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**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 

**Mark One**

 

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------------|

 

**For The Quarterly Period Ended June 30, 2008**

 

**OR**

** **

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------------|

 

**For the Transition Period from            to**

 

**Commission File Number 000-51260**

 

**INNOVATIVECARD TECHNOLOGIES, INC.**(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **90-0249676**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  or organization) |       | (IRS Employer Identification Number) |
|                                                            |       |                                 |
| **633 West Fifth Street, Suite 2600**                      | ** ** | ** **                           |
| **Los Angeles, CA**                                             | ** ** | **90071**                            |
| (Address of principal executive offices)                        |       | (Zip code)                           |

 

**(310) 312-0700**(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes       x  No  o

 

Indicateby check mark whether the Registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. (See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.)

 

| Large accelerated filer o                 |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                   |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.):

 

Yes  o   No x

 

Asof August 5, 2008 28,495,256 shares of the Registrant’s common stock wereoutstanding.

 

 

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** **

**INNOVATIVECARD TECHNOLOGIES, INC.**

 

INDEX TO FORM 10Q

 
| ** **   | ** **                                                                                                                                             | **PAGE** |
|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|         |                                                                                                                                                   |     |
| PART I  | FINANCIAL INFORMATION                                                                                                                                  | 3        |
|         |                                                                                                                                                   |     |
| Item 1.      | Financial Statements                                                                                                                                   | 3        |
|         |                                                                                                                                                   |     |
|         | Condensed Consolidated Balance Sheets at June 30,  2008 (unaudited) and December 31, 2007                                                    | 3        |
|         |                                                                                                                                                   |     |
|         | Condensed Consolidated Statements of Operations for  the three and six months ended June 30, 2008 (unaudited) and  June 30, 2007 (unaudited) | 4        |
|         |                                                                                                                                                   |     |
|         | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2008 (unaudited) and June 30, 2007  (unaudited)           | 5        |
|         |                                                                                                                                                   |     |
|         | Notes to Condensed Consolidated Unaudited Financial  Statements                                                                                        | 6        |
|         |                                                                                                                                                   |     |
| Item  1A     | Risk  Factors                                                                                                                                          | 19       |
|         |                                                                                                                                                   |     |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                            | 26       |
|         |                                                                                                                                                   |     |
| Item 3.      | Controls and  Procedures                                                                                                                               | 33       |
|         |                                                                                                                                                   |     |
| PART II | OTHER INFORMATION                                                                                                                                      | 34       |
|         |                                                                                                                                                   |     |
| Item 1.      | Legal Proceedings                                                                                                                                      | 34       |
|         |                                                                                                                                                   |     |
| Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                           | 34       |
|         |                                                                                                                                                   |     |
| Item 3.      | Defaults Upon  Senior Securities                                                                                                                       | 35       |
|         |                                                                                                                                                   |     |
| Item 4.      | Submission of  Matters to a Vote of Security Holders                                                                                                   | 35       |
|         |                                                                                                                                                   |     |
| Item 5.      | Other Information                                                                                                                                      | 36       |
|         |                                                                                                                                                   |     |
| Item  6.     | Exhibits                                                                                                                                               | 36       |
|         |                                                                                                                                                   |     |
|         | SIGNATURES                                                                                                                                             | 36       |

 

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**PART I - FINANCIALINFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

 

**INNOVATIVECARD TECHNOLOGIES, INC.****CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                 |       |              |       |                  |       |
| CURRENT ASSETS                                                                                                             |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                  |       | $                 | 1,680,060  |                  | $          | 339,600 |   |
| Accounts receivable                                                                                                        |       | 824,128           |       | 13,077                |       |
| Prepaids and other current assets                                                                                          |       | 341,314           |       | 54,127                |       |
| Deposits on raw materials held for production                                                                              |       | 869,052           |       | 605,662               |       |
| Raw materials held for production                                                                                          |       | 1,365,254         |       | 1,315,960             |       |
| Work in progress inventory                                                                                                 |       | 1,755,182         |       | 886,259               |       |
| Total current assets                                                                                                       |       | 6,834,990         |       | 3,214,685             |       |
|                                                                                                                       |       |              |       |                  |       |
| Property and equipment, net                                                                                                |       | 164,940           |       | 193,185               |       |
| Deferred debt issuance cost                                                                                                |       | 500,420           |       | —                |       |
| Deposits                                                                                                                   |       | 96,860            |       | 177,747               |       |
| Intangible assets, net                                                                                                     |       | 1,762,554         |       | 2,075,953             |       |
| Total assets                                                                                                               |       | $                 | 9,359,764  |                  | $          | 5,661,570 |   |
|                                                                                                                       |       |              |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES                                                                                                        |       |              |       |                  |       |
| Accounts payable and accrued expenses                                                                                      |       | $                 | 1,883,228  |                  | $          | 3,660,044 |   |
| Accounts payable - related parties                                                                                         |       | 595,365           |       | 657,254               |       |
| Warranty reserve                                                                                                           |       | 108,806           |       | 27,816                |       |
| Deferred revenue                                                                                                           |       | 949,069           |       | 898,585               |       |
| Total current liabilities                                                                                                  |       | 3,536,468         |       | 5,243,699             |       |
|                                                                                                                       |       |              |       |                  |       |
| Deferred tax liability                                                                                                     |       | 1,225,018         |       | —                |       |
| 8% convertible debenture, net of $6,010,432 discount                                                                       |       | 2,489,568         |       | —                |       |
| Warrant liability                                                                                                          |       | 1,062,751         |       | —                |       |
| Total liabilities                                                                                                          |       | 8,313,805         |       | 5,243,699             |       |
|                                                                                                                       |       |              |       |                  |       |
| Commitments and contingencies                                                                                              |       |              |       |                  |       |
|                                                                                                                       |       |              |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                  |       |              |       |                  |       |
|                                                                                                                       |       |              |       |                  |       |
| Preferred stock $0.001 par value, 5,000,000 shares authorized, 0  (unaudited) and 0 shares issued and outstanding          |       |              |       | —                |       |
| Common stock $0.001 par value, 75,000,000 shares authorized,  28,495,256 (unaudited) and 28,433,116 issued and outstanding |       | 28,483            |       | 28,433                |       |
| Additional paid-in capital                                                                                                 |       | 31,847,815        |       | 28,456,621            |       |
| Accumulated deficit                                                                                                        |       | (30,830,339       | )          | (28,067,183           | )          |
| Total stockholders’ equity                                                                                            |       | 1,045,959         |       | 417,871               |       |
| Total liabilities and stockholders’ equity                                                                            |       | $                 | 9,359,764  |                  | $          | 5,661,570 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**INNOVATIVECARD TECHNOLOGIES, INC.****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                   | ** ** | **Three months  ended  June 30,  2008** | ** ** | **Three months  ended  June 30,  2007** | ** ** | **Six months  ended  June 30,  2008** | ** ** | **Six months  ended  June 30,  2007** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **(unaudited)**                              | ** ** | **(unaudited)**                              | ** ** | **(unaudited)**                            | ** ** | **(unaudited)**                            | ** ** |
| Revenues                                                     |       | $                                            | 800,209    |                                         | $          | 1,089                                      |       | $                                          | 1,017,425  |   | $ | 2,509 |   |
| Cost of Goods Sold                                           |       | 859,875                                      |       | 395,396                                      |       | 1,070,209                                  |       | 395,396                                    |       |
| Gross Margin                                                 |       | (59,666                                      | )          | (394,307                                     | )          | (52,784                                    | )          | (392,887                                   | )          |
| Operating expenses                                           |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Administrative                                               |       | 1,656,715                                    |       | 1,832,454                                    |       | 3,046,646                                  |       | 3,344,329                                  |       |
| Consulting fees                                              |       | 134,427                                      |       | 115,739                                      |       | 254,525                                    |       | 231,631                                    |       |
| Professional fees                                            |       | 201,192                                      |       | 203,695                                      |       | 449,223                                    |       | 567,218                                    |       |
| Research and development                                     |       | 118,539                                      |       | 173,081                                      |       | 298,355                                    |       | 469,410                                    |       |
| Total operating expenses                                     |       | 2,110,873                                    |       | 2,324,969                                    |       | 4,048,749                                  |       | 4,612,588                                  |       |
| Loss from operations                                         |       | (2,170,539                                   | )          | (2,719,276                                   | )          | (4,101,533                                 | )          | (5,005,475                                 | )          |
| Other income (expense)                                       |       |                                         |       |                                         |       |                                       |       |                                       |       |
|                                                         |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Change in fair value of warrant liability and other expense  |       | 1,778,099                                    |       |                                         |       | 1,903,760                                  |       |                                       |       |
| Interest income                                              |       | 11,703                                       |       | 63,152                                       |       | 20,776                                     |       | 142,692                                    |       |
| Interest expense                                             |       | (419,978                                     | )          | (100                                         | )          | (585,359                                   | )          | (248                                       | )          |
| Total other income                                           |       | 1,369,824                                    |       | 63,052                                       |       | 1,339,177                                  |       | 142,444                                    |       |
|                                                         |       |                                         |       |                                         |       |                                       |       |                                       |       |
| Loss before provision for income taxes                       |       | (800,715                                     | )          | (2,656,224                                   | )          | (2,762,356                                 | )          | (4,863,031                                 | )          |
| Provision for income taxes                                   |       | —                                       |       | —                                       |       | (800                                       | )          | —                                     |       |
| Net loss                                                     |       | $                                            | (800,715   | )                                            | $          | (2,656,224                                 | )          | $                                          | (2,763,156 | ) | $ | (4,863,031 | ) |
| Basic and diluted loss per share                             |       | $                                            | (0.03      | )                                            | $          | (0.09                                      | )          | $                                          | (0.10      | ) | $ | (0.17 | ) |
| Basic and diluted weighted-average common shares outstanding |       | 28,486,411                                   |       | 28,420,616                                   |       | 28,459,763                                 |       | 28,415,133                                 |       |

 

The accompanying notes are an integral part of these condensed consolidatedfinancial statements

 

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**INNOVATIVECARD TECHNOLOGIES, INC.****CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                                   | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2008**                                                        | ** ** | **2007** | ** ** |
| ** **                                                                                                   | ** ** | **(unaudited)**                                                 | ** ** | **(unaudited)** | ** ** |
| Cash flows from operating activities:                                                                        |       |                                                            |       |   |   |
|                                                                                                         |       |                                                            |       |   |   |
| Net loss                                                                                                     |       | $                                                               | (2,763,156 | ) | $ | (4,863,031 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                                 |       |                                                            |       |   |   |
| Depreciation and amortization                                                                                |       | 355,129                                                         |       | 445,323 |   |
| Change in fair value of warrant liability                                                                    |       | (2,024,554                                                      | )          | — |   |
| Amortization of debt discount                                                                                |       | 314,828                                                         |       | — |   |
| Amortization of deferred debt issuance cost                                                                  |       | 27,080                                                          |       | — |   |
| Share-based compensation expense                                                                             |       | 1,049,433                                                       |       | 560,776 |   |
| (Increase) decrease in Accounts receivable                                                                   |       | (811,051                                                        | )          | (76,389 | ) |
| (Increase) decrease in Prepaid expenses and other current assets                                             |       | (8,311                                                          | )          | (26,616 | ) |
| (Increase) decrease in Deposits on raw materials held for production                                         |       | (263,390                                                        | )          | (215,797 | ) |
| (Increase) decrease in Raw materials held for production                                                     |       | (49,294                                                         | )          |   |   |
| (Increase) decrease in Work in progress inventory                                                            |       | (868,923                                                        | )          | (721,205 | ) |
| (Increase) decrease in Deposits                                                                              |       | 80,885                                                          |       | (99,153 | ) |
| Increase (decrease) in Accounts payable and accrued expenses                                                 |       | (1,776,816                                                      | )          | 733,756 |   |
| Increase (decrease) in Accounts payable - related parties                                                    |       | (61,889                                                         | )          | (266,784 | ) |
| Increase (decrease) in Warranty reserve                                                                      |       | 80,990                                                          |       | — |   |
| Increase (decrease) in Deferred revenue                                                                      |       | 50,484                                                          |       | 516,675 |   |
| Net cash used in operating activities                                                                        |       | (6,668,555                                                      | )          | (4,012,445 | ) |
|                                                                                                         |       |                                                            |       |   |   |
| Cash flows from investing activities:                                                                        |       |                                                            |       |   |   |
|                                                                                                         |       |                                                            |       |   |   |
| Purchase of Property and Equipment                                                                           |       | (13,485                                                         | )          | (64,509 | ) |
| Net cash used in investing activities                                                                        |       | (13,485                                                         | )          | (64,509 | ) |
|                                                                                                         |       |                                                            |       |   |   |
| Cash flows from financing activities:                                                                        |       |                                                            |       |   |   |
|                                                                                                         |       |                                                            |       |   |   |
| Gross proceeds from issuance of 8% convertible debenture                                                     |       | 8,500,000                                                       |       | — |   |
| Payments on debt issuance cost                                                                               |       | (527,500                                                        | )          | — |   |
| Offering costs                                                                                               |       |                                                            |       | (3,675 | ) |
| Proceeds from exercise of options / warrants                                                                 |       | 50,000                                                          |       | 24,375 |   |
| Payments on capital lease                                                                                    |       |                                                            |       | (4,947 | ) |
| Net cash provided by financing activities                                                                    |       | 8,022,500                                                       |       | 15,753 |   |
|                                                                                                         |       |                                                            |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                                         |       | 1,340,460                                                       |       | (4,061,201 | ) |
| Cash and cash equivalents, beginning of year                                                                 |       | 339,600                                                         |       | 8,270,096 |   |
| Cash and cash equivalents, end of period                                                                     |       | $                                                               | 1,680,060  |   | $ | 4,208,895 |   |
|                                                                                                         |       |                                                            |       |   |   |
| Supplemental disclosures of cash flow information:                                                           |       |                                                            |       |   |   |
| Interest paid                                                                                                |       | $                                                               | 65,667     |   | $ | 248 |   |
| Income tax paid                                                                                              |       | $                                                               | 800        |   | $ | — |   |
|                                                                                                         |       |                                                            |       |   |   |
| Supplemental disclosure of non-cash operating and financing  activities:                                     |       |                                                            |       |   |   |
| Value of warrants issued as non-employee compensation included in  prepaid expenses and other current assets |       | $                                                               | 278,876    |   | $ | — |   |
| Debt discount attributable to beneficial conversion feature                                                  |       | $                                                               | 3,237,953  |   | $ | — |   |
| Debt discount attributable to warrants                                                                       |       | $                                                               | 3,087,307  |   | $ | — |   |
| Deferred tax liability relating to beneficial conversion feature                                             |       | $                                                               | 1,225,018  |   | $ | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**INNOVATIVE CARD TECHNOLOGIES,INC.**

 

**NOTESTO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS****JUNE30, 2008**

 

**NOTE 1 - ORGANIZATION AND LINE OFBUSINESS**

 

**BASIS OF PRESENTATION**

 

The accompanying condensed consolidated financialstatements of Innovative Card Technologies, Inc. (“InCard”) include theamounts of its wholly-owned subsidiary, PSA Co. (“PSAC”) which was incorporatedin the State of Delaware on August 27, 2003.

