payments, processing of journal entries and accountreconciliations.

·                  We do not maintain a standard listing of recurringjournal entries.  We rely on the previousquarter’s journal entries during the closing process and may overlookadjustments that need to be made to ensure our financial statements arepresented fairly.

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

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

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

·                  Board and management turnover during 2007 resulted inan uneven “tone at the top”.  The currentCEO 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 jobdescriptions do not exist, annual reviews are not performed and an organizationchart was not developed until January 2008.

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

·                  We did not properly account for modifications made tostock option grants in accordance with SFAS 123(R) resulting in a late journalentry being made to prevent the financial statements from being misleading.

 

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

 

Notwithstanding thesematerial weaknesses, we believe that our financial condition, results ofoperations and cash flows presented in this report of Form 10-KSB arefairly presented in all material respects.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting. Management’s report wasnot subject to attestation by the Company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Company to provide only management’s report in this annual report.

 

***(b) Changesin internal control over financial reporting***

 

There were no significantchanges in our internal controls or, to our knowledge, in other factors thatcould significantly affect our internal controls subsequent to the evaluationdate.

 

**ITEM 8B -****OTHERINFORMATION**

 

None.

 

**PART III**

 

**ITEM 9.****OFFICERSAND DIRECTORS**

 

Information regarding our executive officers anddirectors is incorporated by reference to the information set forth under thecaption “ *Directors and Executive Officers*“ in our Proxy Statement for the Annual Meeting of Stockholders to be filedwith the Commission within 120 days after the end of our year ended December 31,2007.

 

We have a Code of Business Conduct and Ethics for allof our employees, including our Chief Executive Officer, Chief FinancialOfficer and Principal Accounting Officer. The purpose of the code is to ensurethat our business is conducted in a consistently legal and ethical matter. Wehave posted the text of the code on our website at www.incardtech.com. We willpost any material amendments or waivers to the code on our website. We willprovide a copy of our code free of charge to any person upon request by writingto us at the following address: 10880 Wilshire Blvd. Suite 950 LosAngeles, CA 90024 Attn: Corporate Secretary.

 

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

 

Information regarding executive compensation isincorporated by reference to the information set forth under the caption “ *Executive Officer Compensation* “ in ourProxy Statement for the Annual Meeting of Stockholders to be filed with theCommission within 120 days after the end of our year ended December 31,2007.

 

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

 

Information regarding security ownership of certainbeneficial owners and management is incorporated by reference to theinformation set forth under the caption “ *VotingSecurities Of Principal Stockholders And Management”* in our ProxyStatement for the Annual Meeting of Stockholders to be filed with theCommission within 120 days after the end of our year ended December 31,2007.

 

23

----

 

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

 

Information regarding certain relationships andrelated transactions is incorporated by reference to the information set forthunder the caption *“Certain Transactions”*in our Proxy Statement for the Annual Meeting of Stockholders to be filed withthe Commission within 120 days after the end of our year ended December 31,2007.

 

**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, 2004       |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                    |
|   2.2(2)  |   | Exchange agreement by and among the registrant, Alan  Finkelstein,  Bradley Ross and Michael Paradise, dated April 1,  2004                                   |
|                |   |                                                                                                                                                                    |
|   2.3(2)  |   | Exchange agreement between the registrant and its  wholly-owned subsidiary, PSACo, Inc., dated April 1, 2004                                                  |
|                |   |                                                                                                                                                                    |
|   2.4(2)  |   | Merger agreement between the registrant and LensCard  International Limited, a British Virgin Islands International Business  Company, dated April 6, 2004         |
|                |   |                                                                                                                                                                    |
|   3.1(2)  |   | Amended and Restated Certificate of incorporation of  the registrant, as currently in effect                                                                            |
|                |   |                                                                                                                                                                    |
|   3.2(2)  |   | Amended and Restated Bylaws of the registrant, as  currently in effect                                                                                                  |
|                |   |                                                                                                                                                                    |
|   3.3(12) |   | Certificate of Amendment of Amended and Restated  Certificate of Incorporation.                                                                                         |
|                |   |                                                                                                                                                                    |
| 10.1(2)             |   | 2004 Stock Incentive Plan                                                                                                                                               |
|                |   |                                                                                                                                                                    |
| 10.2(2)             |   | Sublease agreement between registrant and  Bemel & Ross for premises at 11601 Wilshire Blvd.,#2160, Los  Angeles, California 90025, dated January 5, 2003 |
|                |   |                                                                                                                                                                    |
| 10.3(2)             |   | Guaranty of lease between Alan Finkelstein and  Bemel & Ross, dated January 5, 2003                                                                       |
|                |   |                                                                                                                                                                    |
| 10.4(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, 2003                                                                 |
|                |   |                                                                                                                                                                    |
| 10.5(a) (2)         |   | Waiver of section 2.3 of the securities purchase  agreement between registrant and Bristol Capital, LLC                                                                 |
|                |   |                                                                                                                                                                    |
| 10.6(2)             |   | Shares for debt agreement between registrant and  Alan Finkelstein, dated June 22, 2004                                                                            |
|                |   |                                                                                                                                                                    |
| 10.7(2)             |   | Shares for debt agreement between registrant and  Bradley Ross, dated June 22, 2004                                                                                |
|                |   |                                                                                                                                                                    |
| 10.8(2)             |   | Shares for debt agreement between registrant and Luc  Berthoud, dated June 22, 2004                                                                                |
|                |   |                                                                                                                                                                    |
| 10.9(2)             |   | Promissory note (loan no. 00003) between registrant  and City National Bank, dated May 24, 2004                                                                    |
|                |   |                                                                                                                                                                    |
| 10.10(2)            |   | Promissory note (loan no. 00005) between registrant  and City National Bank, dated May 24, 2004                                                                    |
|                |   |                                                                                                                                                                    |
| 10.11(2)            |   | Promissory note (1oan no. 00004) between registrant  and City National Bank, dated May 24, 2004                                                                    |
|                |   |                                                                                                                                                                    |
| 10.12(2)            |   | Promissory note (loan no. 00006) between registrant  and City National Bank, dated May 24 ,2004                                                                    |

 

24

----

 
| 10.13  | (2)    |   | Commercial guaranty between Alan Finkelstein and  City National Bank dated May 24, 2004                                                                     |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                             |
| 10.14  | (2)    |   | Commercial guaranty between Bradley Ross and City  National Bank dated May 24, 2004                                                                         |
|   |   |   |                                                                                                                                                             |
| 10.15  | (2)    |   | Commercial guaranty between Luc Berthoud and City  National Bank dated May 24, 2004                                                                         |
|   |   |   |                                                                                                                                                             |
| 10.16  | (2)    |   | Offer letter between registrant and Murdoch Henretty  dated July 28, 2004                                                                                   |
|   |   |   |                                                                                                                                                             |
| 10.17  | (2)    |   | Employment agreement between registrant and Alan  Finkelstein dated January 1998                                                                            |
|   |   |   |                                                                                                                                                             |
| 10.18  | (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, 2005                                               |
|   |   |   |                                                                                                                                                             |
| 10.20  | (2)    |   | Secured Demand Promissory Note between registrant  and Bristol Investment Fund, Ltd. dated March 30, 2005                                                   |
|   |   |   |                                                                                                                                                             |
| 10.21  | (2)    |   | Capital Lease Agreement between registrant and CNC  Associates, Inc. dated November 30, 2004                                                           |
|   |   |   |                                                                                                                                                             |
| 10.22  | (2)    |   | Guaranty between Alan Finkelstein and CNC  Associates, Inc. dated November 30, 2004                                                                    |
|   |   |   |                                                                                                                                                             |
| 10.23  | (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, 2005                                                                   |
|   |   |   |                                                                                                                                                             |
| 10.26  | (2)    |   | Secured Demand Promissory Note between registrant  and Rodger Bemel dated August 31, 2005                                                                   |
|   |   |   |                                                                                                                                                             |
| 10.27  | (2)    |   | Joint Development Agreement between registrant and  nCryptone dated July 25, 2005                                                                           |
|   |   |   |                                                                                                                                                             |
| 10.28  | (2)    |   | Agreement between registrant and SmartDisplayer  Technology, Inc. dated July 25, 2005                                                                  |
|   |   |   |                                                                                                                                                             |
| 10.29  | (5)    |   | Form of Lock-Up agreement by and between  registrant’s directors and executive officers pursuant to the private  placement dated October 19, 2005 |
|   |   |   |                                                                                                                                                             |
| 10.30  | (4)    |   | Form of Warrant pursuant to private placement  dated October 19, 2005                                                                                  |
|   |   |   |                                                                                                                                                             |
| 10.31  | (4)    |   | Registration Rights Agreement by and between the  registrant and each investor pursuant to the private placement dated  October 19, 2005                    |
|   |   |   |                                                                                                                                                             |
| 10.32  | (4)    |   | Side Letter Agreement between the registrant, T.R.  Winston & Company and investors pursuant to the private placement  dated October 19, 2005      |

