**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB**


(mark
      one)





**x
      ANNUAL REPORT UNDER
      SECITON 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF**


1934





For
      the
      fiscal year ended December 31, 2006





**o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(D) OF THE SECURITIES AND**


**EXCHANGE
      ACT OF 1934**





For
      the
      transition period from ________ to ________________________





*Commission
      file number 000-51260*


**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


(Name
      of
      Small Business Issuer in Its Charter)




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


10880
        WILSHIRE BOULEVARD, SUITE 950
 LOS
        ANGELES, CALIFORNIA 90024
 (310)
        312-0700


(Address
      and telephone number of principal executive


offices
      and principal place of business)





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





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


$0.001
      par value





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


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





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





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





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





The
      registrant's revenue for the fiscal year ended December 31, 2006 was $35,382.





The
      aggregate market value of voting and non-voting common equity held by
      non-affiliates of the registrant as of March 26, 2007 was approximately
      $79,413,558 based upon the closing price reported for such date on the NASDAQ
      Capital Market For purposes of this disclosure, shares of Common Stock held
      by
      persons who hold more than 5% of the outstanding shares of Common Stock and
      shares held by executive officers and directors of the registrant have been
      excluded because such persons may be deemed to be affiliates. This determination
      of executive officer or affiliate status is not necessarily a conclusive
      determination for other purposes.





As
      of
      March 26, 2007 there were 28,420,616 shares of Common Stock issued and
      outstanding.





Transitional
      Small Business Disclosure Format : Yes o No x









**INNOVATIVE
      CARD TECHNOLOGIES, INC.**




TABLE
      OF CONTENTS




Page
              NumberPART
              IITEM
                1DESCRIPTION
                OF BUSINESS
            
            
            3INTRODUCTION
            
            
            3COMPANY
                BACKGROUND
            
            
            3OUR
                BUSINESS
            
            
            4OUR
                POWER INLAY TECHNOLOGY AND
                PRODUCTS
            
            
            4STRATEGIC
                RELATIONSHIPS
            
            
            6RESEARCH
                AND DEVELOPMENT
            
            
            7INTELLECTUAL
                PROPERTY
            
            
            8MANUFACTURING
            
            
            8COMPETITION
            
            
            8GOVERNMENTAL
                REGULATION
            
            
            9EMPLOYEES
            
            
            9RISK
                FACTORS
            
            
            9ITEM
                2 - DESCRIPTION OF PROPERTY
            
            
            14ITEM
                3 - LEGAL PROCEEDINGS
            
            
            14ITEM
                4 - SUBMISSION OF MATTERS TO A VOTE OF
                SECURITY HOLDERS
            
            
            14PART
              IIITEM
                5 - MARKET FOR COMMON EQUITY ANDRELATED
                STOCKHOLDER MATTERS
            
            
            15QUARTERLY
                COMMON STOCK PRICE
                RANGES
            
            
            15SALES
                OF UNREGISTERED SECURITIES
            
            
            15ITEM
                6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION
            
            
            16ITEM
                7 - FINANCIAL STATEMENTS
            
            
            21ITEM
                8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON
                ACCOUNTING AND FINANCIAL DISCLOSURES
            
            
            21ITEM
                8A - CONTROLS AND PROCEDURES
            
            
            21ITEM
                8B - OTHER INFORMATION
            
            
            21PART
              IIIITEM
                9 - OFFICERS AND DIRECTORS
            
            
            21ITEM
                10 - EXECUTIVE COMPENSATION
            
            
            21ITEM
                11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND
                MANAGEMENT
            
            
            21ITEM
                12 - CERTAIN RELATIONSHIPS AND RELATED
                TRANSACTIONS
            
            
            22ITEM
                13 - EXHIBITS
            
            
            22ITEM
                14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
            
            
            22FINANCIAL
              STATEMENTS
            
            
            F-1SIGNATURES




2




**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




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




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




**WHERE
      YOU CAN FIND MORE INFORMATION**




As
      a
      public company, we are required to file annually, quarterly and special reports,
      proxy statements and other information with the SEC. You may read and copy
      any
      of our materials on file with the SEC at the SEC’s Public Reference Room at 450
      Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549. Our filings are
      available to the public over the Internet at the SEC’s website at
      http:\\.www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further
      information on the Public Reference Room. We also provide copies of our Forms
      8-K, 10-KSB, 10-QSB, Proxy and Annual Report at no charge to investors upon
      request and make electronic copies of our most recently filed reports available
      through our website at www.incardtech.com promptly
      after filing such material with the SEC.




**PART
      I**




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




**Our
      Company**





As
      used
      in this Form 10-KSB, we refer to Innovative Card Technologies, Inc. its wholly
      owned subsidiaries, PSA Co., LensCard US LLC, and LensCard International as
      "InCard," "our company," "we," "us" and "our." In addition, LensCard is a
      trademark of InCard. Other service marks, trademarks and trade names referred
      to
      in this Form 10-KSB are the property of their respective owners.





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




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





**INDUSTRY
      BACKGROUND**





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





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




3




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





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





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





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





**OUR
      BUSINESS**





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





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





**PRODUCTION**





The
      ICT
      DisplayCard has been available for issuance on a limited quantity basis since
      December 2006. By September 2007, we expect to be able to produce 200,000
      DisplayCards per month. These production numbers are estimates; our Original
      Equipment Manufacturers (OEM) have not yet manufactured the ICT DisplayCard
      in
      commercial quantities. However, we have produced pilot test quantities and
      we
      believe that our OEM’s will be able to produce the necessary supply. We believe
      that our present capacity will meet our short term anticipated demand. In the
      event that we receive greater interest or orders than our projections, our
      OEMs
      have indicated to us that they will be able to increase capacity. We do not
      manufacture the ICT DisplayCard; we rely on OEMs, and the ability to produce
      the
      ICT DisplayCard is limited to the component parts we are able to procure. Two
      key components of the ICT DisplayCard are produced by OEMs: (1) the battery,
      presently available from only one supplier, Solicore, Inc., and (2) the display,
      presently available from only one supplier, SmartDisplayer. We continue to
      explore alternative supply arrangements, but do not expect any alternatives
      to
      be available in the next six to twelve months. In addition, we have acquired
      a
      contractual right to acquire 51% control of a supplier. We are not obligated
      to
      complete this acquisition and have made no decision as to whether we will do
      so.
      We acquired the contractual right from the adult son of one of our executives.
      If we decide to exercise the contractual right, the adult son of one of our
      executives will only be reimbursed his actual purchase price and acquisition
      costs.




**OUR
      POWER INLAY TECHNOLOGY AND PRODUCTS**





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





**ONGOING
      PRODUCT TESTING AND DEVELOPMENT**





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




4




**OUR
      STRATEGY AND SALES CYCLE**





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





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





**RESELLERS**





The
      resellers for our ICT DisplayCard include Cryptolog (France), Di.Gi Security
      (Italy), eMue (Australia), IdentiPHI (US) Inex Americana (Chile), Innet (S
      Korea), Gemalto (Global), nCryptone (France), and VeriSign (US). These companies
      sell a complete security solution, either by themselves or with other providers.
      Although some of these resellers are required to make a deposit for the ICT
      DisplayCard, none of these resellers are required by these agreements to order
      our products. The extent to which these resellers market and sell our products
      will depend on the reseller’s customer experience with the ICT DisplayCard and
      our ability to provide a quality product, to deliver quantities as needed by
      the
      reseller, and to offer competitive pricing.





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





Prior
      to
      our development of the ICT DisplayCard for both the enterprise and on-line
      banking markets, our predecessors commenced sales of our first product, the
      LensCard, or a credit card embedded with a small magnifying lens, in 1998.
      To
      date, we have received royalties from sales of 1.4 million LensCards and have
      generated limited revenues that derive from these sales pursuant to licensing
      agreements, most of which have terminated. At this time, we do not intend to
      renew these licensing agreements, unless requested by a customer. In 1999,
      we
      began to consider the possibility of placing power into an ISO compliant card
      .
      Since 2002, our core focus has been and continues to be on research and
      development and marketing of our power inlay technology that is designed to
      bring power-based applications for payment and non-payment cards. The first
      products developed using our power inlay technology were LightCard and
      SoundCard. However, we ceased our focus of the LightCard and SoundCard due
      to
      the demand for the ICT DisplayCard. Prior to our focus on the ICT DisplayCard,
      we developed the SoundCard, LightCard, and LensCard all of which remain
      available for sale on a limited quantity basis. In the event that a customer
      wishes to purchase the SoundCard, LightCard and/or LensCard, we will evaluate
      if
      production of the product can be accomplished without removing resources from
      production of the ICT DisplayCard. If such production can be accomplished,
      we
      may outsource manufacturing of the SoundCard, LightCard and/or LensCard.





**HISTORY**





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





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




5




**STRATEGIC
      RELATIONSHIPS**





**VISA**





On
      May
      26, 2004, we entered into a strategic alliance agreement with Visa International
      Services Association (“VISA”), which expires April 30, 2007, with respect to our
      power-enabled technology pursuant whereby VISA promote to its member bank and
      others the ICT DisplayCard to the exclusion of any other powered card, and
      whereby InCard would promote the VISA brand for payment applications of the
      ICT
      DisplayCard to the exclusion of payment associations such as MasterCard or
      American Express. The Strategic Alliance Agreement requires VISA to work with
      its regional offices and encourage them to promote our power-enabled card
      technologies to their member banks. Such promotional activities include
      development by VISA of a promotional sales kit, provision of the Sales Kit
      to
      VISA’s target regions, encourage its regional offices to promote the ICT
      DisplayCard to their member banks, facilitate alliance and marketing
      presentations to be made by InCard to VISA’s targeted regions, permit InCard to
      promote the relationship in the Strategic Alliance Agreement on InCard’s website
      and in other marketing material, make efforts to permit InCard’s participation
      in VISA’s displays at industry and VISA trade shows (including occupancy by
      InCard of space at VISA booths at such trade shows), cooperate with InCard
      in
      making press releases in support of the strategic alliance, conduct meetings
      with InCard twice annually to discuss planning and results for the strategic
      alliance, and make efforts to introduce InCard to potential customers for the
      ICT DisplayCard. InCard is generally responsible for its own costs incurred
      in
      support of the forgoing. We have also agreed to provide VISA, its regional
      offices and member banks our technologies and to work with member banks directly
      in the event that they have special development requests. The mutual exclusivity
      provisions of the Strategic Alliance Agreement terminated on December 1, 2006.
      During the exclusivity period, VISA agreed not to enter into a similar agreement
      with any other party to develop or promote power-enabled cards, and we agreed
      not to provide our power inlay technology to American Express, MasterCard,
      Europay, JCB, Diners Club, Carte Blanche and Discover. Either party may
      terminate the agreement earlier in the event of a material default by the other
      party, if the default is not cured within 30 days, or within 30 days if the
      other party becomes insolvent or ceases to continue its business for fourteen
      days. We can also terminate the agreement at any time if VISA and its regional
      offices do not provide us with an opportunity to demonstrate our technology
      to
      at least ten significant member banks within the first twelve months of the
      agreement, after providing them with 30 days to meet this requirement. In
      addition, VISA can terminate the agreement at any time, after giving us 30
      days
      to remedy, if we have not met standards of quality, timeliness or customer
      service in providing our technology to its regional offices or member
      banks.





On
      October 6, 2006, we entered into a Limited Pilot Agreement with VISA
      International Service Association (“VISA”) to test in market and validate our
      ICT DisplayCard with a VISA member bank as a VISA-branded product. On October
      3,
      2006, in connection with this Pilot Agreement, we entered into an Approval
      Services Testing Agreement with VISA International Service Association, pursuant
      to which a laboratory designated by VISA would conduct certain tests on the
      ICT
      DisplayCard. Both agreements contained a provision whereby VISA could terminate
      without cause. On March 12, 2007, VISA notified us that VISA was terminating
      these agreements without cause. We do not believe that the termination of these
      testing agreements will have any short term impact as our immediate goal is
      to
      sell the ICT DisplayCard to enterprise and to the on-line banking markets,
      neither of which do require the VISA brand. However, in the future, we intend
      to
      enhance the ICT DisplayCard so that it can accommodate financial transactions
      which will likely require us to perform successful testing with VISA, American
      Express, MasterCard, Europay, JCB, Diners Club, Carte Blanche, Discover, and
      other credit card issuers and banks.





**SMARTDISPLAYER
      TECHNOLOGY CO.**





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




SmartDisplayer
      is bound by certain monthly production capability commitments through May 3,
      2009. We place a 20% down payment within seven days after purchase order is
      confirmed with the remainder to be paid within seven days after our inspection
      in SmartDisplayer's factory and before shipping subject to SmartDisplayer's
      invoice.





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





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





**NCRYPTONE**




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




6





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





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





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





Since
      completing the acquisition under the Asset Contribution Agreement, we
      now have all rights, and revenues, relating to the DisplayCard that were
      previously shared by nCryptone under the Joint Development Agreement. We will
      continue to utilize nCryptone personnel for one year after the acquisition
      for
      the further development of the technology surrounding the
      DisplayCard.