 

The Company has a history of recurring losses fromoperations and has an accumulated deficit of $30,830,339 as of June 30,2008.  Sales of the InCard DisplayCard,the Company’s main product, are not expected to generate positive cash flowuntil 2009  As a result, there issubstantial doubt about the Company’s ability to continue as a going concern.The accompanying condensed consolidated unaudited financial statements havebeen prepared assuming that the Company will continue as a going concern. Thisbasis of accounting contemplates the recovery of the Company’s assets and thesatisfaction of liabilities in the normal course of business and does notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that might be necessary should the Company be unable to continueas a going concern.   There can be noassurances that funds will be available to the Company when needed or, ifavailable, that such funds would be available under favorable terms.  In the event that the Company is unable togenerate adequate revenues to cover expenses and cannot obtain additional fundsin the near future, the Company may seek protection under bankruptcy laws.

 

**COMPANY OVERVIEW**

 

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

 

**NOTE 2 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**BASIS OFPRESENTATION**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period. Actual results could differ from those estimates.

 

The accompanyingcondensed consolidated unaudited financial statements of Innovative CardTechnologies, Inc. have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”) regarding interimfinancial reporting. Accordingly, they do not include all of the informationand footnotes required by generally accepted accounting principles for annualfinancial statements and should be read in conjunction with the consolidatedfinancial statements for the year ended December 31, 2007, and notesthereto included in the Company’s Annual Report on Form 10-KSB, filed withthe SEC on April 1, 2008, and amendments thereto. In the opinion ofmanagement, the accompanying condensed consolidated financial statementscontain all adjustments, consisting only of adjustments of a normal recurringnature, necessary for a fair presentation of the Company’s financial positionas of June 30, 2008, and its results of operations for the periodspresented. These condensed consolidated unaudited financial statements are notnecessarily indicative of the results to be expected for the entire year.

 

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**PRINCIPLESOF CONSOLIDATION**

 

The condensed consolidated unaudited financialstatements include the accounts of Innovative Card Technologies and its whollyowned subsidiary, PSA Co.  Allsignificant inter-company accounts and transactions are eliminated inconsolidation.

 

**REVENUERECOGNITION**

 

The Company recognizes revenue in accordance with SECStaff Accounting Bulletin No. 104, or SAB 104. Revenue is recognized whenpersuasive evidence of an arrangement exists, delivery has occurred or serviceshave been rendered, the price is fixed and determinable and collectibility isreasonably assured.   Revenue is notrecognized on product sales transacted on a test or pilot basis.  Instead, receipts from these types oftransactions offset marketing expenses.  Revenue from royalties is recognized with the passage of time inaccordance with the underlying agreement. The Company recognizes certain long-term contracts using thecompleted-contract method in accordance to SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type of Contracts.”  No revenue has been recognized to date fromthese contracts.

 

**COMPREHENSIVEINCOME**

 

The Company utilizes Statement of Financial AccountingStandards (“SFAS”) No. 130, “Reporting Comprehensive Income.” Thisstatement establishes standards for reporting comprehensive income and itscomponents in a financial statement. Comprehensive income as defined includesall changes in equity (net assets) during a period from non-owner sources.Examples of items to be included in comprehensive income, which are excluded fromnet income, include foreign currency translation adjustments, minimum pensionliability adjustments, and unrealized gains and losses on available-for-salesecurities. Comprehensive income is not presented in the Company’s financialstatements since the Company did not have any changes in equity from non-ownersources.

 

**INVENTORY**

 

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

 

**INTANGIBLEASSETS AND LONG-LIVED ASSETS**

 

The cost incurred to acquire intangible assets, whichare active and relate to products with a definitive life cycle, are amortizedover the estimated useful life of three to five years. The Company assesses thecarrying value of long-lived assets in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” The Company assesses theimpairment of identifiable intangibles and long-lived assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable. Factors considered important that could trigger an impairmentreview include, but are not limited to, the following: a significantunderperformance to expected historical or projected future operating results,a significant change in the manner of the use of the acquired asset or thestrategy for the overall business, or a significant negative industry oreconomic trend. Based on anticipated future income and cash flows and otherfactors relevant in the opinion of the Company’s management, the buzzer patentwas completely impaired during the year ended December 31, 2007.  No impairment was recognized during the threemonths or six months ended June 30, 2008.

 

**CASH ANDCASH EQUIVALENTS**

 

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

 

**MAJORSUPPLIERS**

 

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

 

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The Company obtains the display, a key component forthe Company’s InCard DisplayCard, from a single source, SmartDisplayer,pursuant to the Company’s agreement with SmartDisplayer. The Company believesthat alternative sources for this component in the event of a disruption ordiscontinuation in supply would not be available on a timely basis, which coulddisrupt Company operations relating to the InCard DisplayCard, delay productionof the InCard DisplayCard for up to one year and impair the Company’s abilityto manufacture and sell the InCard DisplayCard.

 

The Company assembles its InCard DisplayCard using asingle source, NagraID, pursuant to a written agreement that expired on June 30,2008.  The Company believes thatalternative sources for this component in the event of a disruption ordiscontinuation in supply would not be available on a timely basis, which coulddisrupt Company operations relating to the InCard DisplayCard, delay productionof the InCard DisplayCard for up to one year and impair the Company’s abilityto manufacture and sell the InCard DisplayCard. From July 1, 2008 forward, the Company will contract with NagraIDon a purchase order basis until such time as a new written agreement, which iscurrently under discussion, is entered into by the parties.

 

**PROPERTYAND EQUIPMENT**

 

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

 

**FAIRVALUE OF FINANCIAL INSTRUMENTS**

 

The Company’s financial instruments include cash andcash equivalents, prepaid expenses and other current assets, accounts payableand accrued expenses including accounts payable to related parties, advancespayable, and deferred revenue. The book value of all financial instruments arerepresentative of their fair values.

 

**RESEARCHAND DEVELOPMENT**

 

Research and development costs are charged tooperations as incurred.

 

**LOSS PERSHARE**

 

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

 

Since their effect would have been anti-dilutive,common stock equivalents of 5,786,537 warrants and 3,012,569 stock options wereexcluded from the calculation of diluted loss per share for the six monthsended June 30, 2008. Since their effect would have been anti-dilutive,common stock equivalents of 4,627,098 warrants and 2,254,498 stock options wereexcluded from the calculation of diluted loss per share for the six monthsended June 30, 2007.

 

**INCOMETAXES**

 

The Company utilizes SFAS No. 109, “Accountingfor Income Taxes,” which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns. Under this method,deferred income taxes are recognized for the tax consequences in future yearsof differences between the tax bases of assets and liabilities and theirfinancial reporting amounts at each year-end based on enacted tax laws andstatutory tax rates applicable to the periods in which the differences areexpected to affect taxable income. Also, the Company adopted the provisions ofthe Financial Accounting Standards Board (“FASB”) Interpretation No.48, “Accountingfor Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”(“FIN 48”), effective January 1, 2007. As a result of the implementationof FIN 48, the Company made a comprehensive review of its portfolio ofuncertain tax positions in accordance with recognition standards established byFIN 48. As a result of this review, the Company concluded that at this timethere are no uncertain tax positions.  Asa result of applying the provisions of FIN 48, there was no cumulative effecton retained earnings.

 

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**STOCKINCENTIVE PLAN**

 

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

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued a revision to FASB Statement No. 123, “Share-BasedPayment,” “SFAS No. 123(R)”. This Statement supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. This Statement establishes standardsfor the accounting for transactions in which an entity exchanges its equityinstruments for goods or services. It also addresses transactions in which anentity incurs liabilities in exchange for goods or services. It also addressestransactions in which an entity incurs liabilities in exchange for goods orservices that are based on the fair value of entity’s equity instruments orthat may be settled by the issuance of those equity instruments. This Statementis effective for public entities that file as small business issuers as of thebeginning of the first interim or annual reporting period that begins after December 15,2005. The Company has adopted this statement for the year ended December 31,2006.

 

**ESTIMATES**

 

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

The Company reversed an estimate made at December 31,2007 for an anticipated stock award to a consultant.  The award will not be made.  The reversal reduced accounts payable andadministrative expenses.

 

**CONCENTRATIONSOF CREDIT RISK**

 

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

 

**WARRANTSAND BENEFICIAL CONVERSION****FEATUREON 8% CONVERTIBLE DEBENTURE**

 

The Company accounts for warrants as liabilityinstruments in accordance with paragraph 8 of EITF 00-19, “Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock”.  The beneficialconversion feature associated with the senior secured convertible debenture ismeasured at its intrinsic value after allocation between the warrant and thedebenture and before transaction costs in accordance with EITF 00-27, “Applicationof Issue 98-5 to Certain Convertible Instruments”.  Debt proceeds are first allocated to thewarrant (as it is a mark-to-market, fair-value liability instrument) and theremaining proceeds are allocated to the debt. The debenture will be accreted to liquidation value over the debenture’sterm of three years, using the effective interest rate method.

 

**RECLASSIFICATION**

 

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

 

**RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

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

 

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

 
| ** **                                                                           | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Deposits on raw materials held for production (display and  manufacturing component) |       | $                       | 869,052    |                        | $          | 605,662 |   |
| TOTAL                                                                                |       | $                       | 869,052    |                        | $          | 605,662 |   |

 

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

 

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

 

Raw materials and work in progress inventory held forproduction at June 30, 2008 and December 31, 2007 consisted of thefollowing and are stated at the lower cost or market, net of inventory reservesof $99,335 (unaudited) and $99,335, respectively:

 
| ** **                        | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Raw materials held for production | ** ** | $                       | 1,365,254  |                        | $          | 1,315,960 | ** ** |
| Work in progress inventory        |       | 1,755,182               |       | 886,259                     |       |
| TOTAL                             |       | $                       | 3,120,436  |                        | $          | 2,202,219 |   |

 

**NOTE 5 - PROPERTY AND EQUIPMENT**

 

Property and equipment at June 30, 2008 and December 31,2007 consisted of the following:

 
| ** **                                     | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Computer equipment                             |       | $                       | 103,189    |                        | $          | 96,451 |   |
| Office equipment                               |       | 8,168                   |       | 8,168                       |       |
| Furniture and fixtures                         |       | 24,386                  |       | 24,386                      |       |
| Leasehold improvements                         |       | —                  |       | 5,608                       |       |
| Production equipment                           |       | 284,220                 |       | 277,474                     |       |
|                                           |       | 419,963                 |       | 412,087                     |       |
| Less accumulated depreciation and amortization |       | (255,023                | )          | (218,902                    | )          |
|                                           |       |                    |       |                        |       |
| TOTAL                                          |       | $                       | 164,940    |                        | $          | 193,185 |   |

 

Depreciation and amortization expense was $19,657(unaudited) and $46,757 (unaudited) for the three months ended June 30,2008 and 2007, respectively.

 

Depreciation and amortization expense was $41,731(unaudited) and $91,432 (unaudited), for the six months ended June 30,2008 and 2007, respectively.

 

The Company wrote-off fully amortized leaseholdimprovements amounting to $5,608 at June 30, 2008.

 

**NOTE 6 - PROVISION FOR INCOME TAXES**

 

Income taxes are accounted for using an asset andliability approach that requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of temporary differencesbetween the financial statement and the tax bases of assets and liabilities atthe applicable tax rates. A valuation allowance is provided when it is morelikely than not that some portion or all of the deferred tax assets will not berealized.

 

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The provision for income taxes consisted of thefollowing:

 
| ** **                       | ** ** | **Six Months**           | ** ** | **Six Months**           | ** ** |
|----------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **Ended  June 30,** | ** ** | **Ended  June 30,** | ** ** |
| ** **                       | ** ** | **2008**                 | ** ** | **2007**                 | ** ** |
| ** **                       | ** ** | **(unaudited)**          | ** ** | **(unaudited)**          | ** ** |
| Current Provision:               |       |                     |       |                     |       |
| Federal                          |       | —                   |       | —                   |       |
| State                            |       | $                        | 800        |                     | $          | — |   |
| Total Current Provision          |       | $                        | 800        |                     | $          | — |   |
| Deferred provision (benefit)     |       |                     |       |                     |       |
| Federal                          |       | —                   |       | —                   |       |
| State                            |       | —                   |       | —                   |       |
| Total deferred portion (benefit) |       | —                   |       | —                   |       |
| Total provision for income taxes |       | $                        | 800        |                     | $          | — |   |

 

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

 
| ** **                                          | ** ** | **Six Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2008**                             | ** ** | **2007**                             | ** ** |
| ** **                                          | ** ** | **(unaudited)**                      | ** ** | **(unaudited)**                      | ** ** |
| Federal income tax at statutory rates               |       | 34                                   | %          | 34                                   | %          |
| State income taxes, net of federal benefit          |       | 8                                    | %          | 6                                    | %          |
| Change in valuation allowance                       |       | (54                                  | )%         | (40                                  | )%         |
| Tax credits                                         |       | 0                                    | %          | 0                                    | %          |
| Change in fair value of warrant liability and other |       | 12                                   | %          | 0                                    | %          |
| Effective income tax rate                           |       | 0                                    | %          | 0                                    | %          |

 

Utilization of the Company’s net operating losses (“NOLs”)are limited by the provisions of the Internal Revenue Code Section 382.  NOLs earned prior to an “ownership change”,as defined by Section 382, are subject to limitation.   As a result of this limitation, the Companyreduced its deferred tax assets by $1,061,379 for the six months ended June 30,2008.  No such adjustment was recorded inthe six months ended June 30, 2007.