 

25

----

 
| 10.33        | (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, SA                                                                            |
|         |   |   |                                                                                                                                                                          |
| 10.39        | (10)   |   | License Agreement dated June 28, 2006 by and  between Registrant as licensor and NCryptone, SA as licensee                                                               |
|         |   |   |                                                                                                                                                                          |
| 10.40        | (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 Ethics                                                                                                                                                                |
|         |   |   |                                                                                                                                                                          |
| 21.1         | (2)    |   | List of subsidiaries                                                                                                                                                          |
|         |   |   |                                                                                                                                                                          |
| 23.1         | (1)    |   | Consent of Independent Registered Public Accounting  Firm for Registration Statements (No. 333-137033 and 333-149844) on  Form S-8.                                 |
|         |   |   |                                                                                                                                                                          |
| 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 1934                        |
|         |   |   |                                                                                                                                                                          |
| 31.2         | (1)    |   | Certification of Chief Financial Officer, as  required by Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934                        |
|         |   |   |                                                                                                                                                                          |
| 32           | (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                                                                         |

 

26

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

 

Information regarding accounting fees and disclosuresis incorporated by reference to the information set forth under the caption *“Fees Paid to Independent Auditors”* in ourProxy Statement for the Annual Meeting of Stockholders to be filed with theCommission within 120 days after the end of our year ended December 31,2007.

 

27

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**INNOVATIVECARD TECHNOLOGIES, INC.**

 

**CONTENTS**

 

**DECEMBER31, 2007AND DECEMBER 31, 2006**

 
| ** **                                               | **Page**   |
|----------------------------------------------------------|------------|
|                                                     |       |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM | F-2        |
|                                                     |       |
| CONSOLIDATED  FINANCIAL STATEMENTS                       |       |
|                                                     |       |
| Consolidated Balance Sheets                              | F-3        |
|                                                     |       |
| Consolidated  Statements of Operations                   | F-4        |
|                                                     |       |
| Consolidated  Statements of Shareholders’ Equity    | F-5        |
|                                                     |       |
| Consolidated  Statements of Cash Flows                   | F-6 - F-7  |
|                                                     |       |
| Notes to Consolidated  Financial Statements              | F-8 - F-19 |

 

F-1

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors and Shareholders

Innovative Card Technologies, Inc.

Los Angeles, California

 

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

 

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

 

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

 

The accompanying consolidated financial statementshave been prepared assuming that Innovative Card Technologies, Inc. willcontinue as a going concern.  Asdiscussed in Note 1 to the consolidated financial statements, the Company hassuffered recurring losses and has negative cash flows from operations.  This raises substantial doubt about theCompany’s ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note 1.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

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

 

We were not engaged to examine management’s assertionabout the effectiveness of Innovative Card Technologies, Inc’s. internalcontrol over financial reporting as of December 31, 2007 included in theaccompanying Management’s annual report on internal control over financialreporting  and, accordingly, we do notexpress an opinion thereon.

 

**/s/ SINGER LEWAK GREENBAUM &GOLDSTEIN LLP**

 

Los Angeles, California

March 31, 2008

 

F-2

----

 

**INNOVATIVECARD TECHNOLOGIES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

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

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-3

----

 

**INNOVATIVECARD TECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                         | ** ** | **Year Ended**        | ** **  | **Year Ended**        | ** ** |
|----------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                         | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
| ** **                                         | ** ** | **2007**              | ** **  | **2006**              | ** ** |
|                                               |       |                  |        |                  |       |
| Revenues                                           |       | $                     | 445,000     |                  | $          | 35,382 |   |
| Cost of Goods Sold                                 |       | (276,620              | )           | —                |       |
| Gross Margin                                       |       | 168,380               |        | 35,382                |       |
|                                               |       |                  |        |                  |       |
| Operating expenses                                 |       |                  |        |                  |       |
|                                               |       |                  |        |                  |       |
| Administrative                                     |       | 8,389,987             |        | 4,000,117             |       |
| Consulting Fees                                    |       | 641,884               |        | 419,978               |       |
| Impairment                                         |       | 1,000,010             |        |                  |       |
| Unrecoverable payments to suppliers                |       | 1,546,428             |        |                  |       |
| Inventory write-offs and reserves                  |       | 575,017               |        | 791,818               |       |
| Professional Fees                                  |       | 1,157,781             |        | 917,882               |       |
| Research and development                           |       | 1,352,413             |        | 1,104,681             |       |
|                                               |       |                  |        |                  |       |
| Total operating expenses                           |       | 14,663,520            |        | 7,234,476             |       |
|                                               |       |                  |        |                  |       |
| Loss from operations                               |       | (14,495,140           | )           | (7,199,094            | )          |
|                                               |       |                  |        |                  |       |
| Other income (expense)                             |       |                  |        |                  |       |
|                                               |       |                  |        |                  |       |
| Interest income                                    |       | 183,793               |        | 336,119               |       |
| Interest expense                                   |       | (21,475               | )           | (1,239                | )          |
|                                               |       |                  |        |                  |       |
| Total other income  (expense)                      |       | 162,318               |        | 334,880               |       |
|                                               |       |                  |        |                  |       |
| Loss 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 thesefinancial statements.

 

F-4

----

 

**INNOVATIVECARD TECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)**

**FOR THEYEARS ENDED DECEMBER 31, 2007 AND 2006**

 
| ** **                                                                                            | ** ** | **Series A  Preferred Stock** | ** ** | **Common  Stock** | ** ** | **Additonal Paid-in   Capital** | ** ** | **Accumulated Deficit** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------------|------------|---------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                                            | ** ** | **Shares**                         | ** ** | **Amount**        | ** ** | **Shares**                      | ** ** | **Amount**              | ** ** | ** ** | ** ** | **Total** | ** ** |
|                                                                                                  |       |                               |       |              |       |                            |       |                    |       |       |       |   |   |   |   |
| Balance, December 31, 2005                                                                       |       | —                             |       | $                 | —     |                            | 17,964,566 |                    | $          | 17,965     |       | $ | 10,347,710 |   | $ | (6,866,947 | ) | $ | 3,498,728 |   |
| Exercise of warrants                                                                                  |       | —                             |       | —            |       | 400,100                         |       | 400                     |       | 437,225    |       | — |   | 437,625 |   |
| Issuance of shares of Common Stock                                                                    |       | —                             |       | —            |       | 3,785,500                       |       | 3,785                   |       | 11,352,715 |       | — |   | 11,356,500 |   |
| Offering 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  |       | — |   | 3,468,405 |   |
| Share-based compensation expense                                                                      |       | —                             |       | —            |       | —                          |       | —                  |       | 472,598    |       | — |   | 472,598 |   |
| Cashless exercise of warrants                                                                         |       | —                             |       | —            |       | 1,722,142                       |       | 1,722                   |       | (1,722     | )          | — |   | — |   |
| Warrant compensation expense                                                                          |       | —                             |       | —            |       | —                          |       | —                  |       | 1,253,493  |       | — |   | 1,253,493 |   |
| Net loss                                                                                              |       | —                             |       | —            |       | —                          |       | —                  |       | —     |       | (6,866,614 | ) | (6,866,614 | ) |
| Balance, December 31, 2006                                                                       |       | —                             |       | —            |       | 28,372,308                      |       | 28,372                  |       | 26,298,606 |       | (13,733,561 | ) | 12,593,417 |   |
|                                                                                                  |       |                               |       |              |       |                            |       |                    |       |       |       |   |   |   |   |
| Exercise of warrants                                                                                  |       |                               |       |              |       | 32,000                          |       | 32                      |       | 39,968     |       |   |   | 40,000 |   |
| Cashless exercise of options                                                                          |       |                               |       |              |       | 28,808                          |       | 29                      |       | (3,704     | )          |   |   | (3,675 | ) |
| Share-based compensation expense                                                                      |       |                               |       |              |       |                            |       |                    |       | 2,121,751  |       |   |   | 2,121,751 |   |
| Net 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 thesefinancial statements.