Additionally,
      we plan to retain the two top executives of nCryptone who were instrumental
      in developing the technology of the DisplayCard.





**RESEARCH
      AND DEVELOPMENT**





We
      conduct research and development activities both in-house and at an outside
      laboratory. We retain title rights to all improvements or enhancements to our
      technology developed by or worked on by the outside laboratory. Mr. Finkelstein,
      our President, is responsible for development of the power inlay technology
      and
      new product concepts. We have purchased materials and components for our
      products under development from a number of technology companies.





7





Through
      December 31, 2006, we have generated $0 from the sale of the ICT DisplayCard.
      We
      spent approximately $1,896,499 and $827,354, for research and development for
      the fiscal years ended December 31, 2006 and 2005, respectively.





**INTELLECTUAL
      PROPERTY**





We
      rely
      on a combination of patent, trademark and trade secret laws as well as
      confidentiality procedures and contractual provisions to protect our proprietary
      technology. We currently own ten U.S. patents and twenty three foreign patents.
      Seven of these patents apply to the LensCard, two of these patents apply to
      the LightCard and one of these patents applies to our power inlay
      technology. We have one additional U.S. patent applications pending that apply
      to our power inlay technology as described in more detail below,
      and eighteen foreign patent applications pending, five of which relate to
      the LensCard and thirteen relate to the LightCard. The duration of the U.S.
      patents generally is 20 years from the date the original application was filed.
      At this time, we do not have patent protection on our ICT DisplayCard
      technology.





**Pending
      Patent Application**





**TITLE**
            
            **SERIAL
                NO.**
            
            **FILING
                DATE**Transaction
                Card with Recorded Sound
            
            
            10/300,556
            
            
            November
                20, 2002








We
      currently have a trademark registered for the LensCard in the United States.
      We
      also have additional marks, including InCard, InCard Technologies, LightCard,
      SoundCard, and DisplayCard for which registration is pending.





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





**MANUFACTURING**





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





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





**MARKETING
      AND SALES**





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





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





**COMPETITION**





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





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




8




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





**GOVERNMENT**





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





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





**EMPLOYEES**





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





**RISKS
      FACTORS**





**WE
      ARE AN EARLY STAGE COMPANY WITH AN UNPROVEN BUSINESS STRATEGY, OUR LIMITED
      HISTORY OF OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND PROSPECTS DIFFICULT.**





Our
      business prospects are difficult to predict because of our limited operating
      history, early stage of development and unproven business strategy. Since our
      incorporation on November 22, 2002, we have primarily been and continue to
      be
      involved in development of products using our power inlay technology and
      marketing these products to industry partners. In 1998, Alan Finkelstein
      commenced commercialization of our first product, the LensCard, and entered
      into
      license agreements with banks and credit card issuers, most of which have
      terminated. After discovering the possibility of placing power into an
      International Organization of Standards (ISO) compliant card, we began to focus
      our efforts on the development of our power inlay technology and not on the
      marketing of the LensCard. For these reasons, we expect that future orders
      for
      the LensCard will be insignificant. Although management believes that our power
      inlay technology and products under development have significant profit
      potential, we may not attain profitable operations and our management may not
      succeed in realizing our business objectives. Based on the size of the market
      for OTP tokens and related market research, management believes that demand
      for
      OTP technology to enhance the security of networks and on-line transactions,
      and
      specifically for the unique form-factor of the ICT DisplayCard, will continue
      to
      grow and provide a climate conducive to adoption of the ICT
      DisplayCard.





**WE
      HAVE AN ACCUMULATED DEFICIT OF $13,733,561 AS OF DECEMBER 31, 2006 AND WE MAY
      NEVER ACHIEVE PROFITABILITY.**





We
      have
      incurred significant net losses every year since our inception, including net
      losses of $6,866,614 and $2,565,008 for the fiscal years ending December 31,
      2006 and 2005, respectively. As of December 31, 2006, we had an accumulated
      deficit of $13,733,561. These losses have resulted principally from expenses
      incurred in our research and development programs and general and administrative
      expenses. To date, we have not generated significant revenues. We will use
      capital raised in October 2005 and May 2006 to sustain operations through 2007.
      We anticipate that we will continue to incur substantial operating losses based
      on projected sales revenues less manufacturing, general and administrative
      and
      other operating costs for an indefinite period of time. We expect that our
      current resources including anticipated revenues will be sufficient to sustain
      our operations through April 2008. However, we cannot assure you that we will
      ever be profitable.




**TO
      BE SUCCESSFUL WE MAY REQUIRE ADDITIONAL CAPITAL.**





Assuming
      that we continue to operate at our existing cost structure, our current
      resources will be sufficient to fund operations for the next twelve months
      assuming we generate sales from the ICT DisplayCard with one time password
      during 2007. As we are in the early stage of manufacturing and have not sold
      substantial quantities of our products, we are unable to determine the amount
      of
      additional capital we will need to become successful. We currently do not have
      any binding commitments for, or readily available sources of, additional
      financing. Unless we are able to generate significant sales from the ICT
      DisplayCard that covers the manufacturing costs and operating overhead, we
      will
      continue to incur net losses that exceed our revenue.




9




**WE
      DEPEND O** **N
      A LIMITED NUMBER OF SUPPLIERS, AND WE WILL BE UNABLE TO MANUFACTURE OR DELIVER
      OUR PRODUCTS IF SHIPMENTS FROM THESE SUPPLIERS STOP, ARE LATE OR OTHERWISE
      INTERRUPTED**





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




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




We
      assemble our ICT DisplayCard, using a single source, NagraID, under a written
      agreement by issuing written purchase orders that we pay in advance. We believe
      that alternative sources for assembly in the event of a disruption would not
      be
      available on a timely basis, which would disrupt our operations, delay
      production for up to six months and impair our ability to manufacture and sell
      our ICT DisplayCard.





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





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





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





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





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





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





o
      increases in prices of key components.





**IF
      WE ARE NOT ABLE TO DEVOTE ADEQUATE RESOURCES TO PRODUCT DEVELOPMENT AND
      COMMERCIALIZATION, WE MAY NOT BE ABLE TO DEVELOP OUR PRODUCTS.**





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





o
      continuing to fund research and development endeavors;





o
      complete development of new products; and





o
      successfully introduce and commercialize new products.





**ACQUISITIONS
      COULD RESULT IN OPERATING DIFFICULTIES, DILUTION AND OTHER HARMFUL
      CONSEQUENCES.**




We
      have
      no experience acquiring entire companies. We have evaluated and expect to
      continue to evaluate potential strategic transactions. Any of these transactions
      could be material to our financial condition and results of operations. In
      addition, the process of integrating an acquired company, business or technology
      may create unforeseen operating difficulties and expenditures. The areas where
      we may face risks include:




·
            Difficulty
                in realizing the potential technological benefits of the
                transaction;




·
            Difficulty
                in integrating the technology, operations or work force of the acquired
                business with our existing
                business;




·
            Retaining
                employees from the business we
                acquire;




·
            Disruption
                of our ongoing business; and




·
            Difficulty
                in maintaining uniform standards, controls, procedures and
                policies.




Foreign
      acquisitions involve unique risks in addition to those mentioned above,
      including those related to integration of operations across different cultures
      and languages, currency risks and the particular economic, political and
      regulatory risks associated with specific countries. In addition, future
      acquisitions or dispositions could result in potentially dilutive issuances
      of
      our equity securities, the incurrence of debt, contingent liabilities or
      amortization expenses, write-offs of goodwill, any of which could harm our
      financial condition. Future acquisitions may require us to obtain additional
      equity or debt financing, which may not be available on favorable terms or
      at
      all. ****




10




**FAILURE
      TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS BY US OR OUR SUPPLIERS COULD ENABLE
      THIRD PARTIES TO USE OUR TECHNOLOGY, OR VERY SIMILAR TECHNOLOGY, AND COULD
      REDUCE OUR ABILITY TO COMPETE IN THE MARKET, AND ANY PROPRIETARY RIGHTS
      LITIGATION COULD BE TIME CONSUMING AND EXPENSIVE TO PROSECUTE AND DEFEND.**





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





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





**WE
      DEPEND ON KEY PERSONNEL IN A COMPETITIVE MARKET FOR SKILLED EMPLOYEES, AND
      FAILURE TO RETAIN AND ATTRACT QUALIFIED PERSONNEL COULD SUBSTANTIALLY HARM
      OUR
      BUSINESS.**





We
      rely
      to a substantial extent on the management, marketing and product development
      skills of our key employees and consultants, particularly John A. Ward III,
      our
      CEO and Chairman of our Board of Directors, Alan Finkelstein, our co-founder,
      and president, Bennet P. Tchaikovsky, our chief financial officer, Philippe
      Guillaud who supervises software and firmware development of the ICT
      DisplayCard, and Craig Nelson, who supervises the manufacturing and testing
      of
      the ICT DisplayCard to formulate and implement our business plan, including
      the
      development of our power inlay technology. Our success depends to a significant
      extent upon our ability to retain and attract key personnel. Competition for
      employees can be intense in the payment card industry and the process of
      locating key personnel with the right combination of skills is often lengthy.
      The loss of the services of our key personnel may significantly delay or prevent
      the achievement of product development and could have a material adverse effect
      on us.





**IF
      OUR FUTURE PRODUCTS DO NOT ACHIEVE A SIGNIFICANT LEVEL OF MARKET ACCEPTANCE,
      IT
      IS HIGHLY UNLIKELY THAT WE EVER WILL BECOME PROFITABLE.**





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





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





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





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





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





**WE
      HAVE GRANTED THIRD PARTIES SUBSTANTIAL MARKETING RIGHTS TO CERTAIN OF OUR
      PRODUCTS AND PRODUCTS UNDER DEVELOPMENT. IF THE THIRD PARTIES ARE NOT SUCCESSFUL
      IN MARKETING OUR PRODUCTS WE MAY NOT BE ABLE TO COMMERCIALIZE OUR PRODUCTS.**





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





**WE
      MAY EXPERIENCE CUSTOMER CONCENTRATION IN THE ENTERPRISE AND ON-LINE BANKING
      MARKETPLACE, WHICH MAY EXPOSE US TO ALL OF THE RISKS FACED BY OUR POTENTIAL
      MATERIAL CUSTOMERS.**





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




11




**THE
      POWER INLAY TECHNOLOGY HAS NOT BEEN PROVEN IN FULL SCALE PRODUCTION. FAILURE
      TO
      DEVELOP THE PROTOTYPE SCALE INTO MASS PRODUCTION MAY HAVE A MATERIAL NEGATIVE
      EFFECT ON OUR BUSINESS STRATEGY AND OPERATIONS.**





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





**WE
      RELY SUBSTANTIALLY ON THIRD-PARTY MANUFACTURERS. THE LOSS OF ANY THIRD-PARTY
      MANUFACTURER COULD LIMIT OUR ABILITY TO LAUNCH OUR PRODUCTS IN A TIMELY MANNER,
      OR AT ALL.**





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





o
      delays
      in the quantities needed for product development could delay commercialization
      of or products in development;





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





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





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





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





**RISKS
      RELATED TO OUR SECURITIES**





**THE
      APPLICATION OF THE PENNY STOCK RULES COULD ADVERSELY AFFECT TRADING IN OUR
      COMMON STOCK.**





As
      long
      as the trading price of our common stock is below $5.00 per share, the
      open-market trading of our common stock will be a "low-priced" security under
      the "penny stock" rules promulgated under the Securities Exchange Act of 1934.
      The "penny stock" rules impose additional sales practice requirements on
      broker-dealers who sell securities to persons other than established customers
      and accredited investors (generally those with assets in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 together with their spouse). In
      accordance with these rules, broker-dealers participating in transactions in
      low-priced securities must first deliver a risk disclosure document which
      describes the risks associated with such stocks, the broker-dealer's duties
      in
      selling the stock, the customer's rights and remedies and certain market and
      other information. Furthermore, the broker-dealer must make a suitability
      determination approving the customer for low-priced stock transactions based
      on
      the customer's financial situation, investment experience and objectives.
      Broker-dealers must also disclose these restrictions in writing to the customer,
      obtain specific written consent from the customer, and provide monthly account
      statements to the customer. The effect of these restrictions will probably
      decrease the willingness of broker-dealers to make a market in our common stock,
      decrease liquidity of our common stock and increase transaction costs for sales
      and purchases of our common stock as compared to other securities.





Stockholders
      should be aware that, according to Securities and Exchange Commission Release
      No. 34-29093, the market for penny stocks has suffered in recent years from
      patterns of fraud and abuse. Such patterns include (i) control of the market
      for
      the security by one or a few broker-dealers that are often related to the
      promoter or issuer; (ii) manipulation of prices through prearranged matching
      of
      purchases and sales and false and misleading press releases; (iii) boiler room
      practices involving high-pressure sales tactics and unrealistic price
      projections by inexperienced sales persons; (iv) excessive and undisclosed
      bid-ask differential and markups by selling broker-dealers; and (v) the
      wholesale dumping of the same securities by promoters and broker-dealers after
      prices have been manipulated to a desired level, along with the resulting
      inevitable collapse of those prices and with consequent investor losses. Our
      management is aware of the abuses that have occurred historically in the penny
      stock market. Although we do not expect to be in a position to dictate the
      behavior of the market or of broker-dealers who participate in the market,
      management will strive within the confines of practical limitations to prevent
      the described patterns from being established with respect to our securities.