 

The Company adopted the provisions of the FinancialAccounting Standards Board (“FASB”) Interpretation No. 48, “Accounting forUncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” (“FIN48”), effective January 1, 2007. As a result of the implementation of FIN48, the Company made a comprehensive review of its portfolio of uncertain taxpositions in accordance with recognition standards established by FIN 48. As aresult of applying the provisions of FIN 48, there was no cumulative effect onretained earnings.

 

For the six months ended June 30, 2008, thecumulative unrecognized tax benefit was $79,352 which was netted against deferred tax assets with a full valuation allowance, and if recognizedthere will be no effect on the Company’s effective tax rate. In accordance withEITF 05-08 the Company has recorded a deferred tax liability for the differencebetween book and tax accounting related to the beneficial conversion featuresof the Company’s convertible debentures.

 

**NOTE 7 - COMMITMENTS ANDCONTINGENCIES**

 

**EMPLOYMENTAGREEMENT**

 

In March 2008, the Company entered intoemployment agreements with Steven Delcarson, its Chief Executive Officer, andCharles Caporale, its Chief Financial Officer. The initial term of each agreement is for one year and is renewable.

 

In May 2008, the Company entered into employmentagreements with Mark Poidomani, its Chief Technology Officer, and VincentSchiavo, its Senior Vice President — Global Sales.  The initial term of Mr. Poidomani’sagreement is one year and is renewable.  Mr. Schiavo’sagreement may be terminated by either party at any time with or without cause.

 

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**LITIGATION**

 

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

 

**WARRANTY**

 

The Company guarantees the performance of its productsfor certain periods of time or usage, depending on the particular agreementwith the customer.   In order to properlymatch revenue and related expenses, the Company makes an estimate of the costassociated with fulfilling its warranty obligations at the time of sale.

 

**NOTE 8 - STOCKHOLDERS’ EQUITY**

 

**PREFERREDSTOCK**

 

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

 

**COMMONSTOCK**

 

The Company has75,000,000 authorized shares of $0.001 par value common stock.  In January 2008, the Company enteredinto a Securities Purchase Agreement (the “Purchase Agreement”) with 13institutional and accredited investors (the “Purchasers”). Pursuant to theterms of the Purchase Agreement, the Purchasers purchased $3.5 million of theCompany’s 8% Senior Secured Convertible Debenture (“Debenture”). The Debentureis convertible at the holder’s option into shares of common stock at $2.50 pershare.  The Purchase Agreement has aforced conversion feature which allows the Company to force the conversion ofthe Debenture if the Company’s common stock trades above $5.00 for 20consecutive trading days and certain other conditions are met. The Company alsoissued to the Purchasers five-year common stock purchase warrants to purchase700,000 shares of common stock at an exercise price of $2.75 per share (the “Warrants”).   Both the conversion price ofthe Debenture and the Warrant strike price were reset following the April 15,2008 financing described below.

 

In April 2008, the Company entered into aSecurities Purchase Agreement (the “Purchase Agreement”) with EMC Corporation (“EMC”).Pursuant to the terms of the Purchase Agreement, EMC purchased $5.0 million ofthe Company’s 8% Senior Secured Convertible Debenture (“Debenture”). TheDebenture is convertible at the holder’s option into shares of common stock at$2.48 per share.  The PurchaseAgreement has a forced conversion feature which allows the Company toforce the conversion of the Debenture if the Company’s common stock tradesabove $5.00 for 20 consecutive trading days and certain other conditions aremet. The Company also issued to the Purchasers five-year common stock purchasewarrants to purchase 1,008,064 shares of common stock at an exercise price of$2.728 per share (the “Warrants”).

 

**WARRANTS**

 

The following summarizes the warrant transactions:

 
| ** **                                        | ** ** | **Warrants  Outstanding** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|-------------------------------------------|------------|
|                                              |       |                      |       |                                      |       |
| December 31, 2007                            |       | 4,614,598                 |       | $                                         | 1.43       |   |
| Issued during 2008  (unaudited)              |       | 2,118,064                 |       | $                                         | 2.69       |   |
| Exercised during 2008  (unaudited)           |       | (25,000                   | )          | $                                         | 1.25       |   |
| Outstanding, June 30, 2008  (unaudited) |       | 6,707,662                 |       | $                                         | 1.83       |   |

 

**2004STOCK INCENTIVE PLAN**

 

The Company’s Board of Directors and stockholdersapproved the 2004 Stock Incentive Plan in August 2004. The 2004 StockIncentive Plan provides for the grant of incentive stock options to the Company’semployees, and for the grant of non-statutory stock options, restricted InCardstock, stock appreciation rights and performance shares to the Company’semployees, directors and consultants.

 

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The Company reserved a total of 2,351,000 shares ofits common stock for issuance pursuant to the 2004 Stock Incentive Plan. Theboard of directors, or a committee of the board, administers the 2004 StockIncentive Plan. Stock options are generally granted with terms of up to tenyears and vest over a period of five years under the 2004 Stock Incentive Plan.The administrator determines the exercise price of options granted under the2004 Stock Incentive Plan, but the exercise price must not be less than 85% ofthe fair market value of the Company’s common stock on the date of grant. Inthe event the participant owns 10% or more of the voting power of all classesof the Company’s stock, the exercise price must not be less than 110% of thefair market value per share of the Company’s common stock on the date of grant.With respect to all incentive stock options, the exercise price must at leastbe equal to the fair market value of the Company’s common stock on the date ofgrant. The term of an incentive stock option may not exceed 10 years, exceptthat with respect to any participant who owns 10% of the voting power of allclasses of the Company’s outstanding stock or the outstanding stock of anyparent or subsidiary of the Company, the term must not exceed five years andthe exercise price must equal at least 110% of the fair market value on thegrant date. The administrator determines the term of all other options;however, no option will have a term in excess of 10 years from the date of grant.

 

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

 

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The following summarizes stock option transactions forthe period shown:

 
| ** **                         | ** ** | **Six Months Ended  June 30, 2008** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **(unaudited)**                                         | ** ** |
| **ALL OPTIONS**                    | ** ** | ** **                                              | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| ** **                         | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Outstanding at beginning of period |       | 2,184,498                                               |       | $ | 1.97 |   |
| Options granted                    |       | —                                                  |       | $ | — |   |
| Options forfeited                  |       | (140,000                                                | )          | $ | 3.54 |   |
| Options expired                    |       | —                                                  |       | $ | — |   |
| Options exercised                  |       | (50,000                                                 | )          | $ | 1.00 |   |
|                               |       |                                                    |       |   |   |
| Outstanding at end of period       |       | 1,994,498                                               |       | $ | 1.89 |   |
|                               |       |                                                    |       |   |   |
| Exercisable at end of period       |       | 1,559,498                                               |       | $ | 1.41 |   |

 
| ** **                         | ** ** | **Six Months Ended  June 30, 2008** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                         | ** ** | **(unaudited)**                                         | ** ** |
| **NON VESTED OPTIONS**   | ** ** | ** **                                              | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Non- vested at beginning of period |       | 585,000                                                 |       |   | 3.72 |   |
| Options granted                    |       | —                                                  |       | $ | — |   |
| Options forfeited                  |       | (80,000                                                 | )          | $ | 4.46 |   |
| Options expired                    |       | —                                                  |       | $ | — |   |
| Options vested                     |       | (70,000                                                 | )          | $ | 3.72 |   |
|                               |       |                                                    |       |   |   |
| Non- vested at end of period       |       | 435,000                                                 |       | $ | 3.58 |   |

 

The weighted average grant-date fair value of optionsgranted during the six month periods ended June 30, 2008 and 2007 was $0(unaudited) and $0 respectively, as no options were granted.

 

The weighted average remaining contractual lives ofthe options outstanding and options exercisable at June 30, 2008, were asfollows:

 
| ** **                     | ** ** | **Options  outstanding** | ** ** | **Options  exercisable** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                           |       |                     |       |                     |       |
| June 30, 2008 (unaudited) |       | 6.53  years              |       | 6.24  years              |       |

 

**2007EQUITY INCENTIVE PLAN**

 

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

 

The Company reserved a total of 4,000,000 shares ofits common stock for issuance pursuant to the 2007 Equity Incentive Plan. Acommittee of the board of directors administers the 2007 Equity Incentive Plan.Stock options are generally granted with terms of up to ten years and vest overa period of five years under the 2007 Equity Incentive Plan. The administratordetermines the exercise price of options granted under the 2007 EquityIncentive Plan, but the exercise price must not be less than 85% of the fairmarket value of the Company’s common stock on the date of grant. In the eventthe participant owns 10% or more of the voting power of all classes of theCompany’s stock, the exercise price must not be less than 110% of the fairmarket value per share of the Company’s common stock on the date of grant. Withrespect to all incentive stock options, the exercise price must at least beequal to the fair market value of the Company’s common stock on the date ofgrant. The 

 

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term of an incentive stock option may not exceed 10years, except that with respect to any participant who owns 10% of the votingpower of all classes of the Company’s outstanding stock or the outstandingstock of any parent or subsidiary of the Company, the term must not exceed fiveyears and the exercise price must equal at least 110% of the fair market valueon 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 ofgrant.

 

Without further stockholder approval, the 2007 EquityIncentive Plan may not issue incentive stock options after September 2017.  A summary of stock option activity andweighted average exercise prices for the six months ended June 30, 2008 isas follows:

 
| ** **                         | ** ** | **2008**        | ** ** |
|------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(unaudited)** | ** ** |
| **ALL OPTIONS**               | ** ** | ** **      | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Outstanding at beginning of period |       | 68,511          |       | $ | 2.76 |   |
| Options granted                    |       | 1,906,666       |       | $ | 2.09 |   |
| Options forfeited                  |       | —          |       | — |   |
| Options expired                    |       | —          |       | — |   |
| Options exercised                  |       | —          |       | — |   |
|                               |       |            |       |   |   |
| Outstanding at end of period       |       | 1,975,177       |       | $ | 2.11 |   |
|                               |       |            |       |   |   |
| Exercisable at end of period       |       | 125,000         |       | 2.25 |   |

 
| ** **                         | ** ** | **2008**        | ** ** |
|------------------------------------|------------|-----------------|------------|
| ** **                         | ** ** | **(unaudited)** | ** ** |
| **NON VESTED OPTIONS**   | ** ** | ** **      | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Non- vested at beginning of period |       | 68,511          |       | $ | 2.76 |   |
| Options granted                    |       | 1,906,666       |       | $ | 2.09 |   |
| Options forfeited                  |       | —          |       | — |   |
| Options expired                    |       | —          |       | — |   |
| Options vested                     |       | (125,000        | )          | $ | 2.25 |   |
|                               |       |            |       |   |   |
| Non- vested at end of period       |       | 1,850,177       |       | $ | 2.10 |   |

 

The weighted average remaining contractual lives ofthe options outstanding and options exercisable at June 30, 2008, were asfollows:

 
| ** **                     | ** ** | **Options  outstanding** | ** ** | **Options  exercisable** | ** ** |
|--------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                           |       |                     |       |                     |       |
| June 30, 2008 (unaudited) |       | 9.77  years              |       | 9.75  years              |       |

 

The Company recorded $914,957 (unaudited) and $560,776(unaudited) of compensation expense for employee stock options during the sixmonth periods ending June 30, 2008 and June 30, 2007, respectivelywhich is included in the administrative expense category. At June 30,2008, there was a total of $2,985,049 of unrecognized compensation costsrelated to the non-vested share-based compensation arrangements under the 2004and 2007 Plans. The cost is expected to be recognized over a weighted averageperiod of 1.43 years. The total fair value of shares vested during the sixmonth period ended June 30, 2008 was approximately $158,750 (unaudited).The aggregate intrinsic value of total outstanding options and totalexercisable options was $402,299 (unaudited) and $365,849 (unaudited),respectively as of June 30, 2008.

 

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

 

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The Black Scholes assumptions used are listed below:

 
| ** **              | ** ** | **Six Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **2008**                       | ** ** | **2007**                       | ** ** |
|                    |       |                           |       |                           |       |
| Risk free interest rate |       | 3.45% to 3.91%       |       | 4.97%                          |       |
| Dividends               |       | —                         |       | —                         |       |
| Volatility factor       |       | 88%  to 132%                   |       | 200%                           |       |
| Expected life           |       | 10  years                      |       | 10  years                      |       |
| Annual forfeiture rate  |       | 0%                             |       | 0%                             |       |

 

**NOTE 9 - RELATED PARTY TRANSACTIONS**

 

**ACCOUNTSPAYABLE - RELATED PARTIES**

 

Accounts payable - related parties at June 30,2008 is $595,365 (unaudited), which is due to nCryptone, SA and payable in January 2009.Accounts payable - related parties at December 31, 2007 was $657,254comprised of $642,733 due to nCryptone, SA, and due in January 2009 and$14,521 due to Blakely, Sokoloff, Taylor & Zafman, LLP (BSTZ), a lawfirm in which former director George Hoover is a partner, for legal servicesrelated to our intellectual property.  BSTZ is not a related party at June 30, 2008.