 

F-5

----

 

**INNOVATIVECARD TECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                  | ** ** | **For the Years Ended  December 31,** | ** **  |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                  | ** ** | **2007**                                   | ** **  | **2006** | ** ** |
|                                                                        |       |                                       |        |   |   |
| Cash flows from operating  activities                                       |       |                                       |        |   |   |
| Net loss                                                                    |       | $                                          | (14,333,622 | ) | $ | (6,866,614 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities |       |                                       |        |   |   |
| Depreciation and  amortization                                              |       | 779,466                                    |        | 488,390 |   |
| Stock compensation expense                                                  |       | 2,121,751                                  |        | 472,598 |   |
| Warrant compensation  expense                                               |       | —                                     |        | 809,000 |   |
| Impairment 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                                  |        | 207,356 |   |
| Increase (decrease) in  warranty reserve                                    |       | 27,816                                     |        |   |   |
|                                                                        |       |                                       |        |   |   |
| Increase (decrease) in  Accounts payable - related parties                  |       | (664,905                                   | )           | 307,149 |   |
| Increase (decrease) in  Deferred revenue                                    |       | 558,575                                    |        | 302,867 |   |
| Net cash used in operating  activities                                      |       | (7,945,470                                 | )           | (5,990,620 | ) |
| Cash flows from investing  activities                                       |       |                                       |        |   |   |
| Purchase of Property and  Equipment                                         |       | (21,351                                    | )           | (218,786 | ) |
| Net cash used in investing  activities                                      |       | 21,351                                     |        | (218,786 | ) |
| Cash flows from financing  activities                                       |       |                                       |        |   |   |
|                                                                        |       |                                       |        |   |   |
| Proceeds from exercise of  warrants                                         |       | 36,325                                     |        | 437,625 |   |
| Proceeds from 5/30/06  Common Stock offering                                |       | —                                     |        | 11,356,500 |   |
| Offering costs- 5/30/06  Common Stock offering                              |       | —                                     |        | (582,825 | ) |
| Payments on capital lease                                                   |       | —                                     |        | (9,330 | ) |
| Net cash provided by  financing activities                                  |       | 36,325                                     |        | 11,201,970 |   |
| Net increase (decrease) in  cash and cash equivalents                       |       | (7,930,496                                 | )           | 4,992,564 |   |
| Cash and cash equivalents,  beginning of year                               |       | 8,270,096                                  |        | 3,277,532 |   |
| Cash and cash equivalents,  end of period                                   |       | $                                          | 339,600     |   | $ | 8,270,096 |   |

 

The accompanying notes are an integral part of thesefinancial statements

 

F-6

----

 

**INNOVATIVECARD TECHNOLOGIES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

Supplemental disclosures of cash flow

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

 

Supplemental schedule of non-cash investing andfinancing activities

 

During the year ended December 31, 2006:

 

On May 30, 2006, the Company issued warrants topurchase 113,565 shares of common stock at an exercise price of $3.30 to T.RWinston in conjunction with the Company’s May 30, 2006 financing andrecognized $444,493 in offering costs relating to the issuance of thesewarrants.

 

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

 

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

 

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

 

During the year ended December 31, 2007:

 

On January 12, 2007 employees cashlesslyexercised 35,002 stock options resulting in the issuance of 28,808 shares ofcommon stock.

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-7

----

 

**NOTE 1 - ORGANIZATION AND LINE OFBUSINESS**

 

**BASIS OF PRESENTATION**

 

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

 

The Company has a historyof recurring losses from operations and has an accumulated deficit of $28,067,183as of December 31, 2007. As of March 15, 2008, the Company hadavailable cash and cash equivalents totaling $425,860.   Sales of the ICT DisplayCard, the Company’smain product, are not expected to generate adequate revenue until the secondhalf of 2008.  Until that time, theCompany will require additional cash funding to purchase inventory, meetselling, general and administrative expenses and to continue research anddevelopment efforts associated with the ICT DisplayCard.  As a result, there is substantial doubt aboutthe Company’s ability to continue as a going concern. The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern. This basis of accounting contemplates therecovery of the Company’s assets and the satisfaction of liabilities in thenormal course of business and this does not include any adjustments to reflectthe possible future effects on the recoverability and classification of assetsor the amounts and classification of liabilities that might be necessary shouldthe Company be unable to continue as a going concern.   The Company is actively seeking additionalfunding to finance its continuing operations. There can be no assurances that funds will be available to the Companywhen needed or, if available, that such funds would be available underfavorable terms.  In the event that theCompany cannot obtain additional funds in the near future, the Company may seekprotection under bankruptcy laws.

 

**COMPANY OVERVIEW**

 

The Company develops and markets secure powered cardsfor payment, identification, physical and logical access applications. Our mainproduct, the ICT DisplayCard, integrates the security of a one-time passwordtoken directly into a card the size of a standard credit or debit card. A tokenis a portable physical device, typically in a key-fob form factor, thatgenerates the one-time password (also referred to as a one-time passcode). Atthe 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, thisnumber is entered into a user interface with other information (such as theuser’s static PIN and login name). This information is relayed to a backendsystem for multi-factor authentication. InCard does not provide the backendauthentication server, but rather will integrate the ICT DisplayCard intoauthentication systems provided by other companies including distributors andother resellers of the ICT DisplayCard. The ICT DisplayCard’s OTPauthentication works like tokens issued by VASCO, RSA, and ActivIdentity, butin a more convenient, wallet-sized card form factor.

 

**NOTE 2 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**PRINCIPLESOF CONSOLIDATION**

 

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

 

**REVENUERECOGNITION**

 

The Company recognizes revenue in accordance with SECStaff Accounting Bulletin No. 104, or SAB 104. Revenue is recognized whenpersuasive evidence of an arrangement exists, delivery has occurred or serviceshave been rendered, the price is fixed and determinable and collectibility isreasonably assured.   Revenue is notrecognized on product sales transacted on a test or pilot basis.  The Company recognizes certain long-termcontracts using the completed-contract method in accordance to SOP 81-1, “Accountingfor Performance of Construction-Type and Certain Production-Type of Contracts.”

 

**COMPREHENSIVEINCOME**

 

The Company utilizes Statement of Financial AccountingStandards (“SFAS”) No. 130, “Reporting Comprehensive Income.” Thisstatement establishes standards for reporting comprehensive income and itscomponents in a financial statement. Comprehensive income as defined includesall changes in equity (net assets) during a period from non-owner sources.Examples of items to be included in comprehensive income, which are excludedfrom net income, include foreign currency translation adjustments, minimumpension liability adjustments, and unrealized gains and losses onavailable-for-sale securities. Comprehensive income is not presented in theCompany’s financial statements since the Company did not have any changes inequity from non-owner sources.

 

**INVENTORY**

 

The Company values its inventory at the lower of cost(first-in, first-out) or market. The Company uses estimates and judgmentsregarding the valuation of inventory to properly value inventory. Inventoryadjustments are made for the difference between the cost of the inventory andthe estimated market value and charged to operations in the period in which thefacts that give rise to the adjustments become known.

 

**INTANGIBLEASSETS AND LONG-LIVED ASSETS**

 

The cost incurred to acquire intangible assets, whichare active and relate to products with a definitive life cycle, are amortizedover the estimated useful life of three to five years. The Company assesses thecarrying value of long-lived assets in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” The Company assesses theimpairment of identifiable intangibles and long-lived assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Factors considered important that could trigger an impairmentreview include, but are not limited to, the following: a significantunderperformance to expected historical or projected future operating results,a significant change in the manner of the use of the acquired asset or thestrategy for the overall business, or a significant negative industry oreconomic trend. Based on anticipated future income and cash flows and otherfactors relevant in the opinion of the Company’s management, the buzzer patentwas completely impaired during the year ended December 31, 2007.

 

F-8

----

 

**CASH ANDCASH EQUIVALENTS**

 

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

 

**MAJORSUPPLIERS**

 

The Company obtains the battery, a key component forthe Company’s power inlay technology, from a single source, Solicore, Inc.,on a purchase order basis. The Company believes that alternative sources forthis component in the event of a disruption or discontinuation in supply wouldnot be available on a timely basis, which could disrupt Company operations,delay production for up to twelve months and impair the Company’s ability tomanufacture and sell products.

 

The Company obtains the display, a key component forthe Company’s ICT DisplayCard, from a single source, SmartDisplayer, pursuantto the Company’s agreement with SmartDisplayer. On November 10, 2007, the Companywas 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 exclusivitywith SmartDisplayer.  The Company has apurchase commitment with SmartDisplayer to purchase inventory through July 2008worth $1,181,020. The Company believes that alternative sources for thiscomponent in the event of a disruption or discontinuation in supply would notbe available on a timely basis, which could disrupt Company operations relatingto the ICT DisplayCard, delay production of the ICT DisplayCard for up to twelvemonths and impair the Company’s ability to manufacture and sell the ICTDisplayCard.

 

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

 

**MAJORCUSTOMERS**

 

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

 

**PROPERTYAND EQUIPMENT**

 

Property and equipment are stated at cost. The Companyprovides for depreciation and amortization using the double-declining methodover estimated useful lives of five to seven years. Expenditures for maintenanceand repairs are charged to operations as incurred while renewals andbetterments are capitalized. Gains or losses on the sale of property andequipment are reflected in the statements of operations.

 

**FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The Company’s financial instruments include cash andcash equivalents, prepaid expenses and other current assets, due from relatedparties, accounts payable and accrued expenses, advances payable, and deferredrevenue. The book value of all financial instruments are representative oftheir fair values.