12




**NASD
      SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY AND
      SELL OUR STOCK.**





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





**WE
      DO NOT ANTICIPATE PAYING ANY CASH DIVIDENDS IN THE FORESEEABLE FUTURE, WHICH
      MAY
      REDUCE YOUR RETURN ON AN INVESTMENT IN OUR COMMON STOCK.**





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





**SUBSTANTIAL
      FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK
      PRICE.**





As
      of
      March 23, 2007, we will have 28,420,616 shares of common stock outstanding.
      Of
      these shares, 25,584,169 can be traded pursuant to a prospectus or via a rule
      144(k) transaction. Of our 4,627,098 warrants outstanding, 4,525,223 have been
      registered and common stock issued on exercise can be sold pursuant to a
      prospectus. 2,351,000 shares issuable upon exercise of options issued under
      our
      2004 Stock Incentive Plan were registered as well.





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





**WE
      MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE
      YOUR OWNERSHIP INTEREST AND VOTING RIGHTS.**





Our
      certificate of incorporation currently authorizes our board of directors to
      issue up to 50,000,000 shares of common stock and 5,000,000 shares of preferred
      stock. As of March 26, 2007, after taking into consideration our outstanding
      common and preferred shares, our board of directors will be entitled to issue
      up
      to 21,579,384 additional common shares and 5,000,000 preferred shares. The
      power
      of the board of directors to issue these shares of common stock, preferred
      stock
      or warrants or options to purchase shares of our stock is generally not subject
      to stockholder approval.





We
      may
      require additional working capital to fund our business. If we raise additional
      funds through the issuance of equity, equity-related or convertible debt
      securities, these securities may have rights, preferences or privileges senior
      to those of the holders of our common stock. The issuance of additional common
      stock or securities convertible into common stock by our board of directors
      will
      also have the effect of diluting the proportionate equity interest and voting
      power of holders of our common stock.





**WE
      ARE CONTROLLED BY OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS,
      AND AS A RESULT, THE TRADING PRICE FOR OUR SHARES MAY BE DEPRESSED AND THESE
      STOCKHOLDERS CAN TAKE ACTIONS THAT MAY BE ADVERSE TO YOUR INTERESTS.**





Our
      principal stockholders, executive officers and directors, in the aggregate,
      beneficially own approximately 40.34% of our common stock including options
      held
      by each principal stockholder, executive officer and director that are
      exercisable within 60 days of March 26, 2007. These stockholders, acting
      together, will have the ability to exert substantial influence over all matters
      requiring approval by our stockholders, including the election and removal
      of
      directors and any proposed merger, consolidation or sale of all or substantially
      all of our assets. In addition, they could dictate the management of our
      business and affairs. This concentration of ownership could have the effect
      of
      delaying, deferring or preventing a change in control, or impeding a merger
      or
      consolidation, takeover or other business combination that could be favorable
      to
      you. This significant concentration of share ownership may also adversely affect
      the trading price for our common stock because investors may perceive
      disadvantages in owning stock in companies with controlling stockholders.





**OUR
      INCORPORATION DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT
      STOCKHOLDERS CONSIDER FAVORABLE AND COULD ALSO LIMIT THE MARKET PRICE OF YOUR
      STOCK, WHICH MAY INHIBIT AN ATTEMPT BY OUR STOCKHOLDERS TO CHANGE OUR DIRECTION
      OR MANAGEMENT.**





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





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




13




o
      prohibit stockholders from calling special meetings;





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





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





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





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





**NEW
      RULES, INCLUDING THOSE CONTAINED IN AND ISSUED UNDER THE SARBANES-OXLEY ACT
      OF
      2002, MAY MAKE IT DIFFICULT FOR US TO RETAIN OR ATTRACT QUALIFIED OFFICERS
      AND
      DIRECTORS, WHICH COULD ADVERSELY AFFECT THE MANAGEMENT OF OUR BUSINESS AND
      OUR
      ABILITY TO OBTAIN OR RETAIN LISTING OF OUR COMMON STOCK.**





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




**OUR
      INTERNAL CONTROLS OVER FINANCIAL REPORTING MAY NOT BE EFFECTIVE, AND OUR
      INDEPENDENT AUDITORS MAY NOT BE ABLE TO CERTIFY AS TO THEIR EFFECTIVENESS,
      WHICH
      COULD HAVE A SIGNIFICANT AND ADVERSE EFFECT ON OUR
      BUSINESS.**





We
      are
      subject to various regulatory requirements, including the Sarbanes-Oxley Act
      of
      2002. We, like all other public companies, must incur additional expenses and,
      to a lesser extent, diversion of our management’s time in our efforts to comply
      with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal
      controls over financial reporting. We have not evaluated our internal controls
      over financial reporting in order to allow management to report on, and our
      independent auditors to attest to, our internal controls over financial
      reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and
      the rules and regulations of the SEC, which we collectively refer to as
      Section 404. We have never performed the system and process evaluation and
      testing required in an effort to comply with the management assessment and
      auditor certification requirements of Section 404, which may initially
      apply to us as of December 31, 2006. Our lack of familiarity with Section
      404 may unduly divert management’s time and resources in executing the business
      plan. If, in the future, management identifies one or more material weaknesses,
      or our external auditors are unable to attest that our management’s report is
      fairly stated or to express an opinion on the effectiveness of our internal
      controls, this could result in a loss of investor confidence in our financial
      reports, have an adverse effect on our stock price and/or subject us to
      sanctions or investigation by regulatory authorities.





**ITEM
      2 - DESCRIPTION OF PROPERTY**





We
      do not
      own any real property. Our corporate office is approximately 6,500 square feet
      of leased office space in Los Angeles, California. We sublease this office
      space
      at a monthly base rent of $16,789 from Bergman and Dacey, Inc. We have agreed
      under the terms of the sublease to pay 32.5% of any additional rents or charges
      due from Bergman & Dacey to the master landlord. This sublease expires on
      July 31, 2009.We expect that this property will be adequate for our needs for
      the near to medium term.





**ITEM
      3 - LEGAL PROCEEDINGS**





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





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





None.




14




**PART
      II**





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





On
      March
      9, 2007, we were listed NASDAQ Capital Market and trade under the symbol “INVC”.
      From October 18, 2005 to March 8, 2007, our common stock traded on the OTC
      Bulletin Board under the symbol "INVC.OB". Our common stock is not listed on
      any
      other markets or exchanges. As of March 26, 2007, we had 28,420,616 shares
      of
      common stock issued and outstanding. The following table sets forth the high
      and
      low bid information for our common stock as reported by the OTC Bulletin Board:





**QUARTERLY
      COMMON STOCK PRICE RANGES**




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




These
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not represent actual transactions. As of March 26, 2007,
      there were approximately 74 stockholders of record of our common stock and
      no
      stockholders of record of our preferred stock.





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





**DIVIDENDS**





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





**EQUITY
      COMPENSATION PLAN INFORMATION**





Our
      board
      of directors and stockholders approved our 2004 Stock Incentive Plan in August
      2004. The following table provides information as of December 31, 2006 about
      common stock that may be issued upon the exercise of options, warrants and
      rights under our 2004 Stock 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 the first
              column)Equity compensationapproved
                bystockholders
            
            
            2,215,000
            
            $
            1.93
            
            
            0Equity compensationnot
                approved bystockholders
            
            
            136,000
            
            $
            4.90
            
            
            0Total
            
            
            2,351,000
            
            $
            2.10
            
            
            0




Our
        2004
        Stock Incentive Plan authorized us to issue up to 2,215,000 options under
        the
        plan. Our Board of Directors, in December 2006, increased the shares available
        under the 2004 Stock Incentive Plan by 136,000 shares. This increase was
        not
        approved by the shareholders.




15




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





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





**OVERVIEW**





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





Since
      inception, we have been unprofitable. We incurred net losses of $6,866,614
      and
      $2,565,008 for the fiscal years ending December 31, 2006 and 2005, respectively.
      As of December 31, 2006, we had an accumulated deficit of $13,733,561. Our
      continued existence is dependent upon our ability to obtain additional
      financing. We anticipate that revenues in 2007 from any sales of the DisplayCard
      with One Time Password will not be sufficient enough to sustain our operations,
      and further anticipate that after such introduction we will continue to incur
      net losses due to our costs exceeding our revenues for an indefinite period
      of
      time. Our capital requirements for the next 12 months for retention and hiring
      of key personnel, implementation of a sales force for our products, and further
      research and development relating to the production of our power inlay
      technology, have been and will continue to be significant. To date, our
      operations have been funded primarily through equity financings totaling
      $21,803,691. We believe that we currently have enough cash to meet our needs
      and
      continue our operations for the next twelve months.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





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





Revenue
      recognition. We recognize revenues in accordance with SEC Staff Accounting
      Bulletin No. 104, or SAB 104. Revenues are recognized when persuasive evidence
      of an arrangement exists, delivery has occurred or services have been rendered,
      the price is fixed and determinable and collectibility is reasonably assured.
      We
      recognize certain long-term contracts using the complete-contract method in
      accordance to SOP 81-1, “Accounting for Performance of Construction-Type and
      Certain Production-Type of Contracts.”





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





We
      anticipate that the majority of our revenues in the coming year will come from
      the ICT DisplayCard. We intend to sell these cards through resellers.





To
      date
      we have entered into nine reseller agreements whereby the resellers agree to
      sell our ICT DisplayCard to their customers. We have one agreement with a bank
      that issues financial cards for the LensCard product. The revenue generated
      from
      the LensCard agreements is negligible, and we expect that the sales of the
      LensCard will have no impact on our results of operations.





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





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





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




16




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





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





We
      assess
      the carrying value of long-lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” During the
      year ended December 31, 2006, we did not recognize any impairment to intangible
      assets and property and equipment.




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





**RESULTS
      OF OPERATIONS**





**YEAR
      ENDED DECEMBER 31, 2006 AND 2005**





Past
      revenue consists of royalties from the LensCard and gross revenues from the
      LightCard. Total revenue increased slightly from $21,460 for the twelve months
      ended December 31, 2005 to $35,382 for the twelve months ended December 31,
      2006. The increase resulted primarily from recognition of deferred revenue
      on
      LensCard royalties received from a terminated licensing agreement. We believe
      that future revenue will be primarily from the sales of the ICT DisplayCard;
      we
      anticipate that such revenues will begin in the third quarter of 2007.





Cost
      of
      Goods Sold consists of costs to manufacture the LightCard. Total cost of goods
      sold decreased from $9,865 for the year ended December 31, 2005 to $0 for the
      year ended December 31, 2006. The 2005 cost resulted from a LightCard order
      that
      we completed in 2005. We sold no LightCards in 2006. We believe that future
      cost
      of goods sold will be primarily from the ICT DisplayCard; we anticipate that
      such costs will begin to be recognized in the third quarter of
      2007.





Administrative
      expense consists of travel and marketing expenses, compensation expense,
      administrative fees and depreciation and amortization expense. Administrative
      expense increased from $1,178,398 for the year ended December 31, 2005 to
      $4,335,095 for the year ended December 31, 2006. The increase is primarily
      due
      to the hiring of additional employees, insurance costs, compensation expenses
      relating to vesting of employee and director's stock options of $472,598, and
      travel expenses relating to business development. We anticipate that
      administrative expenses will increase in 2007 as we incur increased costs
      associated with establishing our operations.





Consulting
      expense consists of payments made to an independent contractor that provided
      services to us. Consulting expense remained constant at $85,000 for the years
      ended December 31, 2006 and 2005. We anticipate that our consulting expense
      will
      remain constant in absolute dollars as the company does not presently have
      the
      intention of hiring additional outside consultants.





Professional
      fees consist of amounts paid to our outside counsel, auditors and to providers
      of other outside services rendered to the company.




Professional
      fees expense increased from $445,913 for the year ended December 31, 2005 to
      $917,882 for the year ended December 31, 2006. Professional fees expense
      increased due to legal fees for the maintenance and establishment of the
      company's intellectual property rights, costs relating to the acquisition of
      certain assets of nCryptone, and the legal and accounting fees costs associated
      with being a public company. We anticipate that professional fees will continue
      to increase as we will have to assess our internal controls relating to
      Sarbanes-Oxley and the related legal costs associated with being a public
      company.





Research
      and development expense consists primarily of costs relating to the development
      enhancements relating to the ICT DisplayCard. Research and development costs
      increased from $827,354 for the year ended December 31, 2005 to $1,896,499
      for
      the year ended December 31, 2006 due to increased research and development
      of
      the ICT DisplayCard with one time password. We expect our research and
      development expenses to increase as we continue to invest in developing
      enhancements of our ICT DisplayCard with one time password.





Interest
      expense decreased from $43,593 for the year ended December 31, 2005 to $1,239
      for the year ended December 31, 2006 due to the smaller amount of debt we owed
      during the year ended December 31, 2006.