 

**CONSULTINGAGREEMENTS**

 

In connection with his resignation as Chief FinancialOfficer in October 2007, Bennet Tchaikovsky and the Company entered intothree separate agreements: an Indemnification Agreement, a Consulting Agreement,and a Separation Agreement. Beginning October 29, 2007 and ending on June 29,2008, Mr. Tchaikovsky was paid $12,270 per month plus certain otherreimbursements for assisting us with transitioning our new Chief FinancialOfficer.  As part of the SeparationAgreement, Mr. Tchaikovsky fully released the Company in consideration forMr. Tchaikovsky becoming vested in his remaining 60,000 unvested optionsand extending the termination period for all of his options.

 

The Company was a party to a Consulting Agreement withForest Finkelstein, the son of Alan Finklestein during the years ended December 31,2007, 2006 and 2005.  The agreement wascancelled in December 2007.  TheCompany paid Mr. Finklestein $0 (unaudited) and $42,500 (unaudited),respectively, during the six months ended June 30, 2008 and 2007. ForestFinkelstein is not a related party at June 30, 2008.

 

**LEGALSERVICES**

 

The Company receives legal services from Blakely,Sokoloff, Taylor and Zafman, LLP, a law firm that George Hoover, a former directorof the Company, is a partner in. During the six months ended June 30,2007, the Company paid $78,293 (unaudited) to this entity for legal servicesrendered.  Blakely, Sokoloff, Taylor &Zaffman is not a related party at June 30, 2008.

 

**NOTE 10****-****CONCENTRATIONOF SUPPLIERS AND SIGNIFICANT CUSTOMERS**

 

The Company currently relies on a limited number ofsuppliers to manufacture its products, and does not have a long-term contractwith any of these suppliers. The Company also does not have internal manufacturingcapabilities. Management believes that in the event of an interruption ofservice production of the DisplayCard would be delayed for up to one year.

 

Three customers account for 91% of the Company’srevenues and 92% of the Company’s accounts receivable.

 

**NOTE 11 - CONVERTIBLE DEBENTURES**

 

On January 8, 2008, the Company entered into aSecurities Purchase Agreement (the “Purchase Agreement”) with 13 institutionaland accredited investors (the “Purchasers”). Pursuant to the terms of thePurchase Agreement, the Purchasers purchased $3.5 million of the Company’s 8%Senior Secured Convertible Debenture (“Debenture”). The Debenture: (i) bearsinterest at 8% per year, paid quarterly in cash or registered common stock, atthe Company’s discretion; (ii) has a maturity of January 8, 2011, (iii) isconvertible at the holder’s option into shares of common stock at $2.50 pershare, (iv) is secured by all of the Company’s and its subsidiary’s assetsincluding inventory, receivables, unencumbered equipment and intellectual 

 

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property under the terms of a Security Agreement, and (v) hasa forced conversion feature which allows the Company to force the conversion ofthe Debenture if the Company’s common stock trades above $5.00 for 20consecutive trading days and certain other conditions are met. The Company alsoissued to the Purchasers five-year common stock purchase warrants to purchase700,000 shares of common stock at an exercise price of $2.75 per share (the “Warrants”).The Company used the net proceeds of the financing for working capitalrequirements and to pay down certain obligations. The Debenture also containscustomary events of default provisions. As part of the transaction, the Companyagreed to: (i) cut its monthly burn rate to $600,000 (ii) becompliant with NASDAQ listing requirements; and (iii) obtain shareholderapproval prior to effectuating a reverse stock split.

 

Both the conversion priceunder the Debenture and the exercise price of the Warrants are subject to “full-ratchet”price protection in the event of stock issuances below their respectiveconversion or exercise prices and have been reset to $2.48 and $2.728respectively as a result of the April financing discussed below.  The “full-ratchet” price protection does notapply to issuances of stock options and stock issuances to officers, directors,employees and consultants.  Both theconversion price of the Debenture and the Warrant strike price were resetfollowing the April 15, 2008 financing described below.

 

Upon review of EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, paragraphs 12-32, the Companyconcluded that all applicable requirements for equity treatment on theconversion feature were met. The intrinsic value of the conversion featureamounting to $1,534,460 was calculated in accordance with EITF 00-27 andrecorded as additional paid-in capital and a corresponding reduction of thecarrying value of the Debenture,.

 

The Company is accountingfor the Warrants, issued in connection with the Debenture, as derivativeliabilities in accordance with SFAS 133, “Accounting for Derivative Instrumentsand Hedging Activities” and EITF 00-19. The warrant liability was valued at$1,464,459 at warrant issuance date. In accordance with EITF 00-19, the valueof Warrants has been recorded as liability subject to marked-to-marketrevaluation at each period end. At June 30, 2008, the warrant liabilitywas valued at $424,550.   The Companyrecorded a gain on the change in fair value of warrant liability of $1,039,907.The Company uses the Black Scholes model to value the liability. The assumptionsused at January 8, 2008 and June 30, 2008 included expectedvolatility of 118% and 80%, a risk free interest rate of 3.16% and 3.34% andexpected life of 5 and 4.5 years, respectively.

 

The discount attributableto the issuance date intrinsic value of the conversion feature and fair valueof Warrants totaling $2,998,918 is being amortized using the effective interestmethod over the term of the Debenture. During the six months ended June 30,2008, $181,863 of this discount was amortized to expense.

 

In connection with thisDebenture, the Company incurred financing cost of $290,000. This financing costwas capitalized and amortized over the life of the Debenture using theeffective interest method. During the six months ended June 30, 2008,$17,586 of the capitalized financing cost was amortized to expense.

 

Aspart of the transaction, the Company granted the investors registration rightswith regard to: (i) the common shares issuable upon conversion of theDebentures; (ii) the common shares underlying the Warrants; and (iii) thecommon shares issuable as interest payments pursuant to the Debentures.  Pursuant to the registration rightsagreement, the Company was required to use its best efforts to file aregistration statement by June 7, 2008 and have it be declared effectiveby August 7, 2008.  The registrationstatement covering the registrable shares was timely filed and declaredeffective on July 3, 2008.   TheCompany has a continuing obligation to use its best efforts to maintain theregistration statement effective until such time as all the registrablesecurities are eligible for resale without volume or manner-of-salerestrictions and without current public information pursuant to Rule 144.

 

On April 15, 2008, the Company entered into aSecurities Purchase Agreement with EMC Corporation (“EMC”). Pursuant to theterms of the agreement, EMC purchased $5 million of the Company’s 8% SeniorSecured Convertible Debenture (“Debenture”). The Debenture: (i) bearsinterest at 8% per year, paid quarterly in cash or, subject to certainconditions, registered shares of the Company’s common stock; (ii) has amaturity of April 15, 2011, (iii) is convertible at EMC’s option intoshares of the Company’s common stock at $2.48 per share, (iv) is securedby all of the Company’s assets, including inventory, receivables, unencumberedequipment and intellectual property, and (v) has a forced conversionfeature which allows the Company to force the conversion of the Debenture ifthe Company’s common stock trades above $5.00 for 20 consecutive trading days.Such a forced conversion may be limited by contractual restrictions on theamount of the Company’s common stock which EMC may own and certain otherconditions. The Company also agreed to issue EMC five-year Common Stock PurchaseWarrants to purchase 1,008,064 shares of the Company’s common stock at anexercise price of $2.728 per share. The Company is using the net proceeds ofthe financing for working capital requirements and to pay down certainobligations. The Debenture also contains customary events of defaultprovisions. As part of the transaction, the Company agreed to: (i) maintainmonthly burn rate at $600,000 or below, (ii) be compliant with NASDAQlisting 

 

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requirements; and (iii) obtain shareholderapproval prior to effectuating a reverse stock split and for the issuance ofadditional shares of the Company’s common stock. Both the conversion price ofthe Debenture and the exercise price of the Warrants are subject to “full-ratchet”price protection in the event of stock issuances below their respectiveconversion or exercise prices, except for specified exempted issuances includinggrants of stock options and stock issuances to officers, directors, employeesand consultants.  The Company agreed togrant registration rights to EMC, by filing a registration statement coveringthe shares of common stock issuable upon the conversion of the Senior SecuredConvertible Debenture, exercise of the Common Stock Purchase Warrant, andissuable by the Company as interest payments by June 7, 2008, and toobtain effectiveness of that registration statement by August 7, 2008. TheCompany’s officers, directors, and 10% shareholders also executed agreementsprohibiting the sales of the Company’s common stock by them until October 31,2008. In connection with the transaction, the Company also secured votingagreements from its officers, directors and 10% shareholders approving thetransaction in the event that the Company is required to seek such approvalpursuant to the rules of the NASDAQ.

 

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

 

Upon review of EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock”, paragraphs 12-32, the Companyconcluded that all applicable requirements for equity treatment on theconversion feature were met. The intrinsic value of the conversion featureamounting to $1,703,494 was calculated in accordance with EITF 00-27 andrecorded as additional paid-in capital and a corresponding reduction of thecarrying value of the Debenture.

 

The Company is accountingfor the Warrants, issued in connection with the Debenture, as derivativeliabilities in accordance with SFAS 133, “Accounting for Derivative Instrumentsand Hedging Activities” and EITF 00-19. The warrant liability was valued at$1,622,848 at warrant issuance date. In accordance with EITF 00-19, the valueof Warrants has been recorded as liability subject to marked-to-marketrevaluation at each period end. At June 30, 2008, the warrant liabilitywas valued at $638,201.   The Companyrecorded a gain on the change in fair value of warrant liability of $984,647.The Company uses the Black-Scholes model to value the liability. Theassumptions used at April 15, 2008 and June 30, 2008 includedexpected volatility of 80% and 80%, a risk free interest rate of 2.68% and3.34% and expected life of 5 and 4.8 years, respectively.

 

The discount attributableto the issuance date intrinsic value of the conversion feature and fair valueof Warrants totaling $3,326,342 is being amortized using the effective interestmethod over the term of the Debenture. During the six months ended June 30,2008, $132,965 of this discount was amortized to expense.

 

In connection with thisDebenture, the Company incurred financing cost of $237,500. This financing costwas capitalized and amortized over the life of the Debenture using theeffective interest method. During the six months ended June 30, 2008,$9,484 of the capitalized financing cost was amortized to expense.

 

Aspart of the transaction, the Company granted the investors registration rightswith regard to: (i) the common shares issuable upon conversion of theDebentures;  (ii) the common sharesunderlying the Warrants; and (iii) the common shares issuable as interestpayments pursuant to the Debentures. Pursuant to the registration rights agreement, the Company was required touse its best efforts to file a registration statement by June 7, 2008 andhave it be declared effective by August 7, 2008.  The registration statement covering theregistrable shares was timely filed and declared effective on July 3,2008.   The Company has a continuingobligation to use its best efforts to maintain the registration statementeffective until such time as all the registrable securities are eligible forresale without volume or manner-of-sale restrictions and without current publicinformation pursuant to Rule 144.

 

**NOTE 12- SUBSEQUENT EVENT**

 

OnJuly 16, 2008, Innovative Card Technologies, Inc. (“Company”)received notice from the NASDAQ that it was not in compliance with Marketplace Rules forcontinued listing.  Specifically, themarket value of Company’s listed securities is below $35,000,000 as requiredfor continued inclusion by Marketplace Rule 4310(c)(3)(B) (“Rule”).  Therefore, in accordance with Marketplace Rule 4310(c)(8)(C),the Company will be provided 30 calendar days, or until August 15, 2008,to regain compliance.  If, at any timebefore August 15, 2008, the market value of listed securities of theCompany’s common stock is $35,000,000 (a per share price in excess of $1.23assuming 28,495,256 shares outstanding) or more for a minimum of 10 consecutivebusiness days, the Company will be in compliance with the Rule.  If compliance with this Rule cannot bedemonstrated by August 15, 2008, the NASDAQ will provide written notificationthat the Company’s securities will be delisted. At that time, the Company mayappeal the determination to a Listing Qualifications Panel.  Additionally, the Company does not meet thealternative requirements provided for in Marketplace Rules 4310(c)(3)(A) or4310(c)(3)(C) dealing with shareholders’ equity and net income requirements,respectively.  In the event the Companyis delisted, it will be in default under the Securities Purchase Agreements andDebentures discussed in Note 11 above.

 

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**ITEM1A.**  **RISK FACTORS**

 

*This investment has a high degree ofrisk. Before you invest you should carefully consider the risks anduncertainties described below and the other information in this report.  If any of the following risks actually occur,our business, operating results and financial condition could be harmed and thevalue of our stock could go down. As a result, you could lose all or a part ofyour investment.*

 

You should carefully consider the risks describedbelow as well as other information provided to you in this document.  The risks and uncertainties described beloware not the only ones facing the Company. Additional risks and uncertaintiesnot presently known to us or that we currently believes are immaterial may alsoimpair our business operations. If any of the following risks actually occur,our business, financial condition or results of operations could be materiallyadversely affected, the value of our common stock could decline, and you maylose all or part of your investment.

 

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

 

Our business prospects are difficult to predictbecause of our limited operating history, early stage of development andunproven business strategy. Since our incorporation on November 22, 2002,we have primarily been and continue to be involved in development of productsusing our power inlay technology and marketing these products to industrypartners. In 1998, our founder commenced commercialization of our firstproduct, the LensCard, and entered into license agreements with banks andcredit card issuers, most of which have terminated. After discovering thepossibility of placing power into an International Organization of Standards(ISO) compliant card, we began to focus our efforts on the development of ourpower inlay technology and not on the marketing of the LensCard. For thesereasons, we expect that future orders for the LensCard will be insignificant.We closed our first commercial sale of our InCard DisplayCard, which uses ourpower inlay technology, in the fourth quarter of 2007. Although we believe thatour power inlay technology and products under development have significantprofit potential, we may not attain profitable operations and may not succeedin realizing our business objectives.

 

***Our independentregistered public accounting firm has raised concerns about our ability tocontinue as a going concern.***

 

Our auditors have added an explanatory paragraph totheir opinion on our financial statements for the year ended December 31,2007 because of concerns about our ability to continue as a going concern.These concerns arise from the fact that we have not yet established an ongoingsource of revenues sufficient to cover our operating costs and that we mustraise additional capital in order to continue to operate our business. If wefail to generate positive cash flows or obtain additional financing whenrequired, we may have to modify, delay or abandon some or all of our businessand expansion plans.