 

**RESEARCHAND DEVELOPMENT**

 

Research and development costs are charged tooperations as incurred.

 

**LOSS PERSHARE**

 

The Company utilizes SFAS No. 128, “Earnings perShare.” Basic loss per share is computed by dividing loss available to commonshareholders by the weighted-average number of common shares outstanding.Diluted loss per share is computed similar to basic loss per share except thatthe denominator is increased to include the number of additional common shares thatwould have been outstanding if the potential common shares had been issued andif the additional common shares were dilutive. Common equivalent shares areexcluded 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 wereexcluded 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 equivalentsof 4,646,598 warrants and 2,351,000 stock options were excluded from thecalculation of diluted loss per share for the year ended December 31,2006.

 

**INCOMETAXES**

 

The Company utilizes SFAS No. 109, “Accountingfor Income Taxes,” which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns. Under this method,deferred income taxes are recognized for the tax consequences in future yearsof differences between the tax bases of assets and liabilities and theirfinancial reporting amounts at each year-end based on enacted tax laws andstatutory tax rates applicable to the periods in which the differences areexpected to affect taxable income. Also, the Company adoptedthe provisions of the Financial Accounting Standards Board (“FASB”)Interpretation No.48, “Accounting for Uncertainty in Income Taxes-anInterpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007.As a result of the implementation of FIN 48, the Company made a comprehensivereview of its portfolio of uncertain tax positions in accordance withrecognition standards established by FIN 48. As a result of this review, theCompany concluded that at this time there are no uncertain tax positions otherthan an uncertain tax position relating to the limitations imposed on tax losscarryforwards by Internal Revenue Code Section 382. As a result of applying theprovisions of FIN 48, there was no cumulative effect on retained earnings.

 

In 2007, the Company adopted SFAS No. 48, “Accountingfor Uncertainty in Income Taxes” and identified an uncertain tax positionrelating to the limitation imposed on tax loss carryforwards by InternalRevenue Code Section 382.

 

F-9

----

 

**STOCKINCENTIVE PLAN**

 

The Company accounts for its stock incentive planunder SFAS No. 123R, “Share-Based Payments”, which it adopted in 2006,using the fair value based method. Under this method, compensation cost ismeasured at the grant date based on the value of the award and is recognizedover the service period, which is usually the vesting period.

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued a revision to FASB Statement No. 123, “Share-BasedPayment,” “SFAS No. 123(R)”. This Statement supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. This Statement establishes standardsfor the accounting for transactions in which an entity exchanges it equityinstruments for goods or services. It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. This Statement is effective for publicentities that file as small business issuers as of the beginning of the firstinterim 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 requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

**CONCENTRATIONSOF CREDIT RISK**

 

Financial instruments which potentially subject theCompany to concentrations of credit risk consist of cash and cash equivalents.The Company places its cash and cash equivalents with high credit, qualityfinancial institutions. At times, such cash and cash equivalents may be inexcess of the Federal Deposit Insurance Corporation insurance limit of$100,000.  At times, cash balances are inexcess of the insured limit.

 

**RECLASSIFICATION**

 

Certain amounts included in the prior year financialstatements have been reclassified to conform with the current yearpresentation. Such reclassification did not have any effect on the reported netloss.

 

F-10

----

 

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), whichamends SFAS No. 133, “Accounting for Derivatives Instruments and HedgingActivities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”).SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only andprincipal-only strips on debt instruments to include only such stripsrepresenting rights to receive a specified portion of the contractual interestor principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purposeentities to hold a passive derivative financial instrument pertaining tobeneficial interests that itself is a derivative instruments. The adoptionof  this new Standard did not have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets” (“SFAS 156”). SFAS 156 addressesthe accounting for recognized servicing assets and servicing liabilitiesrelated to certain transfers of the servicer’s financial assets and foracquisitions or assumptions of obligations to service financial assets that donot relate to the financial assets of the servicer and its related parties.SFAS 156 requires that all recognized servicing assets and servicingliabilities are initially measured at fair value, and subsequently measured ateither fair value or by applying an amortization method for each class ofrecognized servicing assets and servicing liabilities. SFAS 156 is effective infiscal years beginning after September 15, 2006. The adoption of SFAS 156did not have a material impact on the Company’s financial position, results ofoperations or cash flows.

 

In July 2006, the FASB issued FASB Interpretation(“FIN”) No. 48, Accounting for Uncertainty in Income Taxes—AnInterpretation of FASB Statement No. 109. FIN No. 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109, Accounting forIncome Taxes. It prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. This new standard also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. The provisions of FIN No. 48are 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 atthe effective date may be recognized or continue to be recognized upon adoptionof FIN No. 48. The cumulative effect of applying the provisions of FIN No. 48should be reported as an adjustment to the opening balance of retained earnings(or other appropriate components of equity or net assets in the statement offinancial position) for that fiscal year. The provisions of FIN No. 48 areeffective for fiscal years beginning after December 15, 2006. Earlierapplication is permitted as long as the enterprise has not yet issued financialstatements, including interim financial statements, in the period of adoption.The adoption of FIN No. 48 did not have a material impact on the Company’sfinancial 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 fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. Under thestandard, fair value measurements would be separately disclosed by level withinthe fair value hierarchy. SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years, with early adoption permitted. TheCompany is currently determining the effect, if any, the adoption of SFAS No. 157will have on the Company’s financial statements.

 

In February 2007, the FASB issued Statement ofFinancial Accounting Standard No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value. Unrealized gains and losses on items for which the fairvalue option has been elected are reported in earnings. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the impact of implementing SFAS 159 on our consolidatedfinancial statements, however the Company anticipates that SFAS 159 will nothave a material impact on the Company’s financial position, results ofoperations or cash flows.

 

In December 2007 the FASB issuedSFAS 160 “Non-controlling Interests in Consolidated Financial Statements—anamendment of ARB No. 51”.  This Statementamends ARB 51 to establish accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a non-controlling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements. This Statement changes the way the consolidated income statement ispresented. It requires consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the non-controllinginterest. It also requires disclosure, on the face of the consolidated statementof income, of the amounts of consolidated net income attributable to the parentand to the non-controlling interest. This Statement establishes disclosurerequirements in the consolidated financial statements, which will enable usersto clearly distinguish between the interests of the parent’s owners and theinterests of the non-controlling owners of a subsidiary. SFAS 160 is effectivefor fiscal years, and interim periods within those fiscal years, beginning onor after December 15, 2008; earlier adoption is prohibited. Managementanticipates that the adoption of this standard will have no impact to theCompany’s financial position, results of operations, or cash flows.

 

In March 2008 the FASBissued SFAS 161 “Disclosures about Derivative Instruments and HedgingActivities—an amendment of FASB Statement No. 133”.  This Statement changes the disclosurerequirements for derivative instruments and hedging activities. Entities arerequired to provide enhanced disclosures about (a) how and why an entity uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under Statement 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. This Statement is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008; earlier adoption is encouraged.  Management has not yet determined what impactthe adoption of this statement will have on the Company’s financial position,results of operations, or cash flows.

 

In December 2007, the FASBissued No. 141 (revised 2007), “Business Combinations”, which replaces SFAS No.141. SFAS 141R establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired and the liabilities assumed, any non-controlling interest in theacquiree and the goodwill acquired. This Statement also establishes disclosurerequirements which will enable users to evaluate the nature and financialeffects of the business combination. This Statement is effective for business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008. Management anticipates that theadoption of this statement will have no impact to the Company’s financialposition, results of operations, or cash flows.

 

F-11

----

 

**NOTE 3 - DEPOSITS FOR RAW MATERIALSHELD FOR PRODUCTION**

 
| ** **                                                                                  | ** ** | **December 31,  2007** | ** ** | **December 31,    2006** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------------|------------|
|                                                                                        |       |                        |       |                               |       |
| Deposits on raw materials  held for production (display & manufacturing component) |       | $                           | 605,662    |                               | $          | 1,199,453 |   |
| TOTAL                                                                                       |       | $                           | 605,662    |                               | $          | 1,119,453 |   |

 

These deposits for raw materials are held by twovendors, are not refundable and are made pursuant to agreements as discussed inNote 2 under Major Suppliers.

 

**NOTE 4 - RAW MATERIALS AND WORK INPROGRESS INVENTORY HELD FOR PRODUCTION**

 

Raw materials and work in progress inventory held forproduction at December 31, 2007 and 2006 consisted of the following and arestated 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  |       | 1,098,553 |       |
| TOTAL                              |       | $        | 2,202,219  |      | $          | 1,098,553 |   |

 

**NOTE 5 - PROPERTY AND EQUIPMENT**

 

Property and equipment at December 31, 2007 and2006 consisted of the following:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Computer equipment                              |       | $        | 96,451     |     | $          | 55,672 |   |
| Office equipment                                |       | 8,168    |       | 8,168    |       |
| Furniture and fixtures                          |       | 24,386   |       | 19,878   |       |
| Production equipment,  capital lease            |       | —   |       | 32,598   |       |
| Leasehold improvements                          |       | 5,608    |       | 5,610    |       |
| Production equipment                            |       | 277,474  |       | 473,736  |       |
|                                            |       | 412,087  |       | 595,662  |       |
| Less 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.