Interest
      income increased from $6,055 for the year ended December 31, 2005 to $336,119
      for the year ended December 31, 2006 as a result of an increased operating
      cash
      balance that was earning interest during the year ended December 31,
      2006.




17




**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      principal sources of liquidity have been cash and cash equivalent balances,
      which were $8,270,096 at December 31, 2006. Since our inception, we have
      incurred significant losses, and as of December 31, 2006 we had an accumulated
      deficit of $13,733,561.





Net
      cash
      used in operating activities was $5,990,620 for the year ended December 31,
      2006
      as compared with $2,805,841for the year ended December 31, 2005. The increase
      in
      cash used was due primarily to the cost of increased personnel, increased
      professional fees, deposits made for raw materials inventory, and purchase
      of
      raw materials for production.





Net
      cash
      used in investing activities was $218,756 for the year ended December 31, 2006
      as compared with $276,833 provided by investing activities for the year ended
      December 31, 2005. The decrease in cash used for investing was due to a smaller
      amount of production equipment purchased during the year ended December 31,
      2006.





Net
      cash
      provided by financing activities was $11,201,970 for the year ended December
      31,
      2006 as compared to $5,818,419 for the year ended December 31, 2005. The
      increase occurred because of $11,356,500 in gross proceeds from the private
      offering that took place during the year ended December 31, 2006.





To
      date,
      our operations have been funded primarily through equity financings totaling
      $21,803,691. We believe that we will have enough funding to meet our cash needs
      and continue our operations for the next twelve months assuming (1) that we
      will
      be able to successfully sell the ICT DisplayCard in substantial quantities
      and
      (2) that we make no acquisitions. For example, if we choose to exercise our
      right to acquire control of a supplier, then we will need financing both for
      that transaction and for the supplier’s operating expenses.




**EQUITY
      AND DEBT FINANCINGS AND ACCOUNTS PAYABLE**




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





On
      May
      24, 2004, we obtained a loan in the amount of $246,128 with interest at 4.0%.
      We
      did not make the final principal and interest payment of $158,090 on the
      maturity date of July 31, 2005, but received an extension of maturity until
      April 30, 2006. Additionally, on May 24, 2004, we renewed three notes payable,
      each in the amount of $150,000, from City National Bank that were originally
      dated April 22, 2003, July 16, 2003 and September 24, 2003. Of the three notes
      payable, one had an interest rate of 4.1%, one had an interest rate of 3.1%
      and
      one had an interest rate of 1.9%. Beginning on December 31, 2004, we were
      required to pay monthly interest payments with all outstanding principal and
      accrued and unpaid interest due on April 30, 2006. We owed $450,000 as of
      October 18, 2005. On October 19, 2005, we repaid all outstanding notes to City
      National Bank, including interest, totaling $595,629. We have no further debt
      to
      City National Bank.





In
      March
      2005, we obtained loans in the form of secured demand promissory notes totaling
      $500,000 from Bristol Investment Fund, Ltd. and Union Finance International,
      Corp. Union Finance International Corp. loaned us $333,000 on March 31, 2005
      while Bristol Investment Fund, Ltd. loaned us $167,000 on March 30, 2005 for
      the
      combined total of $500,000. The secured demand promissory notes created security
      interests in our assets, excluding assets subject to liens, leases,
      encumbrances, defenses or other claims. The secured demand promissory notes
      were
      payable without notice by the demand of Union Finance International Corp. or
      Bristol Investment Fund, Ltd. There was no further borrowing capacity under
      both
      of the secured demand promissory notes. On October 11, 2005, Union Finance
      International Corp. transferred its $333,000 loan plus interest to BSR
      Investments, Ltd. On October 19, 2005, BSR Investments, Ltd. converted the
      loan
      plus interest totaling $347,816 into 347,816 shares of common stock and a
      warrant to purchase up to 173,908 shares of our common stock at an exercise
      price of $1.25 per share. On October 20, 2005 the loan, including interest,
      amounting to $174,504 obtained from Bristol Investment Fund, Ltd. was repaid.
      As
      of December 31, 2005, we owed Bristol Investment Fund, Ltd. and BSR Investments,
      Ltd. $0 relating to these secured demand promissory notes.





In
      August
      2005, we obtained loans in the form of secured demand promissory notes totaling
      $200,000 from Bradley Ross and Rodger Bemel. Bradley Ross loaned us $150,000
      and
      Rodger Bemel loaned us $50,000 on August 31, 2005 for the combined total of
      $200,000. The secured demand promissory notes created security interests in
      our
      assets, excluding assets subject to liens, leases, encumbrances, defenses or
      other claims. The secured demand promissory notes were payable without notice
      by
      the demand of Bradley Ross or Rodger Bemel. There was no further borrowing
      capacity under both of the secured demand promissory notes. On October 19,
      2005
      we repaid the principal amounts owed to both Bradley Ross and Rodger Bemel
      in
      full. As of December 31, 2005, we owed Bradley Ross and Rodger Bemel $0 relating
      to these secured demand promissory notes.





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




18




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





On
      June
      28, 2006, we purchased rights relating to the ICT DisplayCard from nCryptone
      for
      4,500,000 shares of our common stock and acquired a license to use a patent
      for
      $1,000,010 USD that is due by June 27, 2007. We intend to pay this note using
      our existing cash balance.





**FUTURE
      NEEDS**





We
      believe that our current cash of $6,946,086 as of March 28, 2007, will provide
      us with sufficient resources for the next twelve months at our anticipated
      level
      of operations. This capital would not be sufficient to finance any acquisition
      or additional activity. If we needed additional capital for acquisitions or
      otherwise, we do not have any binding commitments for, or readily available
      sources of, additional financing. Additional financing, whether through public
      or private equity or debt financing, arrangements with stockholders or other
      sources to fund operations, may not be available, or if available, may be on
      terms unacceptable to us. Our ability to maintain sufficient liquidity is
      dependent on our ability to raise additional capital. If we issue additional
      equity securities to raise funds, the ownership percentage of our existing
      stockholders would be reduced. New investors may demand rights, preferences
      or
      privileges senior to those of existing holders of our common stock. Debt
      incurred by us would be senior to equity in the ability of debt holders to
      make
      claims on our assets. The terms of any debt issued could impose restrictions
      on
      our operations. If adequate funds are not available to satisfy our capital
      requirements, our operations and liquidity could be materially adversely
      affected.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any off-balance sheet transactions.





**NEW
      ACCOUNTING PRONOUNCEMENTS**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued a
      revision to FASB Statement No. 123, ”Share-Based Payment,” “SFAS No. 123(R)”.
      This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to
      Employees. This Statement establishes standards for the accounting for
      transactions in which an entity exchanges it equity instructions for goods
      or
      services. It also addresses transactions in which an entity incurs liabilities
      in exchange for goods or services. It also addresses transactions in which
      an
      entity incurs liabilities in exchange for goods or services that are based
      on
      the fair value of entity's equity instruments or that may be settled by the
      issuance of those equity instruments. This Statement is effective for public
      entities that file as small business issuers as of the beginning of the first
      interim or annual reporting period that begins after December 15, 2005. The
      Company has adopted this statement for the year ended December 31, 2006. We
      recorded $472,598 of compensation expense for employee stock options during
      the
      year ended December 31, 2006.





In
      May
      2005, the FASB issued Statement of Financial Accounting Standards ("SFAS")
      No.
      154, "Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting
      Principles Board ("APB") Opinion No. 20, "Accounting Changes" and SFAS No.
      3,
      "Reporting Accounting Changes in Interim Financial Statements", and changes
      the
      requirements for the accounting for and reporting of a change in accounting
      principle. This statement applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific transition
      provisions. When a pronouncement includes specific transition provision, those
      provisions should be followed.





Opinion
      20 previously required that most voluntary changes in accounting principle
      be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This Statement requires
      retrospective application to prior periods' financial statements of changes
      in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, this Statement requires
      that
      the new accounting principle be applied to the balances of assets and
      liabilities as of the beginning of the earliest period for which retrospective
      application is practicable and that a corresponding adjustment be made to the
      opening balance of retained earnings (or other appropriate components of equity
      or net assets in the statement of financial position) for that period rather
      than being reported in an income statement. When it is impracticable to
      determine the cumulative effect of applying a change in accounting principle
      to
      all prior periods, this Statement requires that the new accounting principle
      be
      applied as if it were adopted prospectively from the earliest date practicable.




19




The
      correction of an error in previously issued financial statements is not an
      accounting change. However, the reporting of an error correction involves
      adjustments to previously issued financial statements similar to those generally
      applicable to reporting an accounting change retrospectively. Therefore, the
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed by this Statement. The adoption of SFAS 154 is
      not
      expected to have a material impact on the Company’s financial position, results
      of operations or cash flows.





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





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





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




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




In
      September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plan - an amendment of FASB
      Statement No. 87, 88, 106 and 132(R). SFAS No. 158 requires an
      employer to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan as an asset or liability in its statement of financial
      position and recognize changes in the funded status in the year in which the
      changes occur. SFAS No. 158 is effective for fiscal years ending after
      December 15, 2006. The Company believes that the adoption of SFAS
      No. 158 will not have a material impact on the Company’s financial
      position, results of operations or cash flows.





In
      September 2006, the SEC issued SAB No. 108, Considering the Effects of
      Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements (“SAB 108”). SAB 108 requires that registrants quantify
      errors using both a balance sheet and income statement approach and evaluate
      whether either approach results in a misstated amount that, when all relevant
      quantitative and qualitative factors are considered, is material. SAB 108 is
      not
      expected to have a material impact on the Company’s consolidated financial
      statements.





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





20





**ITEM
      7 - FINANCIAL STATEMENTS**





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





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





None.





**ITEM
      8A - CONTROLS AND PROCEDURES**





As
      of the
      end of the period covered by this report, we carried out an evaluation of the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act).
      This evaluation was carried out under the supervision and with the participation
      of our management, principally our Chief Executive Officer and Chief Financial
      Officer. Based upon this evaluation, our Chief Executive Officer and Chief
      Financial Officer have concluded that our disclosure controls and procedures
      were effective as of the end of the period covered by this report to ensure
      that
      information required to be disclosed by us in reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified in Securities and Exchange Commission rules and
      forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer.





Our
      disclosure controls and procedures provide our Chief Executive Officer and
      Chief
      Financial Officer reasonable assurances that our disclosures are appropriate.
      However, company management, including our Chief Executive Officer and Chief
      Financial Officer, does not expect that our disclosure controls and procedures
      or our internal controls will prevent all human error. A control system, no
      matter how well designed and implemented, can provide only reasonable, not
      absolute, assurance the objectives of the control system are met. Furthermore,
      the design of a control system must reflect the fact there are internal resource
      constraints, and the benefit of controls must be weighed relative to their
      corresponding costs. Because of the limitations in all control systems, no
      evaluation of controls can provide complete assurance all control issues and
      instances of error, if any, within our company are detected. These inherent
      limitations include the realities that judgments in decision-making can be
      faulty, and that breakdowns can occur due to human error or mistake.
      Additionally, controls, no matter how well designed, could be circumvented
      by
      the individual acts of specific persons within the organization. The design
      of
      any system of controls is also based in part upon certain assumptions about
      the
      likelihood of future events, and there can be no assurance any design will
      succeed in achieving its stated objectives under all potential future
      conditions.





There
      was
      no change in our internal control over financial reporting during our fourth
      quarter of fiscal year ended December 31, 2006 that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.





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





None.





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




Information
      regarding our executive officers and directors is incorporated by reference
      to
      the information set forth under the caption “ *Directors
      and Executive Officers* ”
in
      our
      Proxy Statement for the Annual Meeting of Stockholders to be filed with the
      Commission within 120 days after the end of our year ended December 31,
      2006.




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




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




Information
      regarding executive compensation is incorporated by reference to the information
      set forth under the caption “ *Executive
      Officer Compensation* ”
in
      our
      Proxy Statement for the Annual Meeting of Stockholders to be filed with the
      Commission within 120 days after the end of our year ended December 31,
      2006.




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




Information
      regarding security ownership of certain beneficial owners and management is
      incorporated by reference to the information set forth under the caption “ *Voting
      Securities Of Principal Stockholders And Management”* in our
      Proxy Statement for the Annual Meeting of Stockholders to be filed with the
      Commission within 120 days after the end of our year ended December 31,
      2006.




21




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




Information
      regarding certain relationships and related transactions is incorporated by
      reference to the information set forth under the caption *“Certain
      Transactions”* in our
      Proxy Statement for the Annual Meeting of Stockholders to be filed with the
      Commission within 120 days after the end of our year ended December 31,
      2006.




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




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




Information
      regarding accounting fees and disclosures is incorporated by reference to the
      information set forth under the caption *“Fees
      Paid to Independent Auditors”* in our
      Proxy Statement for the Annual Meeting of Stockholders to be filed with the
      Commission within 120 days after the end of our year ended December 31,
      2006.