 

***We have anaccumulated deficit of $30,830,339 as of June 30, 2008 and we may neverachieve profitability***

 

We have incurred significant net losses every yearsince our inception, including net losses of $2,763,156, $14,333,622 and$6,866,614 for the six months ended June 30, 2008 and for the fiscal yearsending December 31, 2007 and 2006, respectively. As of June 30, 2008,we had an accumulated deficit of $30,830,339. These losses have resultedprincipally from expenses incurred in our research and development programs andgeneral and administrative expenses. To date we have not generated significantrevenues. We have used capital raised in October 2005, May 2006, January 2008and April 2008 to sustain operations through the date of this report. Weanticipate that we will continue to incur substantial operating losses based onprojected sales revenues less manufacturing, general and administrative andother operating costs for an indefinite period of time. However, we cannotassure you that we will ever be profitable.

 

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

 

We believe that our current cash, combined withanticipated revenue collections, will be sufficient to fund our operationsthrough the middle of the fourth quarter of this year.  We currently donot have any binding commitments for, or readily available sources ofadditional financing, and we cannot assure you that such funding will beavailable at all or available on terms acceptable to us.  As we are in the early stage of manufacturingand have not sold substantial quantities of our products, we are unable todetermine the amount of additional capital we will need to become successful.Unless we are able to generate significant sales from the InCard DisplayCardthat cover the manufacturing costs and operating overhead, we will continue toincur net losses that exceed our revenue.

 

***We depend on alimited number of suppliers, and we will be unable to manufacture or deliverour products if shipments from these suppliers stop, are late or are otherwiseinterrupted*** .

 

We obtain the battery, a key component for our powerinlay 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 obtainreplacement batteries on a timely basis, which would disrupt our operations,delay production for up to one year and impair our ability to manufacture andsell our products.

 

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

 

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

 

Our dependence upon outside suppliers exposes us torisks, including:

 

·                     the possibility that our suppliers willexperience major disruptions in production, which is exacerbated by the factthat we are a major customer of our suppliers;

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

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

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

·                     the potential delays and expense of seekingalternative sources of suppliers; and

·                     increases in prices of key components.

 

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

 

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

 

·                     mass produce the InCard DisplayCard at significantlylower cost;

·                     continue to fund research and developmentendeavors;

·                     complete development of new products; and

·                     successfully introduce and commercialize new products.

 

If we do not devote adequate resources to our productdevelopment efforts, we may be unable to develop our products, which wouldadversely affect our revenue growth and profitability.

 

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

 

Establishment of patents and other proprietary rightsby us and our suppliers is important to our success and our competitiveposition. Performance in the payment card industry can depend, among otherfactors, on patent protection. Our policy is to identify patentable inventionsdeveloped by our company, and to seek to acquire patent rights for suchinventions. We mainly develop and patent technology in the fields of cardenhancements and methods of card manufacturing. We seek to obtain a reasonablybroad territorial protection for our patented technologies. We usually fileinitial patent applications in the United States, and subsequently filecorresponding applications in   foreign countries depending on therelevant circumstances. We may elect to forego patent protection for some ofour proprietary technologies   and treat such technologies as tradesecrets. Despite our efforts to establish and protect our patents, tradesecrets or other proprietary rights, unauthorized parties may attempt to copyaspects of our technology or to obtain and use information that we regard asproprietary. In addition, the laws of some foreign countries do not protect ourproprietary rights as much as the laws of the United States protect them. Ourmeans of establishing and protecting our proprietary rights may not beadequate, and our competitors may independently develop similar technology,duplicate our products or design around our patents or our other proprietaryrights.  We do not have patent protection for our InCard DisplayCard.

 

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

 

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

 

We rely to a substantial extent on the management,marketing and product development skills of our key employees and consultants,particularly Steven Delcarson, our President and Chief Executive Officer,Charles Caporale, our Chief Financial Officer, Craig Nelson, who supervises themanufacturing and testing of the InCard DisplayCard, Vincent Schiavo, ourglobal head of sales, and Mark Poidomani, our chief technology officer, toformulate and implement our business plan, including the development of ourpower inlay technology. Our success depends to a significant extent upon ourability to retain and attract key personnel. Competition for employees can beintense in the payment card industry, and the process of locating key personnelwith the right combination of skills is often lengthy. The loss of the servicesof our key personnel may significantly delay or prevent the achievement ofproduct development and could have a material adverse effect on us.

 

***If our futureproducts do not achieve a significant level of market acceptance, it is highlyunlikely that we ever will become profitable.***

 

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

 

·                     our ability to convince prospective strategic partnersand customers to adopt our products;

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

·                     our ability to sell and servicesufficient quantities of our products.

 

Because of these and other factors, our products maynot achieve market acceptance. If our products do not achieve a significantlevel of market acceptance, demand for our future products will not develop asexpected and it is highly unlikely that we ever will become profitable.

 

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

 

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

 

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

 

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

 

***The power inlaytechnology has not been proven in full scale production. Failure to manufacturein mass production may have a material negative effect on our business strategyand operations***.

 

Our power inlay technology has not been produced inmass production quantities as of yet.  We are applying our own resources and working in cooperation with othercompanies that have specialized technical expertise related to the power inlaytechnology for thin, flexible non-payment cards. We expect to enter intoagreements that will grant us ownership or exclusive license rights to themanufacturing process of the power inlay technology for use in credit and otherinformation-bearing plastic cards. Failure to secure or maintain exclusiverights or failure to successfully transition to full scale production, withoutthe use of proprietary technology of others, may have a material negativeeffect on our business strategy and operations.

 

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

 

To be successful, we must manufacture, or contract forthe manufacture of, our future products in compliance with industry standardsand on a timely basis, while maintaining product quality and acceptablemanufacturing costs. As discussed in the risk factor above, we are working incooperation with other companies that have specialized technical expertiserelated to the manufacturing process of our power inlay technology for theInCard DisplayCard. We also currently use a limited number of sources for mostof the supplies and services that we use in the manufacturing of our powerinlay technology and prototypes. Our manufacturing strategy presents thefollowing risks:

 

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

·                     if we need to change to other commercialmanufacturers, any new manufacturer would have to be educated in, or developsubstantially equivalent processes necessary for, the production of ourproducts;

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

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

 

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

 

***Some of ourcompetitors have significantly greater resources than we do and may be able torespond more quickly to new or emerging technologies and changes in customerrequirements, which could adversely affect our ability to generate or maintainrevenues and be profitable.***

 

We are not aware of any product that is being massproduced (or in the final stages of development) in the same credit card formfactor as our InCard DisplayCard that incorporates the token technology.However, there are companies creating tokens and random number generators foruse in dual-factor authentication (as an item separate from the transactioncard). For example, RSA, Vasco, and VeriSign token devices may be costcompetitive to our technology but are not in a credit card form factor. SmartCard, biometrics, and software programs can provide multi-factor authenticationcompetitive to our InCard DisplayCard.

 

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

 

Some of our present and potential competitors havesignificantly greater financial, technical, marketing, purchasing and otherresources than we do, and as a result, may be able to respond more quickly tonew or emerging technologies and changes in customer requirements, or to devotegreater resources to the development, promotion and sale of products, or todeliver competitive products at a lower end-user price. Current and potentialcompetitors have established or may establish cooperative relationships amongthemselves or with third parties to increase the ability of their products toaddress the needs of our prospective customers. It is possible that newcompetitors or alliances may emerge and rapidly acquire significant marketshare. We cannot guarantee that we will be able to compete successfully againstpresent or future competitors or that competitive pressures will not materiallyand adversely affect our business, financial condition and results ofoperations.

 

**Risks Related to our Securities**

 

***We do notanticipate paying any cash dividends in the foreseeable future, which mayreduce your return on an investment in our common stock.***

 

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

 

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

 

As of August 4, 2008, we have 28,495,256 sharesof common stock outstanding. Of these shares, 25,674,809 can be tradedpursuant to a prospectus or via a transaction pursuant to Rule 144 underthe Securities Act of 1933. On a fully diluted basis, including shares issuableupon exercise of warrants and stock options, we have 43,358,572 shares.

 

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

 

***We may raiseadditional capital through a securities offering that could dilute yourownership interest and voting rights.***

 

Our certificate of incorporation currently authorizesour board of directors to issue up to 75,000,000 shares of common stock and5,000,000 shares of preferred stock. As of August 4, 2008, after takinginto consideration our outstanding common and preferred shares, our board ofdirectors will be entitled to issue up to 46,504,744 additional common sharesand 5,000,000 preferred shares. The power of the board of directors to issuethese shares of common stock, preferred stock or warrants or options topurchase shares of our stock is generally not subject to stockholder approval.

 

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

 

***Our incorporation documentsand Delaware law may inhibit a takeover that stockholders consider favorableand could also limit the market price of your stock, which may inhibit anattempt by our stockholders to change our direction or management.***

 

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

 

·                     authorize our board of directors todetermine the rights, preferences, privileges and restrInCardions granted to,or imposed upon, the preferred stock and to fix the number of sharesconstituting any series and the designation of such series without furtheraction by our stockholders;

·                     prohibit stockholders from callingspecial meetings;

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

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

·                     prohibit stockholder action by writtenconsent, requiring all stockholder actions to be taken at a meeting of ourstockholders.

 

In addition, we are governed by the provisions of Section 203of the Delaware General Corporate Law. These provisions may prohibit largestockholders, in particular those owning 15% or more of our outstanding votingstock, from merging or combining with us, which may prevent or frustrate anyattempt by our stockholders to change our management or the direction in whichwe are heading. These and other provisions in our amended and restatedcertificate of incorporation and bylaws and under Delaware law could reduce theprice that investors might be willing to pay for shares of our common stock inthe future and result in the market price being lower than it would be withoutthese 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 anddirectors, which could adversely affect the management of our business and ourability to obtain or retain listing of our common stock.***

 

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

 

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***Our management hasconcluded that, as of December 31, 2007, our disclosure controls andprocedures were not effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act and werenot effective in ensuring that information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the Company’s management, as appropriate toallow timely decisions regarding required disclosure. If we fail to implementnew or improved disclosure controls, investors could lose confidence in thereliability of our financial statements, which could result in a decrease inthe value of our common stock.***

 

Our management, with the participation of our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluatedthe effectiveness of the Company’s disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31,2007. Based on such evaluation which disclosed numerous material weaknesses,our CEO and CFO have concluded that, as of December 31, 2007, the Company’sdisclosure controls and procedures were not effective in recording, processing,summarizing and reporting, on a timely basis, information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act and were not effective in ensuring that information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is accumulated and communicated to the Company’s management,including the Company’s CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure. If we fail to implement new or improveddisclosure controls, investors could lose confidence in the reliability of ourfinancial statements, which could result in a decrease in the value of ourcommon stock.

 

***We have identifiednumerous material weaknesses in our internal control over financial reporting.If we fail to implement new or improved internal controls, investors could loseconfidence in the reliability of our financial statements, which could resultin a decrease in the value of our common stock.***

 

As directed by Section 404 of the Sarbanes-OxleyAct of 2002, the SEC adopted rules requiring public companies to include areport of management on internal control over financial reporting in theirAnnual Reports on Form 10-K. This report is required to contain anassessment by management of the effectiveness of a company’s internal controlover financial reporting. Our non-affiliated market capitalization qualified usas a non-accelerated filer until the end of the 2007 fiscal year. As a result,we were required to include our management’s report on internal control overfinancial reporting in our Annual Report on Form 10-KSB for the 2007 fiscalyear and were not required to include our auditors’ attestation report on ourinternal control over financial reporting. Based on our June 30, 2008 market capitalization, we are once againa non-accelerated filer and will not be required to include our auditor’sattestation report in our 2008 fiscal year filing on Form 10-K.  As discussed in Item 8A to our Annual Reporton Form 10-KSB/A filed with the SEC on June 18, 2008, we haveconcluded that, as of December 31, 2007, our internal control over financialreporting was not effective and have identified a number of material weaknessesin our internal control over financial reporting. While we intend to remedythese weaknesses during the current fiscal year, we may be unable to do so. Ifwe fail to implement required new or improved controls there may be an adversereaction in the financial markets due to a loss of confidence in thereliability of our financial statements, which could cause the market price ofour common stock to decline.

 

***If we trigger an “eventof default” under our debt agreements entered into in January 2008 and April 2008,the debt holders could require us to repay the loan in full and force a sale ofall of our assets to do so, which could cause our common shareholders to incura total loss on their investments in us.***

 

Our debt agreements, entered into in January 2008and April 2008, requires us to adhere to certain covenants relating tocontinued NASDAQ listing and the level of operating expense cash burn to avoidtriggering an “event of default.” Failure to remain in compliance could promptinvestors to call the debt and demand immediate repayment. We could be forcedto seek bankruptcy protection if our loan is called and we are unable to repaythe loan in full. All of our assets are pledged to the debt holders. Ifproceeds from the disposal of our assets are insufficient to repay the loan infull, common shareholders will receive nothing for their stock and suffer atotal loss on their investments in us.

 

***Failure to satisfyNASDAQ Capital Market listing requirements will result in our common stockbeing delisted from the NASDAQ Capital Market.***

 

Our common stock iscurrently listed on the NASDAQ Capital Market under the symbol “INVC.” Forcontinued inclusion on the NASDAQ Capital Market, we must maintain, among otherrequirements, the market value of our listed securities above $35 million orapproximately $1.23 per share based on current shares outstanding.  On July 16, 2008 we 

 

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were informed by NASDAQ that we did not meet thecontinued listing requirement.  We have until August 15, 2008 toregain compliance with the NASDAQ requirements.  If we are unable tomaintain the market value of our listed securities for 10 consecutive daysprior to August 15, 2008, our common stock could be removed from listingon the NASDAQ Capital Market.  If our common stock were delisted from theNASDAQ Capital Market, the trading of our common stock, if any, may beconducted in the over-the-counter market in the so-called “pink sheets” or, ifavailable, the National Association of Securities Dealer’s “Electronic BulletinBoard.” Consequently, broker-dealers may be less willing or able to sell and/ormake a market in our common stock. Additionally, an investor would find it moredifficult to dispose of, or to obtain accurate quotations for the price of, ourcommon stock. A delisting would likely also make it more difficult for us toraise funds through the sale of our securities.