 

F-12

----

 

**NOTE 6 - INTANGIBLE ASSETS**

 

Upon review of the report received from the thirdparty valuation firm that assisted the Company with the valuation of theintangible assets acquired from nCryptone in 2006, the Company allocated thepurchase price by assigning a value of $3,030,000 to intangible assets and$1,000,010 to a patent license fee. The $1,000,010 patent license fee, whichwas 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 totalpurchase price allocation of the DisplayCard assets of nCryptone is summarizedas follows:

 
|  Common Stock:          |   | $      | 3,468,405 |   |
|------------------------------|--------|--------|-----------|--------|
|                         |   |   |      |
|  Total Purchase  Price: |   | $      | 3,468,405 |   |

 

The Company’s allocation of the purchase price issummarized as follows:

 
| Assets:             |   |    |      |
|---------------------|--------|---------|-----------|
| Intangible Assets   |   | $       | 3,030,000 |   |
| Accounts Receivable |   | 14,830  |      |
| Equipment           |   | 25,619  |      |
| Inventory           |   | 397,956 |      |
| Total Assets        |   | $       | 3,468,405 |   |

 

$2,900,000 of acquired intangibles has been assignedto developed technologies and $130,000 has been assigned to a non-competitionagreement, which are subject to periodic amortization over the estimated usefullives of five and three years, respectively.

 

Amortization expense for 2007 was $590,380. Estimatedamortization 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 andliability approach that requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the financial statement and the tax bases of assets and liabilities atthe applicable tax rates. A valuation allowance is provided when it is morelikely than not that some portion or all of the deferred tax assets will not berealized.

 

The provision for income taxes consisted of thefollowing:

 
| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| ** **                        | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Current provision:                |       |                              |       |   |   |
| Federal                           |       | —                            |       | — |   |
| State                             |       | $                                 | 800        |   | $ | 2,400 |   |
| Total Current Provision           |       | $                                 | 800        |   | $ | 2,400 |   |
| Deferred provision  (benefit)     |       |                              |       |   |   |
| Federal                           |       |                              |       | — |   |
| State                             |       |                              |       | — |   |
| Total deferred portion  (benefit) |       |                              |       | — |   |
| Total provision for income  taxes |       | $                                 | 800        |   | $ | 2,400 |   |

 

Reconciliations between the statutory federal incometax 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 basedon the difference between the financial statement and tax bases of assets andliabilities at the applicable tax rates. The significant components of theCompany’s net deferred tax assets and (liabilities) consisted of the following:

 
| ** **                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Benefits from NOL  carryforwards                            |       | $                     | 7,699,234  |   | $ | 3,472,511 |   |
| Tax credit carryforward                                     |       | 170,422               |       | 61,788 |   |
| Differences in financial  statement and tax accounting for: |       |                  |       |   |   |
| Stock compensation                                          |       | 1,457,994             |       | 549,037 |   |
| Accruals                                                    |       | 285,149               |       | 10,358 |   |
| Inventory                                                   |       | 42,555                |       | 260,140 |   |
| Deferred Revenue                                            |       | 384,954               |       | 145,660 |   |
| Depreciation and amortization                               |       | 844,056               |       | 237,830 |   |
| State income tax                                            |       | (741,259              | )          | (331,068 | ) |
| Total Deferred tax assets  (gross)                          |       | 10,143,105            |       | 4,406,526 |   |
| Less Valuation allowance                                    |       | (10,143,105           | )          | (4,406,526 | ) |
| Total Deferred Tax assets,  net                             |       | $                     | —     |   | $ | — |   |

 

F-13

----

 

A valuation allowance has been established due to theuncertainty of realizing certain net operating loss (NOL) carryforwards and theother deferred tax assets. The Company had NOL carryforwards at December 31,2007 and 2006  of approximately $18.6million and $8.1 million respectively for federal income tax purposes and anaggregate of $18.6 million and $8.2 million respectively of state income taxpurposes. The Company also has Federal research tax credit carryforward of$138,536 and $31,886 for the years ended December 31, 2007 and 2006respectively. The Company’s Federal and State NOL carryforwards will beavailable to offset taxes through December 31, 2019 and 2024,respectively.

 

The Company adopted theprovisions of the Financial Accounting Standards Board (“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASBStatemen No. 109” (“FIN 48”), effective january 1, 2007. As a result of theimplementation of FIN 48, the Company made a comprehensive review of itsportfolio of uncertain tax positions in accordance with recognition standardsestablished by FIN 48. As a result of this review, the Company concluded thatat this time there are no uncertain tax positions other than an uncertain taxposition relating to the limitations imposed on tax loss carryforwards byInternal Revenue Code Section 382. As a result of applying the provisions ofFIN 48, there was no cumulative effect on retained earnings.

 

Utilization of the NOLsmay be subject to a substantial annual limitation due to ownership changelimitations that may have occurred or that could occur in the future, asrequired by Section 382 of the Internal Revenue Code of 1986, as amended(the “Code”), as well as similar state and foreign limitations. These ownershipchanges may limit the amount of NOLs that can be utilized annually to offsetfuture taxable income and tax, respectively. In general, an “ownership change”as defined by Section 382 of the Code, results from a transaction orseries of transactions over a three-year period resulting in an ownershipchange of more than 50 percentage points of the outstanding stock of acompany by certain stockholders or public groups.

 

The Company has notfinalized its study to assess whether an ownership change has occurred thatwould materially impact the utilization of NOLs. The work performed to datedoes not indicate a material limitation of any NOLs, however there may beadditional ownership changes in the future, and any future change at itscurrent market capitalization would severely limit the annual use of these NOLsgoing forward. Such limitation could also result in expiration of a portion ofthe NOLs before utilization. Further, until the study is completed and anylimitations known, no amounts are being considered as an uncertain tax positionor disclosed as an unrecognized tax benefit under FIN 48. Due to theexistence of the valuation allowance, future changes in the Company’sunrecognized benefits will not impact its effective tax rate. Any NOLs thatexpire prior to utilization as a result of such limitations will be removedfrom deferred tax assets with a corresponding reduction of the valuationallowance.

 

**NOTE 8 - COMMITMENTS ANDCONTINGENCIES**

 

**LEASE**

 

Until September 30, 2006, the Company subleasedits office space under a non-cancelable operating lease agreement from astockholder. The lease required minimum monthly payments of $2,568, andrequired the Company to pay 15.03% of any additional rents and/or charges ofany kind due from Bemel & Ross. Since May 2005, the lease becamea 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 costspassed through the master landlord to Bemel & Ross. The direct costsare based on operating costs during the calendar year ending December 31,2003, or the base year. Thereafter, if the direct costs in a subsequent yearexceed the direct costs in the base year, the master landlord bills Bemel &Ross its proportionate share of the excess of direct costs, which may includetax costs related to real estate and/or costs and expenses incurred by themaster landlord in connection with common areas of the building, the parkingstructure or the cost of operating the building. Through September 30,2006, Bemel & Ross has charged the Company for additional rents and/orcharges in the amount of $2,165.  TheCompany terminated this lease on September 30, 2006.

 

On September 14, 2006, the Company entered into asublease for 6,500 square feet of office space with Bergman & Dacey, Inc.which commenced on October 1, 2006 and expires on July 31, 2009. TheCompany paid a security deposit of $71,244. The lease requires monthly paymentsof $16,789 plus 32.5% of triple net costs charged to Bergman & Dacey,such as common area operating expenses, taxes and insurance. The rent increases3% on October 1st of each year. Total minimum lease payments will be $208,924 and $160,051 in calendaryears  2008 and 2009, respectively.

 

Rent expense was $252,530 and $77,524 for the yearsended December 31, 2007 and 2006, respectively.

 

**PATENTAND TRADEMARK LICENSE AGREEMENTS**

 

The Company has entered into various Patent andTrademark License Agreements with financial institutions granting a limited,non-exclusive right and license to make, distribute, market, sell, and usecredit cards or debit cards containing a magnifying lens (the “LicensedProducts”). 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-14

----

 

**EMPLOYMENTAGREEMENT**

 

The Company entered into an Employment Agreement withAlan Finkelstein, its former Director and former President; the initial term ofthree 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 hasnever been involved with any litigation. However, in the future, the Company,like any other business or individual, may become subject to litigation some ofwhich the Company can control and other litigation that the Company cannotcontrol. If the Company were to become involved in any litigation, managementwould have to assess whether or not such litigation would likely have amaterial adverse effect on the Company’s consolidated financial condition orresults of operations.