22




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





**CONTENTS**





**DECEMBER
      31, 2006 AND DECEMBER 31, 2005**




PageREPORT
              OF INDEPENDENT REGISTERED PUBLIC
              ACCOUNTING FIRM
            
            
            F-2CONSOLIDATED
              FINANCIAL STATEMENTSConsolidated
                Balance Sheets
            
            
            F-3Consolidated
                Statements of Operations
            
            
            F-4Consolidated
                Statements of Shareholders' Equity
                (Deficit)
            
            
            F-5Consolidated
                Statements of Cash Flows
            
            
            F-6
              -
              F-7Notes
                to Consolidated Financial Statements
            
            
            F-8
              -
              F-19




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Shareholders


Innovative
      Card Technologies, Inc.


Los
      Angeles, California





We
      have
      audited the accompanying consolidated balance sheets of Innovative Card
      Technologies, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
      related consolidated statements of operations, shareholders' equity (deficit)
      and cash flows for the years then ended. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Innovative Card
      Technologies, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
      results of their operations and their cash flows for the years then ended,
      in
      conformity with U.S. generally accepted accounting principles.





**SINGER
      LEWAK GREENBAUM & GOLDSTEIN LLP**





Los
      Angeles, California


April
      2,
      2007




F-2




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**




**December
                31,**
              **2006**
            
            **December
                31,**
              **2005****ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            8,270,096
            
            $
            3,277,532Accounts
                receivable
            
            
            14,836
            
            
            18,297Prepaids
                and other current assets
            
            
            42,658
            
            
            11,773Deposits
                on raw materials held for production
            
            
            1,199,453
            
            
            100,000Raw
                materials held for production
            
            
            —
            
            
            172,497Work
                in progress inventory
            
            
            1,098,553
            
            
            —Total
                current assets
            
            
            10,625,596
            
            
            3,580,099**PROPERTY
                AND EQUIPMENT, NET**
            
            
            360,920
            
            
            241,264**RENT
                DEPOSITS**
            
            
            71,244
            
            
            —**INTANGIBLE
                ASSETS, NET**
            
            
            3,666,343
            
            
            —Total
                assets
            
            $
            14,724,103
            
            $
            3,821,363**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable and accrued expenses
            
            $
            460,162
            
            $
            252,806Accounts
                payable - related parties
            
            
            1,322,159
            
            
            15,000Short
                term portion of capital lease
            
            
            8,355
            
            
            9,331Deferred
                revenue
            
            
            340,010
            
            
            37,143Total
                current liabilities
            
            
            2,130,686
            
            
            314,280**LONG
                TERM LIABILITIES**Long
                term portion of capital lease
            
            
            —
            
            
            8,355Total
                liabilities
            
            
            2,130,686
            
            
            322,635Commitments
                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, 50,000,000 shares authorized, 28,372,308
                and
                17,964,566 shares issued and outstanding
            
            
            28,372
            
            
            17,965Additional
                paid-in capital
            
            
            26,298,606
            
            
            10,347,710Accumulated
                deficit
            
            
            (13,733,561
            )
            
            (6,866,947
            )Total
                stockholders’ equity
            
            
            12,593,417
            
            
            3,498,728Total
                liabilities and stockholders’ equity
            
            $
            14,724,103
            
            $
            3,821,363





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




F-3




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


Year
                  Ended
              
              Year
                  EndedDecember
                  31,
              
              December
                  31,2006
              
              2005Revenues
              
              $
              35,382
              
              $
              21,460Cost
                  of Goods Sold
              
              
              —
              
              
              9,865Gross
                  Margin
              
              
              35,382
              
              
              11,595Operating
                  expensesAdministrative
              
              
              4,335,095
              
              
              1,178,398Consulting
                  Fees
              
              
              85,000
              
              
              85,000Professional
                  Fees
              
              
              917,882
              
              
              445,913Research
                  and development
              
              
              1,896,499
              
              
              827,354Total
                  operating expenses
              
              
              7,234,476
              
              
              2,536,665Loss
                  from operations
              
              
              (7,199,094
              )
              
              (2,525,070
              )Other
                  income (expense)Interest
                  income
              
              
              336,119
              
              
              6,055Interest
                  expense
              
              
              (1,239
              )
              
              (43,593
              )Total
                  other income (expense)
              
              
              334,880
              
              
              (37,538
              )Loss
                    before provision for income taxes
              
              
              (6,864,214
              )
              
              (2,562,608
              )Provision
                  for income taxes
              
              
              (2,400
              )
              
              (2,400
              )Net
                  loss
              
              $
              (6,866,614
              )
              $
              (2,565,008
              )Basic
                  and diluted loss per share
              
              $
              (0.29
              )
              $
              (0.23
              )Weighed-average common
                    shares outstanding
              
              
              23,535,792
              
              
              11,341,702




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




F-4




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


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


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**




**Series
                A**
              **Preferred
                Stock**
            
            **Common**
              **Stock****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Additonal
                Paid-in Capital**
            
            **Accumulated
                Deficit**
            
            **Total**Balance,
                December 31, 2004
            
            
            2,843,500
            
            $
            2,844
            
            
            8,050,000
            
            $
            8,050
            
            $
            3,673,715
            
            $
            (4,301,939
            )
            $
            (617,330
            )Conversion
                of Series A PreferredStock
                to Common Stock, May 5, 2005
            
            
            (2,843,500
            )
            
            (2,844
            )
            
            2,843,500
            
            
            2,844
            
            
            —
            
            
            —
            
            
            —Issuance
                of units whereby each unit represents one share of common stockand
                1⁄2 share of a detachable warrant
            
            
            
            
            
            
            
            
            7,071,066
            
            
            7,071
            
            
            7,063,995
            
            
            —
            
            
            7,071,066Offering
                costs
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (390,000
            )
            
            —
            
            
            (390,000
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,565,008
            )
            
            (2,565,008
            )Balance,
                December 31, 2005
            
            
            —
            
            
            —
            
            
            17,964,566
            
            
            17,965
            
            
            10,347,710
            
            
            (6,866,947
            )
            
            3,498,728Exercise
                of warrants
            
            
            —
            
            
            —
            
            
            400,100
            
            
            400
            
            
            437,225
            
            
            —
            
            
            437,625Issuance
                of shares of Common Stock
            
            
            —
            
            
            —
            
            
            3,785,500
            
            
            3,785
            
            
            11,352,715
            
            
            —
            
            
            11,356,500Offering
                Costs
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,027,318
            )
            
            —
            
            
            (1,027,318
            )Issuance
                of shares of Common Stock in Connection with the acquisition of certain
                assets of nCryptone
            
            
            —
            
            
            —
            
            
            4,500,000
            
            
            4,500
            
            
            3,463,905
            
            
            —
            
            
            3,468,405Stock
                compensation expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            472,598
            
            
            —
            
            
            472,598Cashless
                exercise of warrants
            
            
            —
            
            
            —
            
            
            1,722,142
            
            
            1,722
            
            
            (1,722
            )
            
            —
            
            
            —Warrant
                compensation expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,253,493
            
            
            —
            
            
            1,253,493Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (6,866,614
            )
            
            (6,866,614
            )Balance,
                December 31, 2006
            
            
            —
            
            $
            —
            
            
            28,372,308
            
            $
            28,372
            
            $
            26,298,606
            
            $
            (13,733,561
            )
            $
            12,593,417




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




F-5




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




For
                  the Years Ended
                December
                  31,2006
              
              2005Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (6,866,614
              )
              $
              (2,565,008
              )Adjustments
                  to reconcile net loss to net cash used
                  in operating activitiesDepreciation
                  and amortization
              
              
              488,390
              
              
              78,009Stock
                  compensation expense
              
              
              472,598
              
              
              —Warrant
                  compensation expense
              
              
              809,000
              
              
              —(Increase)
                  decrease in Accounts receivable
              
              
              18,291
              
              
              (14,982
              )(Increase)
                  decrease in Prepaid expenses and other current assets
              
              
              (30,885
              )
              
              29,658(Increase)
                  decrease in Deposits on raw materials held for production
              
              
              (701,472
              )
              
              (100,000
              )(Increase)
                  decrease in Raw materials held for production
              
              
              172,497
              
              
              (172,497
              )(Increase)
                  decrease in Work in Progress Inventory
              
              
              (1,098,553
              )
              
              —(Increase)
                  decrease in Rental Deposit
              
              
              (71,244
              )
              
              —Increase
                  (decrease) in Accounts payable and accrued expenses
              
              
              207,356
              
              
              176,302Increase
                  (decrease) in Accounts payable - related parties
              
              
              307,149
              
              
              (233,980
              )Increase
                  (decrease) in Deferred revenue
              
              
              302,867
              
              
              (3,343
              )Net
                  cash used in operating activities
              
              
              (5,990,620
              )
              
              (2,805,841
              )Cash
                  flows from investing activitiesPurchase
                  of Property and Equipment
              
              
              (218,786
              )
              
              (276,833
              )Net
                  cash used in investing activities
              
              
              (218,786
              )
              
              (276,833
              )Cash
                  flows from financing activitiesRepayment
                  of notes payable
              
              
              —
              
              
              (648,270
              )Proceeds
                  from exercise of warrants
              
              
              437,625
              
              
              —Repayment
                  of demand notes payable related parties
              
              
              —
              
              
              (317,000
              )Repayment
                  of demand notes payable
              
              
              —
              
              
              (50,000
              )Proceeds
                  from notes payable related parties
              
              
              —
              
              
              650,000Proceeds
                  from demand notes payable
              
              
              —
              
              
              50,000Proceeds
                  from 10/19/05 Common Stock offering
              
              
              —
              
              
              6,517,500Offering
                  costs- 10/19/05 Common Stock offering
              
              
              —
              
              
              (390,000
              )Proceeds
                  from 5/30/06 Common Stock offering
              
              
              11,356,500
              
              
              —Offering
                  costs- 5/30/06 Common Stock offering
              
              
              (582,825
              )
              
              —Interest
                  payable- related parties
              
              
              —
              
              
              23,944Interest
                  paid on demand notes payable related parties
              
              
              —
              
              
              (9,128
              )Interest
                  payable on demand notes payable
              
              
              —
              
              
              542Interest
                  paid
              
              
              —
              
              
              (542
              )Payments
                  on capital lease
              
              
              (9,330
              )
              
              (8,627
              )Net
                  cash provided by financing activities
              
              
              11,201,970
              
              
              5,818,419Net
                  increase in cash and cash equivalents
              
              
              4,992,564
              
              
              2,735,748Cash
                  and cash equivalents, beginning of year
              
              
              3,277,532
              
              
              541,784Cash
                  and cash equivalents, end of period
              
              $
              8,270,096
              
              $
              3,277,532


The
      accompanying notes are an integral part of these financial statements





F-6




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Supplemental
      disclosures of cash flow




For
                the Years Ended
              December
                31,2006
            
            2005Interest
              paid
            
            $
            1,239
            
            $
            28,833Income
              tax paid
            
            $
            —
            
            $
            —




Supplemental
      schedule of non-cash investing and financing activities





During
      the year ended December 31, 2005,





o
      2,843,500 shares of preferred stock with a par value of $0.001 was converted
      into 2,843,500 shares of common stock with a par value of $0.001.





o
      $347,816 of demand notes payable related parties, that included interest, was
      converted into 347,816 shares of common stock with a par value of $0.001 and
      173,908 warrants to purchase common stock at $1.25 per share.





o
      $125,000 of accounts payable related parties was converted to 125,000 shares
      of
      common stock with a par value of $0.001 and 62,500 warrants to purchase common
      stock at $1.25 per share.





o
      $92,850
      of accounts payable and accrued expenses was converted to 80,750 shares of
      common stock with a par value of $0.001 and 40,375 warrants to purchase common
      stock at $1.25 per share.





During
      the year ended December 31, 2006





On
      April
      12, 2006, the Company issued warrants to purchase 150,000 shares of common
      stock
      at an exercise price of $3.25 per share to SRG, LLC in conjunction with the
      retention of SRG, LLC to perform investor relations services for the Company
      whereby the Company recognized $450,000 in administrative costs relating to
      the
      issuance of these warrants.





On
      May
      19, 2006, the Company issued warrants to purchase 100,000 shares of common
      stock
      at an exercise price of $4.13 per share to Crystal Research Associates, LLC
      in
      conjunction with the retention of Crystal Research Associates, LLC to perform
      investor relations services for the Company whereby the Company recognized
      $359,000 in administrative costs relating to the issuance of these
      warrants.





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





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





On
      June
      28, 2006, the Company entered into an agreement with nCryptone whereby for
      $1,000,010, the Company could acquire a license to nCryptone's buzzer patent
      that is payable within one year of June 28, 2006.




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





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





F-7




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





**GENERAL**





The
      accompanying consolidated financial statements of Innovative Card Technologies,
      Inc. ("ICTI") include the amounts of its wholly-owned subsidiary, PSA Co. and
      LensCard US, LLC ("LensCard US"), formerly Universal Magnifier, LLC, organized
      under the laws of the State of Delaware on January 7, 1999 and LensCard
      International Limited ("LensCard International"), formerly Universal Magnifier
      International Limited ("UMIL"), incorporated as an International Business
      Company under the laws of the British Virgin Islands on August 21, 1995. On
      January 7, 1999, LensCard US merged with Universal Magnifier LLC ("UMUS"),
      a
      California limited liability company founded in January, 1998, for the purpose
      of changing the place of organization of UMUS.