 

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.**

 

The following Management’s Discussion and Analysis ofour Financial Condition and Results of Operations should be read in conjunctionwith the consolidated financial statements and notes thereto included as partof this Quarterly Report. This report contains forward-looking statements thatare based upon current expectations. We sometimes identify forward-lookingstatements with such words as “may”, “will”, “expect”, “anticipate”, “estimate”,“seek”, “intend”, “believe” or similar words concerning future events. Theforward-looking statements contained herein, include, without limitation,statements concerning future revenue sources and concentration, gross profitmargins, selling and marketing expenses, research and development expenses,general and administrative expenses, capital resources, additional financingsor borrowings and additional losses and are subject to risks and uncertaintiesthat could cause actual results to differ materially from the resultscontemplated by these forward-looking statements. We also urge you to carefullyreview the risk factors set forth in other documents we file from time to timewith the Securities and Exchange Commission, particularly our Form 10-KSBand amendments thereto for the year ended December 31, 2007.

 

**OVERVIEW**

 

Since 2002, we have continued to develop our powerinlay technology that is designed to bring power-based applications to theenterprise market and on-line banking market. Our present focus is the InCardDisplayCard power inlay technology which consists of a battery, circuit, andswitch that can power applications on credit card sized cards and otherinformation-bearing plastic cards. We have devoted a majority of our efforts tocompleting the development of our power inlay technology, initiating marketingand raising the financing required to do so and fund our expenses. We havegenerated limited revenues. Prior to the fourth quarter of 2007 these revenuesderived primarily from licensing agreements of our LensCard product, most ofwhich have terminated. At this time, we have no plans to renew the LensCardlicensing agreements or to further market or sell the LensCard, unlessrequested by a customer.

 

Since inception, we have been unprofitable. Weincurred net losses of $2,763,156 and $4,863,031 for the six months ending June 30,2008 and 2007, respectively. As of June 30, 2008, we had an accumulateddeficit of $30,830,339.  Our continuedexistence is dependent upon our ability to generate sales of the InCardDisplayCard or, if we are unable to do so in sufficient quantity to cover ourexpenses, to obtain additional financing. We further anticipate that after suchintroduction of the InCard DisplayCard in 2008, we will continue to incur netlosses due to our costs exceeding our revenues for an indefinite period oftime. Our capital requirements for the next 12 months for acquisition ofinventory, retention and hiring of key personnel, implementation of a salesforce for our products, and further research and development relating to theproduction of our power inlay technology will continue to be significant.  In addition, our gross margin is greatly impactedby production volume.  At low levels ofproduction our gross margin is in the single digits and may be negative.  At the higher volume levels our gross margincan be as high as 35% to 40%.  To date,our operations have been funded primarily through equity and debt financingstotaling $30,303,691.

 

We believe that our current cash, combined withanticipated revenue collections, will be adequate to fund our operations untilmid-way through the fourth quarter 2008. If we are unable to raise additional financing by that date, we will beforced to curtail our operations or seek bankruptcy protection.    We anticipate that we will not be able togenerate sales of the InCard DisplayCard in substantial quantities until thesecond half of 2008 to support our cash needs since the sales cycle for thatproduct is longer than originally anticipated.

 

Our backlog, which consistsof orders received but not yet shopped, totals $1.2 million at June 30,2008, most of which we expect to deliver in the third and fourth quarter of2008.

 

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We raised $3,500,000 of operating capital in January 2008and $5,000,000 in April 2008 (see Equity and Debt Financings and AccountsPayable in this Item 2) but may be unable to raise additional operating capitalon terms satisfactory to us, if at all. There can be no assurances that we willbe able to raise operating capital on satisfactory terms, or that sufficientrevenues will be generated from the sales of our product in order to sustainour operations. Should our cash and liquidity position become severe, we wouldneed to limit our operations which would harm the value of your investment in theCompany.

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

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

 

Revenue recognition. We recognize revenues inaccordance with SEC Staff Accounting Bulletin No. 104 (“SAB 104”).Revenues are recognized when persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the price is fixed anddeterminable and collectability is reasonably assured.  Revenue is not recognized on product salestransacted on a test or pilot basis. Instead, receipts from these types of transactions offset marketingexpenses.  Revenue from royalties isrecognized with the passage of time in accordance with the underlyingagreement.  We recognize certainlong-term contracts using the completed-contract method in accordance with SOP81-1, “Accounting for Performance of Construction-Type and CertainProduction-Type of Contracts.”

 

We have generated revenue from three sources: sale ofthe InCard DisplayCard, licensing of the LensCard to various credit cardissuers and selling the LightCard to a credit card issuer. The LensCard iscomposed 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 asmall LED light is activated. We sell time-based licenses to various creditcard issuers for the LensCard. We recognize royalties attributable to thesetime-based licenses as they are sold to the credit card issuers’ customers.Royalty revenue is recognized when each LensCard is sold by an issuer inaccordance with SAB 104.

 

We anticipate that the majority of our revenues in thecoming year will come from the InCard DisplayCard. We intend to sell thesecards through resellers.  We do notrecognize revenue when we sell the InCard DisplayCard in small quantities undera test or pilot program.  Cash receiptsfrom these transactions are used to offset marketing expenses.

 

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

 

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

 

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

 

Warranty expense. We estimate the cost associated with meeting our warranty obligationsfor the sale of our products.  Theinitial estimate and changes to the estimate are charged to cost of goodssold  at the time of sale of the product.

 

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

 

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

 

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Valuation of Intangible Assets and Long-Lived Assets.We assess the impairment of identifiable intangibles and long-lived assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors considered important that could trigger animpairment review include, but are not limited to, the following: a significantunderperformance to expected historical or projected future operating results,a significant change in the manner of the use of the acquired asset or thestrategy for the overall business, or a significant negative industry oreconomic trend.  We assess the carryingvalue of long-lived assets in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”

 

Stock Based Compensation. On January 1, 2006, weadopted SFAS No. 123 (R), “Share Based Payment,” which establishesstandards for the accounting of transactions in which an entity exchanges itsequity instruments for goods or services, primarily focusing on accounting fortransactions where an entity obtains employee services in share-based paymenttransactions. SFAS No.123(R) requires a public entity to measure the costof employee services received in exchange for an award of equity instruments,including stock options, based on the grant-date fair value of the award and torecognize it as compensation expense over the period the employee is requiredto provide service in exchange for the award, usually the vesting period. SFASNo.123(R) supersedes the Company’s previous accounting under AccountingPrinciples Board (APB) Opinion No. 25, Accounting for Stock Issued toEmployees for periods beginning in fiscal year 2006. In March 2005, theSEC 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).

 

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**RESULTS OF OPERATIONS**

 

**COMPARISON OF THE THREE MONTH PERIODSENDED JUNE 30, 2008 AND JUNE 30, 2007**

 

**OVERVIEW**

 

Our financial results for the three months ended June 30,2008 reflect a net loss of $800,715, or $0.03 per share (basic and diluted),compared to a net loss of $2,656,224, or $0.09 per share (basic and diluted),for the three months ended June 30, 2007.

 

The major factors contributing to our decreased net lossof $800,715 during the three month period ended June 30, 2008 were anincrease in our gross margin of $334,641, a decrease in operating expenses of $214,096and a decrease in the fair value of our warrant liability as a result of thedecline in our stock price.  Offsettingthis was $419,978 of interest expense associated with our 2008 financings.

 

Revenue.  In the2008 period, revenue is from the sale of the InCard DisplayCard and theclamshell.  In the 2007 period, revenueconsists of royalties from the LensCard.  We believe that future revenue will be primarily from the sales of theInCard DisplayCard; revenue from LensCard royalties is expected to benegligible.

 

Total revenue increased from $1,089 for the threemonths ended June 30, 2007 to $800,209 for the three months ended June 30,2008.  The increase is attributable tosales of the InCard DisplayCard and the clamshell in the current period.  For the three months ended June 30,2007, revenue was from LensCard royalties.

 

Cost of goods sold - Cost ofgoods sold increased to $859,875 for the three months ended June 30, 2008from $395,396 for the same period in the prior year.  The components of cost of goods sold are asfollows:

 
| ** **                   | ** ** | **3 mos ended  June 30, 2008** | ** ** | **3 mos ended  June 30, 2007** | ** ** |
|------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Cost of finished goods  sold |       | $                                   | 709,962    |                                | $          |   |   |
| Inventory write-off  (scrap) |       | 78,917                              |       |                                | 395,396    |   |
| Warranty reserve             |       | 70,996                              |       |                                |       |
| Total cost of goods sold     |       | $                                   | 859,875    |                                | $          | 395,396 |   |

 

No cost of goods sold isassociated with LensCard royalties.

 

Administrative. Administrative expense consists oftravel and marketing expenses, compensation expense, administrative fees anddepreciation and amortization expense.

 

Administrative expense decreased to $1,656,715 for thethree months ended June 30, 2008 from $1,832,454 for the three monthsended June 30, 2007.  The majorcontributors to the reduction in administrative expenses were a reduction indue diligence expenses related to our planned acquisition in the 2007 period ofone of our suppliers, a reduction in travel and entertainment expenses and areduction in marketing expenses.  Offsetting this was an increase in salary and related expenses andcharges relating to a warrant issuance to our investor relations consultant.  We anticipate that administrative expenseswill remain relatively flat for the remainder of 2008.

 

Consulting expense. Consulting expense consists ofpayments made to independent contractors that provided services to us.

 

Consulting expense increased to $134,427 for the threemonths ended June 30, 2008 from $115,739 in the 2007 period.  We anticipate that our consulting expensewill remain fairly constant for the remainder of the year.

 

Professional fees expense. Professional fees consistof amounts paid to our outside counsel, auditors and other outside servicesrendered to us.

 

Professional fees expense decreased to $201,192 forthe three months ended June 30, 2008 from $203,695 for the three monthsended June 30, 2007.  We anticipatethat professional fees will remain fairly steady for the remainder of 2008.

 

Research and Development. Research and developmentexpense consists primarily of costs relating to further development of theInCard DisplayCard.

 

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Research and development costs decreased to $118,539for the three months ended June 30, 2008 from $173,081 for the threemonths ended June 30, 2007 primarily due to a shift in focus from R&Dto manufacturing.   We expect ourresearch and development expenses to decrease for the remainder of the year.

 

Change in fair value of warrant liability and otherincome - Due to the decline in our stock price, the valuation of our warrantliability decreased by $1,898,895 in the 2008 period.  We had no warrant liability at June 30,2007.  We also recognized a loss on thesublet of our previous office space of $120,796.

 

Interest income. Interest income decreased to $11,703for the three months ended June 30, 2008 from $63,152 for the three monthsended June 30, 2007 due to the reduced cash on hand during the 2008period.

 

Interest expense. Interest expense increased to$419,978 for the three months ended June 30, 2008 from $100 for the threemonths ended June 30, 2007.  The2008 period interest relates to our $8.5 million 8% senior secured convertibledebentures issued in January and April 2008.  We had no debt during the 2007 period.

 

**COMPARISON OF THE SIX MONTH PERIODSENDED JUNE 30, 2008 AND JUNE 30, 2007**

 

**OVERVIEW**

 

Our financial results for the six months ended June 30,2008 reflect a net loss of $2,763,156 or $0.10 per share (basic and diluted),compared to a net loss of $4,863,031, or $0.17 per share (basic and diluted),for the six months ended June 30, 2007.

 

The major factors contributing to our decreased netloss of $2,763,156 for the six months ended June 30, 2008 were an increasein gross margin of $340,103, a decrease in operating expenses of $563,839 and adecrease in the fair value of our warrant liability as a result of the declinein our stock price.  Offsetting this was$585,359 of interest expense associated with our 2008 financings.

 

Revenue.  In the2008 period, revenue is from the sale of the InCard DisplayCard.  In the 2007 period, revenue consists ofroyalties from the LensCard.   We believethat future revenue will be primarily from the sales of the InCard DisplayCard;revenue from LensCard royalties is expected to be negligible.

 

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Total revenue increased from $2,509 for the six monthsended June 30, 2007 to $1,017,425 for the six months ended June 30,2008. The increase is attributable to sales of the InCard DisplayCard in thecurrent period.  For the six months endedJune 30, 2007, revenue was from LensCard royalties.

 

Cost of goods sold - Cost ofgoods sold increased to $1,070,209 for the six months ended June 30, 2008from $395,396 for the same period in the prior year.  The components of cost of goods sold are asfollows:

 
| ** **                  | ** ** | **6 mos ended  June 30, 2008** | ** ** | **6 mos ended  June 30, 2007** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Cost of finished goods sold |       | $                                   | 846,636    |                                | $          |   |   |
| Inventory write-off (scrap) |       | 84,664                              |       |                                | 395,396    |   |
| Warranty reserve            |       | 138,909                             |       |                                |       |
| Total cost of goods sold    |       | $                                   | 1,070,209  |                                | $          | 395,396 |   |
|                             |            |                                     |            |                                     |            |  |  |  |

 

No cost of goods sold isassociated with LensCard royalties.

 

Administrative. Administrative expense consists oftravel and marketing expenses, compensation expense, administrative fees anddepreciation and amortization expense.

 

Administrative expense decreased from $3,344,329 forthe six months ended June 30, 2007 to $3,046,646 for the six months ended June 30,2008.  The major contributors to thereduction in administrative expenses were a reduction in due diligence expensesrelated to our planned acquisition in the 2007 period of one of our suppliers,a reduction in travel and entertainment expenses, a reduction in marketingexpenses and a reduction in depreciation.  Offsetting this was an increase in salary and related expenses andcharges relating to a warrant issuance to our investor relationsconsultant.  We anticipate thatadministrative expenses will remain relatively flat for the remainder of 2008.