 

**NOTE 9 - STOCKHOLDER’S EQUITY**

 

**PREFERREDSTOCK**

 

The Company has 5,000,000 authorized shares of $0.001par value preferred stock. The preferred stock may be issued in series, fromtime to time, with such designations, rights, preferences, and limitations asthe Board of Directors may determine by resolution.

 

**COMMONSTOCK**

 

During the year ended December 31, 2006, theCompany completed the following:

 

On May 30, 2006, the Company issued 3,785,500shares of common stock at a price of $3.00 per share to accredited investorspursuant to a private placement for total gross proceeds of $11,356,500.  The Company paid offering costs of $582,825and a warrant to purchase 113,565 shares of our common stock at an exerciseprice of $3.30 per share valued at $444,493 that expires on May 30, 2011.

 

On June 28, 2006 the Company exchanged 4,500,000shares of its common stock for certain assets of nCryptone. The assets acquiredwere intangible assets of $3,030,000, accounts receivable of $14,830, fixedassets 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                |       | $                                    | 1.16       |   |
| Granted                              |       | 363,565                  |       | $                                    | 3.51       |   |
| Exercised                            |       | (2,550,100               | )          | $                                    | 1.00       |   |
| Outstanding,                         |       |                     |       |                                 |       |
| December 31, 2006               |       | 4,646,598                |       | $                                    | 1.43       |   |
| Granted                              |       |                     |       |                                 |       |
| Exercised                            |       | (32,000                  | )          | $                                    | 1.25       |   |
|                                 |       |                     |       |                                 |       |
| Outstanding,  December 31, 2007 |       | 4,614,598                |       | $                                    | 1.43       |   |
|                                 |       |                     |       |                                 |       |
| Exercisable,  December 31, 2007 |       | 4,614,598                |       | $                                    | 1.43       |   |

 

F-15

----

 

No warrants were granted during the year ended December 31,2007.  The weighted-average fair value ofthe warrants granted during the twelve months ended December 31, 2006 forwhich 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 grantedduring the twelve months ended December 31, 2006 for which the exerciseprice was less than or greater than the market price on the grant date. Theweighted-average remaining contractual life of the 4,614,598 warrants with aweighted average exercise price of $1.43 as of December 31, 2007 is 33months.

 

**2004STOCK INCENTIVE PLAN**

 

The Company’s Board of Directors and stockholdersapproved the 2004 Stock Incentive Plan in August 2004. The 2004 StockIncentive Plan provides for the grant of incentive stock options to the Company’semployees, 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 ofits common stock for issuance pursuant to the 2004 Stock Incentive Plan. Theboard of directors, or a committee of the board, administers the 2004 StockIncentive Plan. Stock options are generally granted with terms of up to tenyears and vest over a period of five years under the 2004 Stock Incentive Plan.The administrator determines the exercise price of options granted under the2004 Stock Incentive Plan, but the exercise price must not be less than 85% ofthe fair market value of the Company’s common stock on the date of grant. Inthe event the participant owns 10% or more of the voting power of all classesof the Company’s stock, the exercise price must not be less than 110% of thefair 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 leastbe equal to the fair market value of the Company’s common stock on the date ofgrant. The term of an incentive stock option may not exceed 10 years, exceptthat with respect to any participant who owns 10% of the voting power of allclasses of the Company’s outstanding stock or the outstanding stock of anyparent or subsidiary of the Company, the term must not exceed five years andthe exercise price must equal at least 110% of the fair market value on thegrant 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 ofgrant.

 

The 2004 Stock Incentive Plan was terminatedconcurrent with the approval of the 2007 Equity Incentive Plan in December 2007.  No further grants will be made from the 2004Stock Incentive Plan.  The terminationdoes not affect the rights of holders of options previously granted andoutstanding under the 2004 Stock Incentive Plan.

 

A summary of stock option activity and weightedaverage exercise prices for the years ended December 31, 2007 and 2006 isas 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 |   | $ | 1.00 |   |
| Options granted                     |       | —     |       | —                                                      |       | $ | 766,000 |   | $ | 4.39 |   |
| Options 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 |   | $ | 2.10 |   |
|                                |       |       |       |                                                        |       |   |   |   |   |
| Exercisable 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 |   | $ | 1.00 |   |
| Options granted                     |       | —     |       | —                                                      |       | 766,000 |   | $ | 4.39 |   |
| Options forfeited                   |       | (119,049   | )          | $                                                           | 4.90       |   | — |   | — |   |
| Options expired                     |       | —     |       | —                                                      |       | — |   | — |   |
| Options vested                      |       | (769,802   | )          | $                                                           | 1.63       |   | (325,000 | ) | $ | 1.14 |   |
|                                |       |       |       |                                                        |       |   |   |   |   |
| Non- vested at end of  period       |       | 627,149    |       | $                                                           | 3.55       |   | 1,516,000 |   | $ | 2.68 |   |
|                                     |            |            |            |                                                             |            |  |  |  |  |  |  |  |

 

F-16

----

 

No options were granted during the year ended December 31,2007.  The weighted average grant-datefair value of options granted during the year ended December 31, 2006 was$4.84.

 

In 2007, as part of the separation agreements withthree former officers and directors, the Company modified existing optiongrants by vesting all of the options that at the date of termination wereunvested and would normally be forfeited at termination.  In addition, the Company extended theexercise period beyond 90 days (the standard exercise period for terminatedofficers/directors).  The modificationsresulted in a charge of $727,670 in the 2007 income statement.  The amount was calculated using the stockprice of the Company’s common stock on the date of modification, a risk-freeinterest rate of 4.55% and volatility of 118%.

 

The weighted average remaining contractual lives ofthe options outstanding and options exercisable were as follows:

 
| ** **             | ** ** | **Options   outstanding** | ** ** | **Options   exercisable** | ** ** |
|------------------------|------------|---------------------------|------------|---------------------------|------------|
|                   |       |                      |       |                      |       |
| December 31, 2006 |       | 8.12  years               |       | 7.18  years               |       |
| December 31, 2007 |       | 7.05  years               |       | 6.66years                 |       |

 

**2007EQUITY INCENTIVE PLAN**

 

The Company’s Board of Directors approved the 2007Equity Incentive Plan in September 2007 and stockholders approved the 2007Equity Incentive Plan in December 2007. The 2007 Equity Incentive Planprovides for the grant of incentive stock options to the Company’s employees,and for the grant of non-statutory stock options, restricted stock, stockappreciation rights, performance units and performance shares to the Company’semployees, directors and consultants.

 

The Company reserved a total of 4,000,000 shares ofits common stock for issuance pursuant to the 2007 Equity Incentive Plan. Acommittee 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 overa period of five years under the 2007 Equity Incentive Plan. The administratordetermines the exercise price of options granted under the 2007 EquityIncentive Plan, but the exercise price must not be less than 85% of the fairmarket value of the Company’s common stock on the date of grant. In the eventthe participant owns 10% or more of the voting power of all classes of theCompany’s stock, the exercise price must not be less than 110% of the fairmarket value per share of the Company’s common stock on the date of grant. Withrespect to all incentive stock options, the exercise price must at least beequal to the fair market value of the Company’s common stock on the date ofgrant. The term of an incentive stock option may not exceed 10 years, exceptthat with respect to any participant who owns 10% of the voting power of allclasses of the Company’s outstanding stock or the outstanding stock of anyparent or subsidiary of the Company, the term must not exceed five years andthe exercise price must equal at least 110% of the fair market value on thegrant 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 ofgrant.

 

Without further stockholder approval, the 2007 EquityIncentive Plan may not issue incentive stock options after September 2017.

 

A summary of stock option activity and weightedaverage exercise prices for the years ended December 31, 2007 is asfollows:

 
| ** **                          | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|
| **ALL OPTIONS**                     | ** ** | ** ** | ** ** | **WEIGHTED    AVERAGE    EXERCISE    PRICE** | ** ** |
| Outstanding at beginning  of period |       | —     |       | — |   |
| Options granted                     |       | 68,511     |       | $ | 2.76 |   |
| Options forfeited                   |       | —     |       | — |   |
| Options expired                     |       | —     |       | — |   |
| Options exercised                   |       | —     |       | — |   |
|                                |       |       |       |   |   |
| Outstanding at end of  period       |       | 68,511     |       | $ | 2.76 |   |
|                                |       |       |       |   |   |
| Exercisable at end of  period       |       | —     |       | — |   |

 
| ** **                          | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|
| **NON VESTED OPTIONS**              | ** ** | ** ** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Non- vested at beginning  of period |       | —     |       | — |   |
| Options granted                     |       | 68,511     |       | $ | 2.76 |   |
| Options forfeited                   |       | —     |       | — |   |
| Options expired                     |       | —     |       | — |   |
| Options vested                      |       | —     |       | — |   |
|                                |       |       |       |   |   |
| Non- vested at end of  period       |       | 68,511     |       | $ | 2.76 |   |

 

The weighted average remaining contractual lives ofthe options outstanding at December 31, 2007 was 9.83 years.