LensCard
      Corporation ("LCC") was incorporated in the State of Delaware on November 22,
      2002 and had no financial activity from that date until January 1, 2004. PSACo.,
      Inc. ("PSAC") was incorporated in the State of Delaware on August 27, 2003.




**COMPANY
      OVERVIEW**





The
      Company researches, develops and markets technology-based card enhancements
      primarily for the enterprise and on-line banking markets that are designed
      to
      enable issuers to increase acquisition rates of customers and improve security.
      It commenced sales of its first product, the LensCard, or a card embedded with
      a
      small magnifying lens, in 1998. Since 2002, its core focus has been and
      continues to be on research and development and marketing of its power inlay
      technology that is designed to bring power-based applications, including light,
      sound and display screens, to cards. Power inlay technology consists of a
      battery, circuit, and switch that can power applications on credit cards and
      other information-bearing plastic cards. It has devoted a significant majority
      of its efforts to completing the development of its power inlay technology,
      initiating marketing and raising the financing required to do so and funding
      its
      expenses. It has generated limited revenues that derive from licensing
      agreements of its LensCard product, most of which have terminated.




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





**PRINCIPLES
      OF CONSOLIDATION**





The
      consolidated financial statements include the accounts of Innovative Card
      Technologies, its wholly owned subsidiary, PSA Co., Lens Card US, LLC and Lens
      Card International, (the "Company"). All significant inter-company accounts
      and
      transactions are eliminated in consolidation.





**REVENUE
      RECOGNITION**





The
      Company recognize revenues in accordance with SEC Staff Accounting Bulletin
      No.
      104, or SAB 104. Revenues are recognized when persuasive evidence of an
      arrangement exists, delivery has occurred or services have been rendered, the
      price is fixed and determinable and collectibility is reasonably assured. The
      Company recognize certain long-term contracts using the complete-contract method
      in accordance to SOP 81-1, “Accounting for Performance of Construction-Type and
      Certain Production-Type of Contracts.”





**COMPREHENSIVE
      INCOME**





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





**INVENTORY**





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





**INTANGIBLE
      ASSETS AND LONG-LIVED ASSETS**





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





F-8





**CASH
      AND CASH EQUIVALENTS**





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





**MAJOR
      SUPPLIERS**





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





The
      Company obtains the display, a key component for the Company’s ICT DisplayCard,
      from a single source, SmartDisplayer, pursuant to the Company’s agreement with
      SmartDisplayer. The Company believes that alternative sources for this component
      in the event of a disruption or discontinuation in supply would not be available
      on a timely basis, which could disrupt Company operations relating to the ICT
      DisplayCard, delay production of the ICT DisplayCard for up to twelve months
      and
      impair the Company’s ability to manufacture and sell the ICT
      DisplayCard.





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




**PROPERTY
      AND EQUIPMENT**





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





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





The
      Company's financial instruments include cash and cash equivalents, prepaid
      expenses and other current assets, due from related parties, accounts payable
      and accrued expenses, advances payable, and deferred revenue. The book value
      of
      all other financial instruments are representative of their fair values.





**RESEARCH
      AND DEVELOPMENT**





Research
      and development costs are charged to operations as incurred.





**LOSS
      PER SHARE**





The
      Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share is
      computed by dividing loss available to common shareholders by the
      weighted-average number of common shares outstanding. Diluted loss per share
      is
      computed similar to basic loss per share except that the denominator is
      increased to include the number of additional common shares that would have
      been
      outstanding if the potential common shares had been issued and if the additional
      common shares were dilutive. Common equivalent shares are excluded from the
      computation if their effect is anti-dilutive.




Since
      their effect would have been anti-dilutive, common stock equivalents of
      4,646,598 warrants and 2,351,000 stock options were excluded from the
      calculation of diluted loss per share for the year ended December 31, 2006.
      Since their effect would have been anti-dilutive, common stock equivalents
      of
      6,833,133 warrants and 1,585,000 stock options were excluded from the
      calculation of diluted loss per share for the year ended December 31,
      2005.





**INCOME
      TAXES**





The
      Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each year-end based on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income.





F-9





**STOCK
      INCENTIVE PLAN**





The
      Company accounts for its stock incentive plan under SFAS No. 123R, "Share-Based
      Payments" using the fair value based method. Under this method, compensation
      cost is measured at the grant date based on the value of the award and is
      recognized over the service period, which is usually the vesting period.





**ESTIMATES**





The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Actual results could differ from those estimates.





**CONCENTRATIONS
      OF CREDIT RISK**





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




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**RECLASSIFICATION**





Certain
      amounts included in the prior year financial statements have been reclassified
      to conform with the current year presentation. Such reclassification did not
      have any effect on the reported net loss.





**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued a
      revision to FASB Statement No. 123, ”Share-Based Payment,” “SFAS No. 123(R)”.
      This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to
      Employees. This Statement establishes standards for the accounting for
      transactions in which an entity exchanges it equity instructions for goods
      or
      services. It also addresses transactions in which an entity incurs liabilities
      in exchange for goods or services. It also addresses transactions in which
      an
      entity incurs liabilities in exchange for goods or services that are based
      on
      the fair value of entity's equity instruments or that may be settled by the
      issuance of those equity instruments. This Statement is effective for public
      entities that file as small business issuers as of the beginning of the first
      interim or annual reporting period that begins after December 15, 2005. The
      Company has adopted this statement for the year ended December 31, 2006. The
      Company recorded $472,598 of compensation expense for employee stock options
      during the year ended December 31, 2006.




In
      May
      2005, the FASB issued Statement of Financial Accounting Standards ("SFAS")
      No.
      154, "Accounting Changes and Error Corrections. SFAS No. 154 replaces Accounting
      Principles Board ("APB") Opinion No. 20, "Accounting Changes" and SFAS No.
      3,
      "Reporting Accounting Changes in Interim Financial Statements", and changes
      the
      requirements for the accounting for and reporting of a change in accounting
      principle. This Statement applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific transition
      provisions. When a pronouncement includes specific transition provision, those
      provisions should be followed.





Opinion
      20 previously required that most voluntary changes in accounting principle
      be
      recognized by including in net income of the period of the change the cumulative
      effect of changing to the new accounting principle. This Statement requires
      retrospective application to prior periods' financial statements of changes
      in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, this Statement requires
      that
      the new accounting principle be applied to the balances of assets and
      liabilities as of the beginning of the earliest period for which retrospective
      application is practicable and that a corresponding adjustment be made to the
      opening balance of retained earnings (or other appropriate components of equity
      or net assets in the statement of financial position) for that period rather
      than being reported in an income statement. When it is impracticable to
      determine the cumulative effect of applying a change in accounting principle
      to
      all prior periods, this Statement requires that the new accounting principle
      be
      applied as if it were adopted prospectively from the earliest date practicable.





The
      correction of an error in previously issued financial statements is not an
      accounting change. However, the reporting of an error correction involves
      adjustments to previously issued financial statements similar to those generally
      applicable to reporting an accounting change retrospectively. Therefore, the
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed by this Statement. The Company is currently
      evaluating the impact this new Standard, but believes that it will not have
      a
      material impact on the Company's financial position, results of operations
      or
      cash flows.





F-10





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





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





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




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




In
      September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plan - an amendment of FASB
      Statement No. 87, 88, 106 and 132(R). SFAS No. 158 requires an
      employer to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan as an asset or liability in its statement of financial
      position and recognize changes in the funded status in the year in which the
      changes occur. SFAS No. 158 is effective for fiscal years ending after
      December 15, 2006. The Company believes that the adoption of SFAS
      No. 158 will not have a material impact on the Company’s financial
      position, results of operations or cash flows.





In
      September 2006, the SEC issued SAB No. 108, Considering the Effects of
      Prior Year Misstatements when Quantifying Misstatements in Current Year
      Financial Statements (“SAB 108”). SAB 108 requires that registrants quantify
      errors using both a balance sheet and income statement approach and evaluate
      whether either approach results in a misstated amount that, when all relevant
      quantitative and qualitative factors are considered, is material. SAB 108 is
      not
      expected to have a material impact on the Company’s consolidated financial
      statements.





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




F-11




**NOTE
      3 - DEPOSITS FOR RAW MATERIALS HELD FOR PRODUCTION**




**December
                31,**
              **2006**
            
            **December
                31,**
              **2005**Deposits
                on raw materials held for production (display & manufacturing
                component)
            
            $
            1,199,453
            
            $
            100,000TOTAL
            
            $
            1,199,453
            
            $
            100,000





These
      deposits for raw materials are held by two vendors.




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





Raw
      materials and work in progress inventory held for production at December 31,
      2006 and 2005 consisted of the following and is stated at the lower cost or
      market:





2006
            
            
            2005Raw
                  materials held for production(battery
                  component)
            
            $
            —
            
            $
            172,497Work
                in progress inventory
            
            
            1,098,553
            
            
            —TOTAL
            
            $
            1,098,553
            
            $
            172,497




**NOTE
      5 - PROPERTY AND EQUIPMENT**





Property
      and equipment at December 31, 2006 and 2005 consisted of the
      following:





**2006**
            
            **2005**Computer
                equipment
            
            $
            55,672
            
            $
            16,939Office
                equipment
            
            
            8,168
            
            
            8,168Furniture
                and fixtures
            
            
            19,878
            
            
            18,270Production
                equipment, capital lease
            
            
            32,598
            
            
            32,598Leasehold
                improvements
            
            
            5,610
            
            
            5,610Production
                equipment
            
            
            473,736
            
            
            269,698595,662
            
            
            351,283Less
                accumulated depreciation and amortization
            
            
            (234,742
            )
            
            (110,019
            )TOTAL
            
            $
            360,920
            
            $
            241,264




Depreciation
      and amortization expense was $124,723 and $78,009, for the years ended December
      31, 2006 and 2005, respectively.





**NOTE
      6 - INTANGIBLE ASSET**




Initially,
      upon the completion of the acquisition of nCryptone on June 28, 2006, the
      Company allocated the purchase price in accordance with the signed agreement
      with nCryptone assigning a temporary value of $19,303,095 to intangible assets
      and $1,000,010 to a patent license fee, pending further evaluation by the
      Company and the results of a report to be issued by a third party valuation
      firm. The Company’s preliminary allocation of the purchase price is summarized
      as follows:





Assets:Intangible
                Assets
            
            $
            19,303,095Accounts
                Receivable
            
            
            14,830Equipment
            
            
            25,619Inventory
            
            
            397,956Total
                Assets
            
            $
            19,741,500




F-12




Upon
      review of the report received from the third party valuation firm that assisted
      the Company with the valuation of the intangible assets and the patent license
      fee and other factors, the Company allocated the purchase 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 will be amortized over the remaining life
      of
      the patent (12 years through November 2018). The total purchase price allocation
      of the DisplayCard assets of nCryptone is summarized as follows:




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




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





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




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





Amortization
      expense for 2006 was $363,667. Estimated amortization expense for each of the
      ensuing years through December 31, 2011 is, respectively, $703,871, $703,871,
      $682,204, $660,538 and $370,538.





**NOTE
      7 - PROVISION FOR INCOME TAXES**





Income
      taxes are accounted for using an asset and liability approach that requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of temporary differences between the financial statement and the
      tax bases of assets and liabilities at the applicable tax rates. A valuation
      allowance is provided when it is more likely than not that some portion or
      all
      of the deferred tax assets will not be realized.





The
      provision for income taxes consisted of the following:


Years
                  Ended December 31,2006
              
              2005Current
                  provision:Federal
              
              
              —
              
              
              —State
              
              $
              2,400
              
              $
              2,400Total
                  Current Provision
              
              $
              2,400
              
              $
              2,400Deferred
                  provision (benefit)Federal
              
              
              —
              
              
              —State
              
              
              —
              
              
              —Total
                  deferred portion (benefit)
              
              
              —
              
              
              —Total
                  provision for income taxes
              
              $
              2,400
              
              $
              2,400





Reconciliations
      between the statutory federal income tax rate and the Company’s effective income
      tax rate were as follows:




Years
                  Ended December 31,2006
              
              2005Federal
                  income tax at statutory rates
              
              
              34
              %
              
              34
              %State
                  income taxes, net of federal benefit
              
              
              6
              %
              
              6
              %Change
                  in valuation allowance
              
              
              (40
              %)
              
              (41
              %)Other
              
              
              0
              %
              
              1
              %Effective
                  income tax rate
              
              
              0
              %
              
              0
              %


Deferred
      tax assets and liabilities are measured based on the difference between the
      financial statement and tax bases of assets and liabilities at the applicable
      tax rates. The significant components of the Company’s net deferred tax assets
      and (liabilities) consisted of the following:





December
                31,2006
            
            2005Benefits
                from NOL carryforwards
            
            $
            3,472,511
            
            $
            1,684,177Tax
                credit carryforward
            
            $
            61,788
            
            $
            61,788Differences
                in financial statement and tax accounting for:Stock
                compensation
            
            $
            549,037
            
            $
            —Accrued
                vacation
            
            $
            10,358
            
            $
            —Inventory
            
            $
            260,140
            
            $
            —Deferred
                Revenue
            
            $
            145,660
            
            $
            15,989Depreciation
                and amortization
            
            $
            237,830
            
            $
            —State
                income tax
            
            $
            (331,068
            )
            $
            (118,115
            )Total
                Deferred tax assets (gross)
            
            $
            4,406,526
            
            $
            1,643,799Less
                Valuation allowance
            
            $
            (4,406,526
            )
            $
            (1,643,799
            )Total
                Deferred Tax assets, net
            
            $
            —
            
            $
            —




F-13




A
      valuation allowance has been established due to the uncertainty of realizing
      certain net operating loss (NOL) carryforwards and the other deferred tax
      assets. The Company had NOL carryforwards at December 31, 2006 of approximately
      $8.1 million for federal income tax purposes and an aggregate of $8.2 million
      of
      state income tax purposes. The company also has Federal research tax credit
      carryforward of $61.788. The Company’s Federal and State NOL carryforwards will
      be available to offset taxes through December 31, 2026 and 2012,
      respectively.