 

Consulting expense. Consulting expense consists ofpayments made to an independent contractor that provided services to us.

 

Consulting expense increased from $231,631 for the sixmonths ended June 30, 2007 to $254,525 for the same period in 2008.   We anticipate that our consulting expensewill remain fairly constant for the remainder of the year.

 

Professional fees expense. Professional fees consistof amounts paid to our outside counsel, auditors and other outside servicesrendered to us.

 

Professional fees expense decreased from $567,218for the six months ended June 30, 2007 to $449,223 for the six monthsended June 30, 2008.  Professional fees expense decreased as the result of a reduction inaudit and accounting fees.  We anticipatethat professional fees will remain fairly steady for the remainder of the year.

 

Research and Development. Research and developmentexpense consists primarily of costs relating to the development of new creditcard enhancements.

 

Research and development costs decreased from $469,410for the six months ended June 30, 2007 to $298,355 for the six monthsended June 30, 2008 due to the termination of our agreement with nCryptonefor technical support and a shift in focus from R&D to manufacturing.  We expect our research and developmentexpenses to decrease for the remainder of the year.

 

Change in fair value of warrant liability - Due to thedecline in our stock price, the valuation of our warrant liability decreased by$2,024,556 in the 2008 period.  We had nowarrant liability at June 30, 2007. We also recognized a loss on the sublet of our previous office space of$120,796.

 

Interest income. Interest income decreased from$142,692 for the six months ended June 30, 2007 to $20,776 for the sixmonths ended June 30, 2008 due to the reduced cash on hand during the 2008period.

 

Interest expense. Interest expense increased from $248for the six months ended June 30, 2007 to $585,359 for the six monthsended June 30, 2008.  The 2008period interest relates to our $8.5 million 8% senior secured convertibledebentures issued in January and April 2008.  We had no debt during the 2007 period.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal sources of liquidity have been cash andcash equivalent balances, which were $1,680,060 at June 30, 2008 and$4,208,895 as of June 30, 2007. Since our inception, we have incurredsignificant losses, and as of June 30, 2008 and 2007 we had an accumulateddeficit of $30,830,339 and $18,596,592, respectively.

 

Net cash used in operating activities was $6,668,555for the six months ended June 30, 2008 as compared with $4,012,445 for thesix months ended June 30, 2007. This increase in cash used was primarilydue to an increased use of working capital to build inventory in anticipationof increased sales and reduce trade accounts payable to a more current level.

 

Net cash used in investing activities was $13,485 forthe six months ended June 30, 2008 as compared with $64,509 for the sixmonths ended June 30, 2007.  Wepurchased less production and testing equipment in the 2008 period.

 

Net cash provided by financing activities was$8,022,500 for the six months ended June 30, 2008 as compared to $15,753for the six months ended June 30, 2007. The increase is the result of ourissuance of $8.5 million of 8% senior secured convertible debentures in January andApril 2008.

 

**EQUITY AND DEBT FINANCINGS ANDACCOUNTS PAYABLE**

 

To date, our operations have been funded primarilythrough equity and debt financings totaling $30,303,691. We believe that ourcurrent cash, combined with anticipated revenue collections, will be sufficientto fund our operations until mid-way through the fourth quarter of 2008.  If we are able to successfully sell the InCardDisplayCard in substantial quantities during the third and fourth quarters of2008, we may be able to continue operations through the spring of 2009.   Our significant equity and debt financingsfrom January 1, 2006 through May 6, 2008 are described below.

 

On May 30, 2006, weissued 3,785,500 shares of common stock at a price of $3.00 per share toaccredited investors pursuant to a private placement for total gross proceedsof $11,356,500. In connection with the transaction, T.R. Winston &Company served as placement agent for the securities sold and received a netcommission of 5% of the total gross proceeds and a warrant to purchase 113,565shares of our common stock at an exercise price of $3.30 per share that expireon May 30, 2011.   The warrant issuedto T.R. Winston & Company has full ratchet anti-dilution protection,for so long as it is outstanding, in the event we issue common shares or commonshare equivalents for a price less than $3.00 per share.  No adjustment is required in the event of certainexempt issuances as more fully contained in the warrant.  The warrant exercise pricewas reset following the April 15, 2008 financing described below.

 

On June 28, 2006, we purchased rights relating tothe InCard DisplayCard from nCryptone for 4,500,000 shares of our common stockand acquired a license to use a patent for $1,000,010 that was due by June 27,2007. We have paid $400,000 towards the cost of the patent through March 31,2008. The remainder is due in January 2009.

 

On January 8, 2008, we entered into a SecuritiesPurchase Agreement (the “Purchase Agreement”) with 13 institutional andaccredited investors (the “Purchasers”). Pursuant to the terms of the PurchaseAgreement, the Purchasers purchased $3.5 million of our 8% Senior SecuredConvertible Debenture (“Debenture”). The Debenture: (i) bears interest at8% per year, paid quarterly in cash or registered common stock, at ourdiscretion; (ii) has a maturity of January 8, 2011, (iii) isconvertible at the holder’s option into shares of our common stock at $2.50 pershare, (iv) is secured by all of our and our subsidiary’s assets includinginventory, receivables, unencumbered equipment and intellectual property underthe terms of a Security Agreement, and (v) has a forced conversion featurewhich allows us to force the conversion of the Debenture if our common stocktrades above $5.00 for 20 consecutive trading days and certain other conditionsare met. We also issued to the Purchasers five-year common stock purchasewarrants to purchase 700,000 shares of our common stock at an exercise price of$2.75 per share (the “Warrants”). We used the net proceeds of the financing forour working capital requirements and to pay down certain obligations.  Both the conversion price of the Debentureand the Warrant strike price were reset following the April 15, 2008financing discussed below.

 

On April 15, 2008, we entered into a SecuritiesPurchase Agreement with EMC Corporation (“EMC”). Pursuant to the terms of theagreement, EMC purchased $5 million of our 8% Senior Secured ConvertibleDebenture (“Debenture”). The Debenture: (i) bears interest at 8% per year,paid quarterly in cash or, subject to certain conditions, registered shares ofour common stock; (ii) has a maturity of April 15, 2011, (iii) isconvertible at EMC’s option into shares of our common stock at $2.48 per share,(iv) is secured by all of our and our subsidiary’s assets, includinginventory, receivables, unencumbered equipment and intellectual property, and (v) hasa forced conversion feature which allows us to force the conversion of theDebenture if our common stock trades above $5.00 for 20 consecutive tradingdays. Such a forced conversion may be limited by contractual restrictions onthe amount of our common stock which EMC may own and certain other conditions.We also agreed to issue EMC five-year Common Stock Purchase Warrants topurchase 1,008,064 shares of our common stock at an exercise price of $2.728per share. We expect to use the net proceeds of the financing for our workingcapital requirements and to pay down certain obligations.

 

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**FUTURE NEEDS**

 

We believe that our current cash of $630,000 as of August 1,2008, combined with anticipated revenue collections, will provide us withsufficient resources to fund our operations mid-way through the fourth quarter2008.  If we are able to successfullysell the InCard DisplayCard in substantial quantities during the third andfourth quarters of 2008 we may be able to continue operations through thespring of 2009.  If we need additionalcapital, we do not have any binding commitments for, or readily available sourcesof, additional financing. Additional financing, whether through public orprivate equity or debt financing, arrangements with stockholders or othersources to fund operations, may not be available, or if available, may be onterms unacceptable to us. If we issue additional equity securities to raisefunds, the ownership percentage of our existing stockholders would be reduced.New investors may demand rights, preferences or privileges senior to those ofexisting holders of our common stock. Debt incurred by us would be senior toequity in the ability of debt holders to make claims on our assets. The termsof any debt issued could impose restrictions on our operations. If adequatefunds are not available to satisfy our capital requirements, our operations andliquidity could be materially adversely affected.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

(a) Evaluation of disclosure controls andprocedures. As of the end of the period covered by this report, we carried outan evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended. Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were not effective as of the end of theapplicable period to ensure that information required to be disclosed by us inreports that we file or submit under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

Based on our assessmentat December 31, 2007, management believes that our internal control overfinancial reporting was not effective based on criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission in *Internal Control-Integrated Framework*. The followingmaterial weaknesses were identified in our internal control over financialreporting at December 31, 2007:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  We did not properly account for modifications made to stock optiongrants in accordance with SFAS 123(R) resulting in a late journal entrybeing made to prevent the financial statements from being misleading.   The modifications were******the result of accelerating the vesting of existingstock options and extended the exercise period for three officers and directorswhose service to the Company was terminated in the fourth quarter of 2007.  The modifications were notrequired by the terms of the officers/directors employment agreements, or bythe terms of the stock option plans, or by the terms of the stock option grantsbut were done solely as part of the officers/directors separation agreements.    We accounted for the terminations byexpensing that portion of the unrecognized compensation expense relating tothese three former officers/directors. We recalculated the expense as part of the year end closing following afurther review of the authoritative literature.

 

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

 

Notwithstanding thesematerial weaknesses, we believe that our financial condition, results ofoperations and cash flows presented in this report of Form 10-Q are fairlypresented in all material respects.  Webase our conclusion on our ability to substantiate, with a high degree ofconfidence, the small number of significant general ledger accounts thatcomprise our financial statements.

 

(b) Changes in internal controls over financialreporting.

 

Through the date of thisreport we have made the following changes in internal control over financialreporting:

 

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

 

Beginningin April we established a standard listing of recurring journal entriesthat are reviewed and signed off by the CFO as part of the monthly closingprocess.

 

Weinstituted a formal purchasing policy in May that requires the use ofpurchase orders for all inventory purchases.

 

Weestablished with certainty the Section 382 limitation on our losscarryforwards.

 

TheCFO has reviewed the accounting literature surrounding stock optionmodifications and is now familiar with the proper treatment.  In addition, we now subscribe to a dailyinternet service that keeps the CFO apprised of current developments affectingfinancial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Not Applicable

 

**ITEM 2. UNREGISTERED SALES OFSECURITIES AND USE OF PROCEEDS**

 

·                  On January 4, 2008, we issued a commonstock purchase warrant to purchase 60,000 of our common shares at $2.49 pershare to one of our consultants. The warrant has a ten year exercise period.

 

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·                  On January 8, 2008,we sold $3.5 million of our 8% Senior SecuredConvertible Debentures.  As part of thetransaction, we issued the purchasers common stock purchase warrants topurchase 700,000 of our common shares. For a more detailed description of the transaction, refer to Note 10 ofour financials contained in this report.  We incorporate by reference the disclosure of the transaction andaccompanying documents as contained in our Current Report on Form 8-Kfiled with the SEC on January 9, 2008.

 

·                  On February 25, 2008, pursuant to our 2007 EquityIncentive Plan, we issued one of our directors an option to purchase 63,333common shares at $1.95 per share as compensation for serving on the board andany relevant committees thereof.  Theoption has a vesting period of three years (vesting 1/3 per year), and aduration of 10 years.   In the event thedirector resigns or is removed, the holder has 90 days to exercise of theoption.

 

·                  OnFebruary 25, 2008, pursuant to our 2007 Equity Incentive Plan, we issuedone of our directors an option to purchase 63,333 common shares at $1.95 pershare as compensation for serving on the board and any relevant committeesthereof.  The option has a vesting periodof three years (vesting 1/3 per year), and a duration of 10 years.   In the event the director resigns or isremoved, the holder has 90 days to exercise of the option.

 

·                  OnMarch 27, 2008, pursuant to our 2007 Equity Incentive Plan, we issued toour CEO an option to purchase 1,000,000 common shares at $2.25 per share.  The option vests over a period of 36 monthsupon the occurrence of certain milestones and has duration of 10 years.   For a more detailed description of theoption and the vesting conditions, please refer to our Current Report filedwith the SEC on Form 8-K on April 2, 2008.

 

·                  OnMarch 27, 2008, pursuant to our 2007 Equity Incentive Plan, we issued toour CFO an option to purchase 200,000 common shares at $2.25 per share.  The option vests over a period of 36 monthsupon the occurrence of certain milestones and has duration of 10 years.  For a more detailed description of the optionand the vesting conditions, please refer to our Current Report filed with theSEC on Form 8-K on April 2, 2008.

 

·                  On April 15, 2008, we sold $5 million of our 8%Senior Secured Convertible Debentures. As part of the transaction, we issued the purchaser common stockpurchase warrant to purchase 1,008,064 of our common shares.  For a more detailed description of thetransaction, refer to Note 11 of our financials contained in this report.   We incorporate by reference the disclosureof the transaction and accompanying documents as contained in our CurrentReport on Form 8-K filed with the SEC on April 16, 2008.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

Not Applicable

 

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

 

The following matters were voted on and approved bystockholders at the annual meeting of the stockholders of the Company held on June 17,2008:

 

**1.**The election of five directors to serve until the 2009annual meeting of stockholders.

 

**2.**The ratification of the appointment of Singer LewakGreenbaum & Goldstein LLP as the Company’s independent registeredpublic accounting firm for the 2008 fiscal year.

 

The number of votes cast at the annual meeting inperson and by proxy for each matter is as set forth in the following table:

 
| **Matter voted upon**                                                                | ** ** | **For**    | ** ** | **Against/Withheld** | ** ** | **Abstentions/Broker  Non-votes** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|----------------------|------------|-----------------------------------|------------|
| Election of Donald Joyce                                                             |       | 18,570,769 |       | 50,018               |       |                              |       |
| Election of W. Robert Ramsdell                                                       |       | 18,570,684 |       | 50,103               |       |                              |       |
| Election of Richard Nathan                                                           |       | 18,565,684 |       | 55,103               |       |                              |       |
| Election of Scott V. Ogilvie                                                         |       | 18,570,769 |       | 50,018               |       |                              |       |
| Election of Henry L. Tredennick III                                                  |       | 18,565,684 |       | 55,103               |       |                              |       |
| Ratification of appointment of Singer Lewak Greenbaum &  Goldstein LLP |       | 18,603,406 |       | 13,760               |       | 3,621                             |       |

 

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**ITEM 5. OTHER INFORMATION**

 

Not Applicable

 

**ITEM 6. EXHIBITS**

 

(a) Exhibits

 

The exhibits listed in the Exhibit Index arefiled as a part of this report.