 

The Company recorded $2,121,751 and $472,598 of compensationexpense for employee stock options during the years ending December 31,2007 and 2006 respectively, which is included in the administrative expensecategory. At December 31, 2007 and 2006, there was a total of $4,650,764and $3,328,840, respectively, of unrecognized compensation costs related to thenon-vested share-based compensation arrangements under the 2004 and 2007 Plans.The cost is expected to be recognized over a weighted average period of 1.7years. 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 intrinsicvalue of total outstanding options and total exercisable options was $3,392,007and $2,194,497, respectively, as of December 31, 2007.

 

Since January 1, 2006, the Company is recognizingthe cost of all employee stock options on a straight-line attribution basisover their respective vesting periods, net of estimated forfeitures. TheCompany has selected the modified prospective method of transition;accordingly, prior periods have not been restated. Prior to the adoptions ofSFAS No. 123(R), the Company applied APB Opinion No. 25 and relatedInterpretations in accounting for its stock-based compensation plans; allemployee stock options were granted at or above the grant date market price;and accordingly, no compensation cost was recognized for fixed stock optiongrants in prior periods.

 

F-17

----

 

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  years |       |
| Annual forfeiture rate  |       | 0         | %          | 0         | %          |
|                         |            |           |            |           |            |  |

 

**NOTE 11 - RELATED PARTY TRANSACTIONS**

 

**ACCOUNTSPAYABLE - 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 inJanuary 2009, and $14,521 due to Blakely, Sokoloff, Taylor &Zafman, LLP (BSTZ), a law firm in which former director George Hoover is apartner, 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 alicensing fee and were $1,322,159.  As ofDecember 31, 2006, $61,173 is owed to BSTZ and $1,260,987 is owed tonCryptone, S.A., respectively.

 

**CONSULTINGAGREEMENTS**

 

In connection with his resignation as Chief FinancialOfficer in October 2007, Bennet Tchaikovsky and the Company entered intothree separate agreements: an Indemnification Agreement, a ConsultingAgreement, and a Separation Agreement. Beginning October 29, 2007 andending on June 29, 2008, Mr. Tchaikovsky will be paid $12,270 permonth plus certain other reimbursements for assisting us with transitioning ournew Chief Financial Officer. However, if Mr. Tchaikovsky obtains full-timeemployment during the term of the Consulting Agreement, the ConsultingAgreement will automatically terminate and no further payments will be due fromthe Company to Mr. Tchaikovsky.  TheCompany entered into a Separation Agreement with Mr. Tchaikovsky whereby Mr. Tchaikovskyfully released the Company in consideration for Mr. Tchaikovsky becomingvested in his remaining 60,000 unvested options and waiving the terminationperiod for all of his options.

 

The Company was a party to a Consulting Agreement withForest Finkelstein, the son of Alan Finklestein during the years ended December 31,2007, 2006 and 2005.  The agreement wascancelled in December 2007.  The Companypaid Mr. Finklestein $85,000 and $85,000 , respectively, during the years endedDecember 31, 2007 and 2006.

 

F-18

----

 

**LEGALSERVICES**

 

The Company receives legal services from Blakely,Sokoloff, Taylor and Zafman, LLP, a law firm in which George Hoover, a formerdirector of the Company, is a partner. During the years ended December 31,2007 and 2006, the Company paid  $95,654and $175,822 respectively, to this entity for legal services rendered.

 

**NOTE 13 - SUBSEQUENT EVENTS**

 

On January 8, 2008, the Company entered into aSecurities Purchase Agreement (the “Purchase Agreement”) with 13 institutionaland accredited investors (the “Purchasers”). Pursuant to the terms of thePurchase Agreement, the Purchasers purchased $3.5 million of the Company’s 8%Senior Secured Convertible Debenture (“Debenture”). The Debenture: (i) bearsinterest at 8% per year, paid quarterly in cash or registered common stock, atthe Company’s discretion; (ii) has a maturity of January 8, 2011, (iii) isconvertible at the holder’s option into shares of common stock at $2.50 pershare, (iv) is secured by all of the Company’s and its subsidiary’s assetsincluding inventory, receivables, unencumbered equipment and intellectualproperty under the terms of a Security Agreement, and (v) has a forcedconversion feature which allows the Company to force the conversion of theDebenture if the Company’s common stock trades above $5.00 for 20 consecutivetrading days and certain other conditions are met. The Company also issued tothe Purchasers five-year common stock purchase warrants to purchase 700,000shares 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 workingcapital requirements and to pay down certain obligations. The Debenture alsocontains customary events of default provisions. As part of the transaction,the Company agreed to: (i) cut our monthly burn rate to $600,000 (ii) becompliant with NASDAQ listing requirements; and (iii) obtain shareholderapproval prior to effectuating a reverse stock split.

 

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

 

The Company agreed to grant registration rights to theinvestors, by filing a registration statement covering the shares of commonstock issuable upon the conversion of the Debenture, exercise of the Warrants,and issuable as interest payments, within 30 days of the closing, and obtainingeffectiveness 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, theCompany entered into employment agreements with Steven R. Delcarson, its chiefexecutive officer and president, and Charles M. Caporale, its chief financialofficer.  The material terms of Mr.Delcarson’s agreement are as follows: The term is for one year but may be extended for additional one yearterms.   Mr. Delcarson’s annual basecompensation of $300,000 per year was increased to $335,000 per year.  He is eligible for a bonus up to the amountof his base compensation upon the attainment of certain milestones.  Mr. Delcarson was granted 1,000,000 optionspriced at the closing price on the date of grant which shall vest pursuant to aschedule associated with the achievement of certain milestones. In the event ofa termination by the Company without cause or a change in control of theCompany, all options issued would vest upon the occurrence of such event.  The terms of Mr. Caporale’s agreement areessentially the same as those for Mr. Delcarson except that Mr. Caporale’sannual salary of $180,000 was increased to $200,000 and the number of optionsgranted was 200,000.

 

F-19

----

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant caused this report to besigned 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: March 31, 2008* |

 

**POWER OFATTORNEY**

 

KNOW ALL THESE PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints Steven R.Delcarson and Charles M. Caporale and each of them, jointly and severally, hisattorneys-in-fact, each with full power of substitution, for him or her in anyand 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 connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each said attorneys-in-fact or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Form 10-KSB has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on thedates indicated:

 
| **Name**                   | ** ** | **Title**                                                         | ** ** | **Date**            |
|----------------------------|------------|-------------------------------------------------------------------|------------|---------------------|
|                       |       |                                                              |       |                |
| /s/ Donald Joyce           |       | Chairman of the Board                                             |       | March 31, 2008 |
| Donald Joyce               |       |                                                              |       |                |
|                       |       |                                                              |       |                |
| /s/ Steven R. Delcarson    |       | Chief Executive Officer, President (Principal  Executive Officer) |       | March 31, 2008 |
| Steven R. Delcarson        |       |                                                              |       |                |
|                       |       |                                                              |       |                |
| /s/ Charles M. Caporale    |       | Chief Financial Officer (Principal Accounting  Officer)           |       | March 31, 2008 |
|  Charles M.  Caporale |       |                                                              |       |                |
|                       |       |                                                              |       |                |
| /s/ Richard Nathan         |       | Director                                                          |       | March 31, 2008 |
| Richard Nathan             |       |                                                              |       |                |
|                       |       |                                                              |       |                |
| /s/ Scott Ogilvie          |       | Director                                                          |       | March 31, 2008 |
| Scott Ogilvie              |       |                                                              |       |                |
|                       |       |                                                              |       |                |
| /s/ W. Robert Ramsdell     |       | Director                                                          |       | March 31, 2008 |
| W. Robert Ramsdell         |       |                                                              |       |                |
|                       |       |                                                              |       |                |
| /s/ Harry L. Tredennick    |       | Director                                                          |       | March 31, 2008 |
| Harry L. Tredennick        |       |                                                              |       |                |

 

----

 