**NOTE
      8 - COMMITMENTS AND CONTINGENCIES**





**LEASE**





Until
      September 30, 2006, the Company subleased its office space under a
      non-cancelable operating lease agreement from a stockholder. The lease required
      minimum monthly payments of $2,568, and required the Company to pay 15.03%
      of any additional rents and/or charges of any kind due from Bemel & Ross.
      Since May 2005, the lease became a month to month tenancy cancelable by either
      party with thirty days notice. The additional rents and/or charges that may
      be
      due consist of direct costs passed through the master landlord to Bemel &
Ross. The direct costs are based on operating costs during the calendar year
      ending December 31, 2003, or the base year. Thereafter, if the direct costs
      in a
      subsequent year exceed the direct costs in the base year, the master landlord
      bills Bemel & Ross its proportionate share of the excess of direct costs,
      which may include tax costs related to real estate and/or costs and expenses
      incurred by the master landlord in connection with common areas of the building,
      the parking structure or the cost of operating the building. Through September
      30, 2006, Bemel & Ross has charged the Company for additional rents and/or
      charges in the amount of $2,165. Future minimum lease payments under this
      operating lease agreement at September 30, 2006 are $0. The company terminated
      this lease on September 30, 2006.





On
      September 14, 2006, the Company entered into a sublease for 6,500 square feet
      of
      office space with Bergman & Dacey, Inc. which commenced on October 1, 2006
      and expires on July 31, 2009. The Company paid a security deposit of $71,244.
      The lease requires monthly payments of $16,789 plus 32.5% of triple net costs
      charged to Bergman & Dacey, such as common area operating expenses, taxes
      and insurance. The rent increases 3% on October 1st of each year. Minimum lease
      payments will be $202,974, $209,063 and $124,677 in calendar years 2007, 2008
      and 2009, respectively.





Rent
      expense was $77,524 and $37,040 for the years ended December 31, 2006 and 2005,
      respectively.





**REVENUE
      SHARING AGREEMENTS**





The
      Company entered into an agreement with its wholly owned subsidiary, PSACo.,
      Inc., a Delaware corporation, whereby if the Company receives payments from
      royalty rights related to the LensCard that the Company would be obligated
      to
      make payments related to these rights to PSACo, the Company’s wholly owned
      subsidiary. As of December 31, 2006 and 2005, annual sales have not been
      sufficient to require any payments pursuant to the above agreements to PSACo.
      Any future payments that may be required will be recorded as a reduction of
      revenue.





**PATENT
      AND TRADEMARK LICENSE AGREEMENTS**





The
      Company has entered into various Patent and Trademark License Agreements with
      financial institutions granting a limited, non-exclusive right and license
      to
      make, distribute, market, sell, and use credit cards or debit cards containing
      a
      magnifying lens (the "Licensed Products"). These agreements are as
      follows:




·
            An
                agreement dated July 9, 2001, providing for royalties to the Company
                at
                the rate of $1.20 per LensCard issued to a customer. Royalties will
                be due
                and payable quarterly within 30 days after the last day of each calendar
                quarter. The Company receives sales reports within thirty days following
                the end of a calendar quarter from the customer. The agreement terminated
                July 9, 2006.




·
            An
                agreement dated January 16, 2002 and expiring on March 31, 2004,
                providing
                for royalties to the Company at the rate of $1.50 per LensCard issued
                to a
                customer. Royalties were due and payable quarterly within 30 days
                after
                the last day of each calendar quarter. The Company receives sales
                reports
                within thirty days following the end of a calendar quarter from this
                customer. On April 1, 2004, the agreement was extended requiring
                a $12,500
                payment by the customer with the Company receiving a royalty of $0.25
                per
                licensed product and $0.50 for each additional LensCard sold thereafter.
                The revised agreement is effective until April 1,
                2008.




F-14




**EMPLOYMENT
      AGREEMENT**





The
      Company entered into an Employment Agreement with Alan Finkelstein, its Director
      and President; the initial term of three years, began January 1, 1998 and has
      since January 1, 2000 renewed for successive one year terms. As of December
      31,
      2006, the termination date is December 31, 2007. However, the agreement
      automatically renews if not terminated by December 31, 2007. Mr. Finkelstein
      earns $16,667 as a monthly salary.





**LITIGATION**





To
      date,
      the Company has never been a party to and has never been involved with any
      litigation. However, in the future, the Company, like any other business or
      individual, may become subject to litigation some of which the Company can
      control and other litigation that the Company cannot control. If the Company
      were to become involved in any litigation, management would have to assess
      whether or not such litigation would likely have a material adverse effect
      on
      the Company’s consolidated financial condition or results of
      operations.





**NOTE
      9 - STOCKHOLDER’S EQUITY**





**PREFERRED
      STOCK**





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





From
      April 7, 2004 through October 18, 2004, investors purchased 2,568,500 shares
      of
      convertible series A preferred stock ("Preferred Stock") for $2,568,500, which
      includes the conversion of $340,000 worth of convertible promissory notes into
      340,000 shares of Series A Preferred Stock that were issued on April 7, 2004.
      Not included in the $2,568,500 is the conversion of unsecured advances owed
      to
      certain stockholders totaling $275,000 into 275,000 shares of Preferred Stock.
      Each share of Preferred Stock has a $.001 par value, a non-cumulative dividend
      of $0.06 per share when and if declared by the board of directors, liquidation
      preference and was convertible into one share of common stock at $1 per share.
      Each share of Preferred Stock was automatically converted into shares of common
      stock upon either (i) a majority of the outstanding shares of Preferred Stock,
      voting as a separate class, approves the conversion; or (ii) some or all of
      the
      common shares underlying the Preferred Stock are covered by an effective
      registration statement filed with the SEC. On May 5, 2005, the SEC declared
      the
      registration statement that covered, in part, common stock underlying the
      Preferred Stock effective thereby converting all 2,843,500 outstanding shares
      of
      Preferred Stock into common stock.





**COMMON
      STOCK**





During
      the year ended December 31, 2005, the Company completed the following:





On
      October 19, 2005, the Company issued 7,071,066 shares of common stock and
      4,433,133 warrants to purchase common stock at a price of $1.00 per share to
      a
      number of investors pursuant to a private placement for total gross proceeds
      of
      $6,517,500 and the conversion of $571,066 of indebtedness.





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





On
      May
      30, 2006, the Company issued 3,785,500 shares of common stock at a price of
      $3.00 per share to accredited investors pursuant to a private placement for
      total gross proceeds of $11,356,500 and a warrant to purchase 113,565 shares
      of
      our common stock at an exercise price of $3.30 per share that expire on May
      30,
      2011.





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




**WARRANTS**





The
      following summarizes the warrant transactions:


Warrants
                  Outstanding
              
              Weighted-Average
                Exercise
                  PriceOutstanding,December
                  31, 2004
              
              
              2,400,000
              
              $
              1.00Granted
              
              
              4,433,133
              
              $
              1.25Outstanding,December
                  31, 2005
              
              
              6,833,133
              
              $
              1.16Granted
              
              
              363,565
              
              $
              3.51Exercised
              
              
              (2,550,100
              )
              $
              1.00Outstanding,
                December 31, 2006
              
              
              4,646,598
              
              $
              1.43Exercisable,
                December 31, 2006
              
              
              4,646,598
              
              $
              1.43




F-15




The
      weighted-average fair value of the warrants granted during the twelve months
      ended December 31, 2006 for which the exercise price equals the market price
      on
      the grant date was $3.45, and the weighted-average exercise price was $3.51.
      No
      warrants were granted during the twelve months ended December 31, 2006 for
      which
      the exercise price was less than or greater than the market price on the grant
      date. The weighted-average remaining contractual life of the 4,646,598 warrants
      with a weighted average exercise price of $1.43 as of December 31, 2006 is
      45
      months.





**2004
      STOCK INCENTIVE PLAN**





The
      Company's Board of Directors and stockholders approved the 2004 Stock Incentive
      Plan in August 2004. The 2004 Stock Incentive Plan provides for the grant of
      incentive stock options to the Company's employees, and for the grant of
      non-statutory stock options, restricted stock, stock appreciation rights and
      performance shares to the Company's employees, directors and consultants.





The
      Company reserved a total of 2,351,000 shares of its common stock for issuance
      pursuant to the 2004 Stock Incentive Plan. The board of directors, or a
      committee of the board, administers the 2004 Stock Incentive Plan. Stock options
      are generally granted with terms of up to ten years and vest over a period
      of
      five years under the 2004 Stock Incentive Plan. The administrator determines
      the
      exercise price of options granted under the 2004 Stock Incentive Plan, but
      the
      exercise price must not be less than 85% of the fair market value of the
      Company's common stock on the date of grant. In the event the participant owns
      10% or more of the voting power of all classes of the Company's stock, the
      exercise price must not be less than 110% of the fair market value per share
      of
      the Company's common stock on the date of grant. With respect to all incentive
      stock options, the exercise price must at least be equal to the fair market
      value of the Company's common stock on the date of grant. The term of an
      incentive stock option may not exceed 10 years, except that with respect to
      any
      participant who owns 10% of the voting power of all classes of the Company's
      outstanding stock or the outstanding stock of any parent or subsidiary of the
      Company, the term must not exceed five years an the exercise price must equal
      at
      least 110% of the fair market value on the grant date. The administrator
      determines the term of all other options; however, no option will have a term
      in
      excess of 10 years from the date of grant.





The
      2004
      Stock Incentive Plan will automatically terminate on August 5, 2014, unless
      it
      terminates sooner because all shares available under the Plan have been issued
      or all outstanding options terminate in connection with a change of control.
      In
      addition, the Board of Directors has the authority to amend the 2004 Stock
      Incentive Plan provided this action does not impair the rights of any
      participant.





A
      summary
      of stock option activity and weighted average exercise prices for the years
      ended December 31, 2006 and 2005 is as follows:





**ALL
                OPTIONS**
            
            **2006**
            
            **2005****WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Outstanding
                at beginning of period
            
            
            1,585,000
            
            $
            1.00
            
            
            1,275,000
            
            
            —Options
                granted
            
            
            766,000
            
            $
            4.39
            
            
            350,000
            
            $
            1.00Options
                forfeited
            
            
            —
            
            
            —
            
            
            (40,000
            )
            $
            1.00Options
                expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —Options
                exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Outstanding
                at end of period
            
            
            2,351,000
            
            $
            2.10
            
            
            1,585,000
            
            $
            1.00Exercisable
                at end of period
            
            
            835,000
            
            $
            1.06
            
            
            510,000
            
            $
            1.00






**NON
                VESTED OPTIONS**
            
            **2006**
            
            **2005****WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Non-
                vested at beginning of period
            
            
            1,075,000
            
            $
            1.00
            
            
            990,000
            
            
            —Options
                granted
            
            
            766,000
            
            $
            4.39
            
            
            350,000
            
            $
            1.00Options
                forfeited
            
            
            —
            
            
            —
            
            
            (40,000
            )
            $
            1.00Options
                expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —Options
                vested
            
            
            (325,000
            )
            $
            1.14
            
            
            (225,000
            )
            $
            1.00Non-
                vested at end of period
            
            
            1,516,000
            
            $
            2.68
            
            
            1,075,000
            
            $
            1.00





F-16





The
      weighted average grant-date fair value of options granted during years ended
      December 31, 2006 and 2005 was $4.39, and $1.00, respectively.




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




**Options
                outstanding**
            
            **Options
                exercisable**December
                31, 2005
            
            
            8.37
                years
            
            
            8.37
                yearsDecember
                31, 2006
            
            
            8.12
                years
            
            
            7.18
                years




The
      Company recorded $472,598 of compensation expense for employee stock options
      during the year ending December 31, 2006, which is included in the general
      and
      administrative expense category. At December 31, 2006, there was a total of
      $3,328,840 of unrecognized compensation costs related to the non-vested
      share-based compensation arrangements under the 2004 Plan. The cost is expected
      to be recognized over a weighted average period of 2.67 years. The total fair
      value of shares vested during the year ended December 31, 2006 was approximately
      $371,500. The aggregate intrinsic value of total outstanding options and total
      exercisable options was $5,666,500 and $2,792,500, respectively as of December
      31, 2006.