 

**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the Registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
| ** **                | **INNOVATIVE CARD TECHNOLOGIES, INC.** |
|---------------------------|----------------------------------------|
|                      |                                   |   |
|                      |                                   |   |
| Date: August 8, 2008 |                                   | /s/ Steven R. Delcarson |
|                      |                                   | Steven R. Delcarson |
|                      |                                   | Chief Executive Officer |
|                      |                                   |   |
|                      |                                   |   |
| Date: August 8, 2008 |                                   | /s/ Charles M. Caporale |
|                      |                                   | Charles M. Caporale |
|                      |                                   | Chief Financial Officer |

 

**EXHIBITINDEX**

 
| 2.1(2)           |   | Exchange agreement by and among the registrant,  LensCard US, LLC, Alan Finkelstein, Forest Finkelstein, Bradley Ross and Luc  Berthoud, dated April 1, 2004       |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                    |
| 2.2(2)           |   | Exchange agreement by and among the registrant, Alan  Finkelstein,  Bradley Ross and Michael Paradise, dated April 1,  2004                                   |
|             |   |                                                                                                                                                                    |
| 2.3(2)           |   | Exchange agreement between the registrant and its  wholly-owned subsidiary, PSACo, Inc., dated April 1, 2004                                                  |
|             |   |                                                                                                                                                                    |
| 2.4(2)           |   | Merger agreement between the registrant and LensCard  International Limited, a British Virgin Islands International Business Company,  dated April 6, 2004         |
|             |   |                                                                                                                                                                    |
| 3.1(2)           |   | Amended and Restated Certificate of incorporation of  the registrant, as currently in effect                                                                            |
|             |   |                                                                                                                                                                    |
| 3.2(2)           |   | Amended and Restated Bylaws of the registrant, as  currently in effect                                                                                                  |
|             |   |                                                                                                                                                                    |
| 3.3(12)          |   | Certificate of Amendment of Amended and Restated  Certificate of Incorporation.                                                                                         |
|             |   |                                                                                                                                                                    |
| 10.1(2)          |   | 2004 Stock Incentive Plan                                                                                                                                               |
|             |   |                                                                                                                                                                    |
| 10.2(2)          |   | Sublease agreement between registrant and  Bemel & Ross for premises at 11601 Wilshire Blvd.,#2160, Los  Angeles, California 90025, dated January 5, 2003 |
|             |   |                                                                                                                                                                    |
| 10.3(2)          |   | Guaranty of lease between Alan Finkelstein and  Bemel & Ross, dated January 5, 2003                                                                       |
|             |   |                                                                                                                                                                    |
| 10.4(3)          |   | Form of common stock warrant, as amended on  September 7, 2005.                                                                                               |
|             |   |                                                                                                                                                                    |
| 10.5(2)          |   | Securities purchase agreement between registrant and  Bristol Capital, LLC dated December 23, 2003                                                                 |
|             |   |                                                                                                                                                                    |
| 10.5(a) (2) |   | Waiver of section 2.3 of the securities purchase  agreement between registrant and Bristol Capital, LLC                                                                 |

 

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| 10.6(2)  |   | Shares for debt agreement between registrant and  Alan Finkelstein, dated June 22, 2004                                                                     |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                             |
| 10.7(2)  |   | Shares for debt agreement between registrant and  Bradley Ross, dated June 22, 2004                                                                         |
|     |   |                                                                                                                                                             |
| 10.8(2)  |   | Shares for debt agreement between registrant and Luc  Berthoud, dated June 22, 2004                                                                         |
|     |   |                                                                                                                                                             |
| 10.9(2)  |   | Promissory note (loan no. 00003) between registrant  and City National Bank, dated May 24, 2004                                                             |
|     |   |                                                                                                                                                             |
| 10.10(2) |   | Promissory note (loan no. 00005) between registrant  and City National Bank, dated May 24, 2004                                                             |
|     |   |                                                                                                                                                             |
| 10.11(2) |   | Promissory note (1oan no. 00004) between registrant  and City National Bank, dated May 24, 2004                                                             |
|     |   |                                                                                                                                                             |
| 10.12(2) |   | Promissory note (loan no. 00006) between registrant  and City National Bank, dated May 24 ,2004                                                             |
|     |   |                                                                                                                                                             |
| 10.13(2) |   | Commercial guaranty between Alan Finkelstein and  City National Bank dated May 24, 2004                                                                     |
|     |   |                                                                                                                                                             |
| 10.14(2) |   | Commercial guaranty between Bradley Ross and City  National Bank dated May 24, 2004                                                                         |
|     |   |                                                                                                                                                             |
| 10.15(2) |   | Commercial guaranty between Luc Berthoud and City  National Bank dated May 24, 2004                                                                         |
|     |   |                                                                                                                                                             |
| 10.16(2) |   | Offer letter between registrant and Murdoch Henretty  dated July 28, 2004                                                                                   |
|     |   |                                                                                                                                                             |
| 10.17(2) |   | Employment agreement between registrant and Alan  Finkelstein dated January 1998                                                                            |
|     |   |                                                                                                                                                             |
| 10.18(2) |   | Strategic Alliance Agreement between registrant and  Visa International Service Association dated May 26, 2004                                              |
|     |   |                                                                                                                                                             |
| 10.19(2) |   | Secured Demand Promissory Note between registrant  and Union Finance International Corp. dated March 31, 2005                                               |
|     |   |                                                                                                                                                             |
| 10.20(2) |   | Secured Demand Promissory Note between registrant  and Bristol Investment Fund, Ltd. dated March 30, 2005                                                   |
|     |   |                                                                                                                                                             |
| 10.21(2) |   | Capital Lease Agreement between registrant and CNC  Associates, Inc. dated November 30, 2004                                                           |
|     |   |                                                                                                                                                             |
| 10.22(2) |   | Guaranty between Alan Finkelstein and CNC Associates, Inc.  dated November 30, 2004                                                                    |
|     |   |                                                                                                                                                             |
| 10.23(2) |   | Security Agreement between registrant and Union  Finance International Corp. dated March 31, 2005 (See  Exhibit 10.19)                                 |
|     |   |                                                                                                                                                             |
| 10.24(2) |   | Security Agreement between registrant and Bristol  Investment Fund, Ltd. dated March 30, 2005 (See Exhibit 10.20)                                      |
|     |   |                                                                                                                                                             |
| 10.25(2) |   | Secured Demand Promissory Note between registrant  and Bradley Ross dated August 31, 2005                                                                   |
|     |   |                                                                                                                                                             |
| 10.26(2) |   | Secured Demand Promissory Note between registrant  and Rodger Bemel dated August 31, 2005                                                                   |
|     |   |                                                                                                                                                             |
| 10.27(2) |   | Joint Development Agreement between registrant and  nCryptone dated July 25, 2005                                                                           |
|     |   |                                                                                                                                                             |
| 10.28(2) |   | Agreement between registrant and SmartDisplayer  Technology, Inc. dated July 25, 2005                                                                  |
|     |   |                                                                                                                                                             |
| 10.29(5) |   | Form of Lock-Up agreement by and between  registrant’s directors and executive officers pursuant to the private  placement dated October 19, 2005 |
|     |   |                                                                                                                                                             |
| 10.30(4) |   | Form of Warrant pursuant to private placement  dated October 19, 2005                                                                                  |
|     |   |                                                                                                                                                             |
| 10.31(4) |   | Registration Rights Agreement by and between the  registrant and each investor pursuant to the private placement dated  October 19, 2005                    |
|     |   |                                                                                                                                                             |

 

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| 10.32(4)  |   | Side Letter Agreement between the registrant, T.R.  Winston & Company and investors pursuant to the private placement  dated October 19, 2005 |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                        |
| 10.33(6)  |   | Letter of Intent by and between VASCO Data Security,  nCryptone and Registrant, dated October 28, 2005.                                                |
|      |   |                                                                                                                                                        |
| 10.34(9)  |   | Form of Warrant to TR Winston dated as of  May 30, 2006.                                                                                          |
|      |   |                                                                                                                                                        |
| 10.35(9)  |   | Form of Securities Purchase Agreement dated  May 30, 2006.                                                                                        |
|      |   |                                                                                                                                                        |
| 10.36(9)  |   | Form of Registration Rights Agreement dated  May 30, 2006.                                                                                        |
|      |   |                                                                                                                                                        |
| 10.37(10) |   | Asset Agreement dated June 28, 2006 by and  between Registrant NCryptone, SA and its shareholders.                                                     |
|      |   |                                                                                                                                                        |
| 10.38(10) |   | Registration Rights Agreement dated June 28,  2006 by and between Registrant and NCrytone, SA                                                          |
|      |   |                                                                                                                                                        |
| 10.39(10) |   | License Agreement dated June 28, 2006 by and  between Registrant as licensor and NCryptone, SA as licensee                                             |
|      |   |                                                                                                                                                        |
| 10.40(10) |   | License Agreement dated June 28, 2006 by and  between NCryptone, SA as licensor and Registrant as licensee.                                            |
|      |   |                                                                                                                                                        |
| 10.41(11) |   | Sublease between Registrant as sublessee and Bergman  and Dacey, Inc. as sublessor.                                                                    |
|      |   |                                                                                                                                                        |
| 10.42(8)  |   | Indemnification Agreement                                                                                                                                   |
|      |   |                                                                                                                                                        |
| 10.43(7)  |   | Code of Ethics                                                                                                                                              |
|      |   |                                                                                                                                                        |
| 10.44(13) |   | Separation and Release  Agreement dated October 29, 2007 between Bennet P. Tchaikovsky and  Registrant                                                 |
|      |   |                                                                                                                                                        |
| 10.45(13) |   | Consulting Services  Agreement dated October 29, 2007 between Registrant and Bennet P.  Tchaikovsky                                                    |
|      |   |                                                                                                                                                        |
| 10.46(13) |   | Indemnity Agreement  dated October 29, 2007 between Registrant and Bennet P. Tchaikovsky                                                               |
| 10.47(14) |   | 2007 Equity Incentive  Plan                                                                                                                                 |
|      |   |                                                                                                                                                        |
| 10.48(15) |   | Form of Indemnity  Agreement                                                                                                                           |
|      |   |                                                                                                                                                        |
| 10.49(16) |   | Alan Finkelstein Severance  and Resignation Letter                                                                                                          |
|      |   |                                                                                                                                                        |
| 10.50(17) |   | Form of Securities  Purchase Agreement, dated as of January 8, 2008                                                                               |
|      |   |                                                                                                                                                        |
| 10.51(17) |   | Form of 8% Senior  Secured Convertible Debenture issued January 8, 2008                                                                           |
|      |   |                                                                                                                                                        |
| 10.52(17) |   | Form of Common  Stock Purchase Warrant issued January 8, 2008                                                                                     |
|      |   |                                                                                                                                                        |
| 10.53(17) |   | Form of  Registration Rights Agreement, dated as of January 8, 2008                                                                               |
|      |   |                                                                                                                                                        |
| 10.54(17) |   | Form of Security  Agreement, dated as of January 8, 2008                                                                                          |
|      |   |                                                                                                                                                        |
| 10.55(17) |   | Form of Subsidiary  Guarantee, dated as of January 8, 2008                                                                                        |
|      |   |                                                                                                                                                        |
| 10.56(17) |   | Form of Voting  Agreement, dated as of January 8, 2008                                                                                            |
|      |   |                                                                                                                                                        |
| 10.57(17) |   | Form of Lock-Up  Agreement, dated as of January 8, 2008                                                                                           |
|      |   |                                                                                                                                                        |
| 10.58(18) |   | Employment Agreement  dated March 27, 2008 between Registrant and Steven R. Delcarson                                                                  |
|      |   |                                                                                                                                                        |
| 10.59(18) |   | Employment Agreement  dated March 27, 2008 between Registrant and Charles M. Caporale                                                                  |
|      |   |                                                                                                                                                        |
| 21.1(2)   |   | List of subsidiaries                                                                                                                                        |

 

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| 31.1(1) |   | Certification of Chief Executive Officer, as  required by Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934                        |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                          |
| 31.2(1) |   | Certification of Chief Financial Officer, as  required by Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934                        |
|    |   |                                                                                                                                                                          |
| 32(1)   |   | Certification of Chief Executive Officer and Chief  Financial Officer, as required by Section 1350 of Chapter 63 of Title 18  of the United States Code (18 U.S.C. 1350) |

 

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(1)                        Filed herewith.

(2)                        Previously filed by the registrant on Form SB-2(File No. 333-119814), as amended, with the Securities and ExchangeCommission.

(3)                        Previously filed by the registrant on Form 8-Kwith 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-Kwith the Securities and Exchange Commission on November 18, 2005.

(7)                        Previously filed by the registrant on Form 10-KSBwith the Securities and Exchange Commission on March 20, 2006.

(8)                        Previously filed by the registrant on Form 8-Kwith the Securities and Exchange Commission on March 23, 2007.

(9)                        Previously filed by the registrant on Form 8-Kfiled 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 10QSBwith the SEC on November 13, 2006.

(12)                  Previously filed by the registrant on Form 8-Kwith the SEC on January 2, 2008

(13)                  Previously filed by the registrant on Form 8-Kwith the SEC on November 1, 2007

(14)                  Previously filed by the registrant on Form 10-QSBwith the SEC on November 19, 2007

(15)                  Previously filed by the registrant on Form 8-Kwith the SEC on November 29, 2007

(16)                  Previously filed by the registrant on Form 8-Kwith the SEC on December 20, 2007

(17)                  Previously filed by the registrant on Form 8-Kwith the SEC on January 9, 2008

(18)                  Previously filed by the registrant on Form 8-Kwith the SEC on April 2, 2008

 

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