**EXHIBITINDEX**

 
|   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, 2004       |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                    |
|   2.2(2)  |   | Exchange agreement by and among the registrant, Alan  Finkelstein,  Bradley Ross and Michael Paradise, dated April 1, 2004                                    |
|                |   |                                                                                                                                                                    |
|   2.3(2)  |   | Exchange agreement between the registrant and its  wholly-owned subsidiary, PSACo, Inc., dated April 1, 2004                                                  |
|                |   |                                                                                                                                                                    |
|   2.4(2)  |   | Merger agreement between the registrant and LensCard  International Limited, a British Virgin Islands International Business  Company, dated April 6, 2004         |
|                |   |                                                                                                                                                                    |
|   3.1(2)  |   | Amended and Restated Certificate of incorporation of  the registrant, as currently in effect                                                                            |
|                |   |                                                                                                                                                                    |
|   3.2(2)  |   | Amended and Restated Bylaws of the registrant, as  currently in effect                                                                                                  |
|                |   |                                                                                                                                                                    |
|   3.3(12) |   | Certificate of Amendment of Amended and Restated  Certificate of incorporation                                                                                          |
|                |   |                                                                                                                                                                    |
| 10.1(2)             |   | 2004 Stock Incentive Plan                                                                                                                                               |
|                |   |                                                                                                                                                                    |
| 10.2(2)             |   | Sublease agreement between registrant and  Bemel & Ross for premises at 11601 Wilshire Blvd.,#2160, Los  Angeles, California 90025, dated January 5, 2003 |
|                |   |                                                                                                                                                                    |
| 10.3(2)             |   | Guaranty of lease between Alan Finkelstein and  Bemel & Ross, dated January 5, 2003                                                                       |
|                |   |                                                                                                                                                                    |
| 10.4(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, 2003                                                                 |
|                |   |                                                                                                                                                                    |
| 10.5(a) (2)    |   | Waiver of section 2.3 of the securities purchase  agreement between registrant and Bristol Capital, LLC                                                                 |
|                |   |                                                                                                                                                                    |
| 10.6(2)             |   | Shares for debt agreement between registrant and  Alan Finkelstein, dated June 22, 2004                                                                            |
|                |   |                                                                                                                                                                    |
| 10.7(2)             |   | Shares for debt agreement between registrant and  Bradley Ross, dated June 22, 2004                                                                                |
|                |   |                                                                                                                                                                    |
| 10.8(2)             |   | Shares for debt agreement between registrant and Luc  Berthoud, dated June 22, 2004                                                                                |
|                |   |                                                                                                                                                                    |
| 10.9(2)             |   | Promissory note (loan no. 00003) between registrant  and City National Bank, dated May 24, 2004                                                                    |
|                |   |                                                                                                                                                                    |
| 10.10(2)            |   | Promissory note (loan no. 00005) between registrant  and City National Bank, dated May 24, 2004                                                                    |
|                |   |
| 10.11(2)            |   | Promissory note (loan no. 00004) between registrant  and City National Bank, dated May 24, 2004                                                                    |
|                |   |                                                                                                                                                                    |
| 10.12(2)            |   | Promissory note (loan no. 00006) between registrant  and City National Bank, dated May 24 ,2004                                                                    |
|                     |        |                                                                                                                                                                         |  |

 

----

 
| 10.13  | (2)    |   | Commercial guaranty between Alan Finkelstein and  City National Bank dated May 24, 2004                                                                     |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                             |
| 10.14  | (2)    |   | Commercial guaranty between Bradley Ross and City  National Bank dated May 24, 2004                                                                         |
|   |   |   |                                                                                                                                                             |
| 10.15  | (2)    |   | Commercial guaranty between Luc Berthoud and City  National Bank dated May 24, 2004                                                                         |
|   |   |   |                                                                                                                                                             |
| 10.16  | (2)    |   | Offer letter between registrant and Murdoch Henretty  dated July 28, 2004                                                                                   |
|   |   |   |                                                                                                                                                             |
| 10.17  | (2)    |   | Employment agreement between registrant and Alan  Finkelstein dated January 1998                                                                            |
|   |   |   |                                                                                                                                                             |
| 10.18  | (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, 2005                                               |
|   |   |   |                                                                                                                                                             |
| 10.20  | (2)    |   | Secured Demand Promissory Note between registrant  and Bristol Investment Fund, Ltd. dated March 30, 2005                                                   |
|   |   |   |                                                                                                                                                             |
| 10.21  | (2)    |   | Capital Lease Agreement between registrant and CNC  Associates, Inc. dated November 30, 2004                                                           |
|   |   |   |                                                                                                                                                             |
| 10.22  | (2)    |   | Guaranty between Alan Finkelstein and CNC  Associates, Inc. dated November 30, 2004                                                                    |
|   |   |   |                                                                                                                                                             |
| 10.23  | (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, 2005                                                                   |
|   |   |   |                                                                                                                                                             |
| 10.26  | (2)    |   | Secured Demand Promissory Note between registrant  and Rodger Bemel dated August 31, 2005                                                                   |
|   |   |   |                                                                                                                                                             |
| 10.27  | (2)    |   | Joint Development Agreement between registrant and  nCryptone dated July 25, 2005                                                                           |
|   |   |   |                                                                                                                                                             |
| 10.28  | (2)    |   | Agreement between registrant and SmartDisplayer  Technology, Inc. dated July 25, 2005                                                                  |
|   |   |   |                                                                                                                                                             |
| 10.29  | (5)    |   | Form of Lock-Up agreement by and between  registrant’s directors and executive officers pursuant to the private  placement dated October 19, 2005 |
|   |   |   |                                                                                                                                                             |
| 10.30  | (4)    |   | Form of Warrant pursuant to private placement  dated October 19, 2005                                                                                  |
|   |   |   |                                                                                                                                                             |
| 10.31  | (4)    |   | Registration Rights Agreement by and between the  registrant and each investor pursuant to the private placement dated  October 19, 2005                    |
|   |   |   |                                                                                                                                                             |
| 10.32  | (4)    |   | Side Letter Agreement between the registrant, T.R.  Winston & Company and investors pursuant to the private placement  dated October 19, 2005      |

 

----

 
| 10.33  | (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, SA                                                                            |
|   |   |   |                                                                                                                                                                          |
| 10.39  | (10)   |   | License Agreement dated June 28, 2006 by and between  Registrant as licensor and NCryptone, SA as licensee                                                               |
|   |   |   |                                                                                                                                                                          |
| 10.40  | (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 Ethics                                                                                                                                                                |
|   |   |   |                                                                                                                                                                          |
| 10.44  | (13)   |   | Separation and Release Agreement dated  October 29, 2007 between Bennet P. Tchaikovsky and Registrant                                                                         |
|   |   |   |                                                                                                                                                                          |
| 10.45  | (13)   |   | Consulting Services Agreement dated  October 29, 2007 between Registrant and Bennet P. Tchaikovsky                                                                            |
|   |   |   |                                                                                                                                                                          |
| 10.46  | (13)   |   | Indemnity Agreement dated October 29, 2007 between  Registrant and Bennet P. Tchaikovsky                                                                                      |
|   |   |   |                                                                                                                                                                          |
| 10.47  | (14)   |   | 2007 Equity Incentive Plan                                                                                                                                                    |
|   |   |   |                                                                                                                                                                          |
| 10.48  | (15)   |   | Form of Indemnity Agreement                                                                                                                                                   |
|   |   |   |                                                                                                                                                                          |
| 10.49  | (16)   |   | Alan Finkelstein Severance and Resignation Letter                                                                                                                             |
|   |   |   |                                                                                                                                                                          |
| 10.50  | (17)   |   | Form of Securities Purchase Agreement, dated as of  January 8, 2008                                                                                                           |
|   |   |   |                                                                                                                                                                          |
| 10.51  | (17)   |   | Form of 8% Senior Secured Convertible Debenture  issued January 8, 2008                                                                                                       |
|   |   |   |                                                                                                                                                                          |
| 10.52  | (17)   |   | Form of Common Stock Purchase Warrant issued January  8, 2008                                                                                                                 |
|   |   |   |                                                                                                                                                                          |
| 10.53  | (17)   |   | Form of Registration Rights Agreement, dated as of  January 8, 2008                                                                                                           |
|   |   |   |                                                                                                                                                                          |
| 10.54  | (17)   |   | Form of Security Agreement, dated as of January 8,  2008                                                                                                                      |
|   |   |   |                                                                                                                                                                          |
| 10.55  | (17)   |   | Form of Subsidiary Guarantee, dated as of January 8,  2008                                                                                                                    |
|   |   |   |                                                                                                                                                                          |
| 10.56  | (17)   |   | Form of Voting Agreement, dated as of January 8,  2008                                                                                                                        |
|   |   |   |                                                                                                                                                                          |
| 10.57  | (17)   |   | Form of Lock-Up Agreement, dated as of January 8,  2008                                                                                                                       |
|   |   |   |                                                                                                                                                                          |
| 21.1   | (2)    |   | List of subsidiaries                                                                                                                                                          |
|   |   |   |                                                                                                                                                                          |
| 23.2   | (1)    |   | Consent of Independent Registered Public Accounting  Firm for Registration Statements (No. 333-137033 and No. 333-149844) on  Form S-8.                                  |
|   |   |   |                                                                                                                                                                          |
| 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 1934                        |
|   |   |   |                                                                                                                                                                          |
| 31.2   | (1)    |   | Certification of Chief Financial Officer, as  required by Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934                        |
|   |   |   |                                                                                                                                                                          |
| 32     | (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                                       |

 

----