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




F-17




If
      the
      fair value method had been applied, the Company's net loss and earnings per
      share would have been reduced to the pro forma amounts as follows:




**Year****Ended**
              **December
                31, 2005**Net
                loss:As
                reported
            
            $
            (2,565,008
            )Less:
                Total share-Based employee Compensation expense Determined under
                fair
                value method for employee stock options, net of tax
            
            
            (250,858
            )Pro
                forma net loss
            
            $
            (2,815,866
            )Basic
                and diluted loss per Share:As
                reported
            
            $
            (0.23
            )Pro
                Forma
            
            $
            (0.25
            )




The
      Black
      Scholes assumptions used are listed below:





**2006**
            
            **2005**Risk
                free interest rate
            
            
            4.97
            %
            
            2.34
            %Dividends
            
            
            —
            
            
            —Volatility
                factor
            
            
            200
            %
            
            200
            %Expected
                life
            
            
            10
                years
            
            
            10
                yearsAnnual
                forfeiture rate
            
            
            0
            %
            
            0
            %





**NOTE
      11 - RELATED PARTY TRANSACTIONS**





**ACCOUNTS
      PAYABLE - RELATED PARTIES**





Accounts
      payable - related parties at December 31, 2006 consisted of amounts due for
      legal, expense reimbursement, and for a licensing fee and were $1,322,159.
      As of
      December 31, 2006, $61,173 is owed to Blakely, Sokoloff, Taylor & Zafman,
      LLP (BSTZ), a law firm in which, George Hoover, a director of the Company,
      is a
      partner and $1,260,987 is owed to nCryptone, S.A., respectively. The amount
      is
      currently due to BSTZ and Alan Finkelstein while the amount due to nCryptone
      S.A. is not payable until June 27, 2007.





**CONSULTING
      AGREEMENTS**





The
      Company was a party to a Consulting Agreements with Forest Finkelstein, the
      son
      of Alan Finklestein and during the years ended December 31, 2006 and 2005 the
      Company paid $85,000 and $213,333, respectively.





**DEMAND
      NOTES PAYABLE - RELATED PARTIES**





In
      March
      2005, the Company obtained loans in the form of secured demand promissory notes
      totaling $500,000 from Bristol Investment Fund, Ltd. and Union Finance
      International, Corp; Union Finance International Corp. loaned the Company
      $333,000 while Bristol Investment Fund, Ltd. loaned the Company $167,000. The
      notes were secured by the Company's assets, excluding assets subject to liens,
      leases, encumbrances, defenses or other claims. The notes were payable on the
      demand of the respective lender. There was no further borrowing capacity under
      either of the notes. On October 11, 2005, Union Finance International Corp.
      transferred its $333,000 loan plus interest to BSR Investments, Ltd. On October
      19, 2005, BSR Investments, Ltd. voluntarily converted the loan plus interest
      totaling $347,816 into 347,816 shares of common stock and 173,908 warrants
      to
      purchase common stock at $1.25. On October 20, 2005 the loan, including
      interest, amounting to $174,504 obtained from Bristol Investment Fund, Ltd.
      was
      repaid. As of December 31, 2005, the Company owed Bristol Investment Fund,
      Ltd.
      and BSR Investments, Ltd. $0 relating to these secured demand promissory notes.





On
      August
      31, 2005, the Company obtained a loan in the form of a secured demand promissory
      note of $150,000 from Bradley Ross. The note was secured by the Company's
      assets, excluding assets subject to liens, leases, encumbrances, defenses or
      other claims. The note was payable on the demand of Bradley Ross. On October
      19,
      2005 the Company repaid the principal amounts owed to Bradley Ross. As of
      December 31, 2005, the Company owed Bradley Ross $0 relating to this secured
      demand promissory note.




F-18




**LEGAL
      SERVICES**





The
      Company receives legal services from Blakely, Sokoloff, Taylor and Zafman,
      LLP,
      a law firm in which George Hoover, a director of the Company, is a partner.
      During the years ended December 31, 2006 and December 31, 2005, the Company
      paid
      $205,059 and $175,822 respectively, to this entity for legal services rendered.





**NOTE
      13 - SUBSEQUENT EVENTS (UNAUDITED)**





On
      January 12, 2007 two employees cashlessly exercised a total of 35,000 stock
      options resulting in the issuance of 28,808 shares.





On
      January 26, 2007, two warrant holders exercised a total of 15,500 warrants
      resulting in the issuance of 15,500 shares of common stock for proceeds of
      $19,375.





On
      February 6, 2007, a warrant holder exercised 4,000 warrants resulting in the
      issuance of 4,000 shares of common stock for proceeds of $5,000.





Subsequent
      to year end, the Company entered into an option agreement with a related party
      whereby the Company may, but is not obligated to, purchase 51% ownership in
      a
      significant supplier of the Company.




F-19




**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
      the
      registrant caused this report to be signed on its behalf by the undersigned,
      thereunto duly authorized.




**INNOVATIVE
              CARD TECHNOLOGIES, INC.***By:*
            */s/
              Bennet P. Tchaikovsky**Bennet
                P. Tchaikovsky*
              *Chief
                Financial Officer**Dated:
              March
              31, 2007*




**POWER
      OF ATTORNEY**





KNOW
      ALL
      THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Alan Finkelstein and Bennet P. Tchaikovsky and each
      of
      them, jointly and severally, his attorneys-in-fact, each with full power of
      substitution, for him or her in any and all capacities, to sign any and all
      amendments to this Form 10-KSB, and to file the same, with exhibits thereto
      and
      other documents in connection therewith, with the Securities and Exchange
      Commission, hereby ratifying and confirming all that each said attorneys-in-fact
      or his substitute or substitutes, may do or cause to be done by virtue hereof.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Form 10-KSB
      has
      been signed below by the following persons on behalf of the Registrant and
      in
      the capacities and on the dates indicated:




Name
              
              Title
              
              Date/s/John
                  A. Ward, III
              
              Chairman
                  of the Board and Chief Executive Officer
              
              March31,2007John
                  A. Ward, III
              
              (PrincipalExecutive
                Officer)/s/Bennet
                  P. Tchaikovsky
              
              Chief
                  Financial Officer (PrincipalFinancial
                  and
              
              March
                  31,2007Bennet
                  P Tchaikovsky
              
              Accounting
                Officer)/s/Alan
                  Finkelstein
              
              President,
                  Chief Operating Officerand
                  Director
              
              March
                  31,2007Alan
                  Finkelstein/s/Donald
                  Joyce
              
              Director
              
              March
                  31,2007Donald
                  Joyce/s/George
                  Hoover
              
              Director
              
              March
                  31,2007George
                  Hoover/s/Robert
                  Sutcliffe
              
              Director
              
              March
                  31,2007Robert
                  Sutcliffe/s/Donald
                  Killian
              
              Director
              
              March
                  31,2007Donald
                  Killian/s/Scott
                  Ogilvie
              
              Director
              
              March
                  31,2007Scott
                  Ogilvie









**EXHIBIT
      INDEX**


2.1
              (2)
              
              Exchange
                  agreement by and among the registrant, LensCard US, LLC, Alan
                  Finkelstein, Forest Finkelstein, Bradley Ross and Luc Berthoud,
dated
                  April 1, 20042.2
              (2)
              
              Exchange
                  agreement by and among the registrant, Alan Finkelstein, Bradley
                  Ross and Michael Paradise, dated April 1, 20042.3
              (2)
              
              Exchange
                  agreement between the registrant and its wholly-owned subsidiary,
                  PSACo, Inc., dated April 1, 20042.4
              (2)
              
              Merger
                  agreement between the registrant and LensCard International Limited,
                  a British Virgin Islands International Business Company, dated
                  April 6, 20043.1
              (2)
              
              Amended
                  and Restated Certificate of incorporation of the registrant, as
                  currently in effect3.2
              (2)
              
              Amended
                  and Restated Bylaws of the registrant, as currently in effect10.1
              (2)
              
              2004
                  stock incentive plan10.2
              (2)
              
              Sublease
                  agreement between registrant and Bemel & Ross for premises at
                  11601 Wilshire Blvd., #2160, Los Angeles, California 90025, dated
January
                  5, 200310.3
              (2)
              
              Guaranty
                  of lease between Alan Finkelstein and Bemel & Ross, dated January
                  5, 200310.4
              (3)
              
              Form
                  of common stock warrant, as amended on September 7,
                  2005.10.5
              (2)
              
              Securities
                  purchase agreement between registrant and Bristol Capital,
                  LLC dated December 23, 200310.5
              (a)(2)
              
              Waiver
                  of section 2.3 of the securities purchase agreement between registrant
                  and Bristol Capital, LLC10.6
              (2)
              
              Shares
                  for debt agreement between registrant and Alan Finkelstein, dated
                  June 22, 200410.7
              (2)
              
              Shares
                  for debt agreement between registrant and Bradley Ross, dated June
                  22, 200410.8
              (2)
              
              Shares
                  for debt agreement between registrant and Luc Berthoud, dated June
                  22, 200410.9
              (2)
              
              Promissory
                  note (loan no. 00003) between registrant and City National
                  Bank, dated May 24, 200410.10
              (2)
              
              Promissory
                  note (loan no. 00005) between registrant and City National
                  Bank, dated May 24, 2004 10.11** Promissory note (loan no. 00004)
                  between registrant and City National Bank, dated May 24,
                  200410.12
              (2)
              
              Promissory
                  note (loan no. 00006) between registrant and City National Bank,
                  dated May
                  24 ,2004







10.13
              (2)
              
              Commercial
                  guaranty between Alan Finkelstein and City National Bank dated
                  May 24, 200410.14
              (2)
              
              Commercial
                  guaranty between Bradley Ross and City National Bank dated
                  May 24, 200410.15
              (2)
              
              Commercial
                  guaranty between Luc Berthoud and City National Bank dated
                  May 24, 200410.16
              (2)
              
              Offer
                  letter between registrant and Murdoch Henretty dated July 28, 200410.17
              (2)
              
              Employment
                  agreement between registrant and Alan Finkelstein dated January
                  199810.18
              (2)
              
              Strategic
                  Alliance Agreement between registrant and Visa International
                  Service Association dated May 26, 200410.19
              (2)
              
              Secured
                  Demand Promissory Note between registrant and Union Finance International
                  Corp. dated March 31, 200510.20
              (2)
              
              Secured
                  Demand Promissory Note between registrant and Bristol Investment
                  Fund, Ltd. dated March 30, 200510.21
              (2)
              
              Capital
                  Lease Agreement between registrant and CNC Associates, Inc. dated
                  November 30, 200410.22
              (2)
              
              Guaranty
                  between Alan Finkelstein and CNC Associates, Inc. dated November
                  30, 200410.23
              (2)
              
              Security
                  Agreement between registrant and Union Finance International
                  Corp. dated March 31, 2005 (See Exhibit 10.19)10.24
              (2)
              
              Security
                  Agreement between registrant and Bristol Investment Fund, Ltd.
                  dated March 30, 2005 (See Exhibit 10.20)10.25
              (2)
              
              Secured
                  Demand Promissory Note between registrant and Bradley Ross dated
                  August 31, 200510.26
              (2)
              
              Secured
                  Demand Promissory Note between registrant and Rodger Bemel dated
                  August 31, 200510.27
              (2)
              
              Joint
                  Development Agreement between registrant and nCryptone dated July
                  25, 200510.28
              (2)
              
              Agreement
                  between registrant and SmartDisplayer Technology, Inc. dated
                  July 25, 200510.29
              (5)
              
              Form
                  of Lock-Up agreement by and between registrant's directors and
executive
                  officers pursuant to the private placement dated October 19,
                  200510.30
              (4)
              
              Form
                  of Warrant pursuant to private placement dated October 19,
                  200510.31
              (4)
              
              Registration
                  Rights Agreement by and between the registrant and each investor
                  pursuant to the private placement dated October 19,
                  200510.32
              (4)
              
              Side
                  Letter Agreement between the registrant, T.R. Winston & Company and
                  investors pursuant to the private placement dated October 19,
                  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, SA10.39
              (10)
              
              License
                  Agreement dated June 28, 2006 by and between Registrant as licensor
                  and NCryptone, SA as licensee10.40
              (10)
              
              License
                  Agreement dated June 28, 2006 by and between NCryptone, SA as
                  licensor and Registrant as licensee.10.41
              (11)
              
              Sublease
                between
                Registrant as sublessee and Bergman and Dacey, Inc. as
                sublessor.10.42
              (8)
              
              Idemnification
                Agreement10.43
              (7)
              
              Code
                of
                Ethics21.1
              (2)
              
              List
                  of subsidiaries23.1
              (1)
              
              Consent
                  of Independent Registered Public Accounting Firm.23.2
              (1)
              
              Consent
                  of Independent Registered Public Accounting Firm for Registration
                  Statement (No. 333-137033) 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
                  193431.2
              (1)
              
              Certification
                  of Chief Financial Officer, as required by Rule 13a-14(a)
                  or Rule 15d-14(a) of the Securities Exchange Act of
                  193432
              (1)
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer,
                  as required by Section 1350 of Chapter 63 of Title 18 of the
                  United States Code (18 U.S.C.
                  1350)





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