**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**




**x** **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934**




For
      the
      quarterly period ended: September 30, 2006




or




**TRANSITION
      REPORT PURSUANT TO SECTION 13 0R 15(D) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**




For
      the
      transition period from _____________ to ____________




*Commission
      File Number: 000-51260*




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


(Exact
      name of small business issuer as specified in its charter)




Delaware
            90-0249676(State
                or Other jurisdiction of
              incorporation
                or organization)
            (IRS
                Employer
              Identification
                No.)





10880
                Wilshire Boulevard, Suite 950
            90024Los
                Angeles, California
              (Address
                of principal executive offices)
            (Zip
                Code)





(310)
      312-0700


(Issuer's
      telephone number including area code)




Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or for such shorter period that the registrant was required to file such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days.




Yes x No o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act)




Yes o No x




State
      the
      number of shares outstanding of each of the issuer's classes of common stock,
      as
      of the latest practicable date.




Common
      Stock Outstanding as of November 7, 2006: 28,364,308 shares




Transitional
      Small Business Disclosure Format: Yes o No x










**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





INDEX
      TO
      FORM 10QSB





PAGEPART
                I
            
            FINANCIAL
                INFORMATION
            
            3Item
                1.
            
            Financial
                Statements
            
            3Consolidated
                Balance Sheets at September 30, 2006 (unaudited)and
                December 31, 2005
            
            3Consolidated
                Statements of Operations for the three and nineMonth
                periods ended September 30, 2006 and September 30, 2005 (unaudited)
            
            4Consolidated
                Statements of Stockholders' Equity (unaudited)
            
            5Consolidated
                Statements of Cash Flows for the nine monthperiods
                ended September 30, 2006 and September 30, 2005 (unaudited)
            
            6Notes
                to Unaudited Consolidated Financial Statements
            
            8Item
                2.
            
            Management's
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            
            18Item
                3.
            
            Controls
                and Procedures
            
            24PART
                II
            
            OTHER
                INFORMATION
            
            24Item
                1.
            
            Legal
                Proceedings
            
            24Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            24Item
                3.
            
            Defaults
                Upon Senior Securities
            
            24Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            24Item
                5.
            
            Other
                Information
            
            24Item
                6.
            
            Exhibits
            
            25SIGNATURES
            
            25











**PART
      I - FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS**




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**




September
                30,
              2006
            
            December
                31,
              2005ASSETS
            
            (unaudited)CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            9,916,221
            
            $
            3,277,532Accounts
                receivable
            
            
            19,830
            
            
            18,297Prepaids
                and other current assets
            
            
            46,626
            
            
            11,773Deposits
                on raw materials held for production
            
            
            1,504,422
            
            
            100,000Raw
                materials held for production
            
            
            226,904
            
            
            172,497Work
                in progress inventory
            
            
            594,101Total
                current assets
            
            
            12,308,104
            
            
            3,580,099PROPERTY
                AND EQUIPMENT, NET
            
            
            250,981
            
            
            241,264RENT
                DEPOSITS
            
            
            71,244
            
            
            0INTANGIBLE
                ASSETS
            
            
            20,303,105
            
            
            —Total
                assets
            
            $
            32,933,434
            
            $
            3,821,363LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable and accrued expenses
            
            $
            127,233
            
            $
            252,806Accounts
                payable - related parties
            
            
            1,065,234
            
            
            15,000Short
                term portion of capital lease
            
            
            9,897
            
            
            9,331Deferred
                revenue
            
            
            142,526
            
            
            37,143Total
                current liabilities
            
            
            1,344,890
            
            
            314,280LONG
                TERM LIABILITIESLong
                term portion of capital lease
            
            
            860
            
            
            8,355Total
                liabilities
            
            
            1,345,750
            
            
            322,635STOCKHOLDERS'
                EQUITYPreferred
                stock $0.001 par value, 5,000,000 sharesAuthorized,
                0 (unaudited) and 0 shares issued and outstanding
            
            
            —
            
            
            —Common
                stock $0.001 par value, 50,000,000 sharesAuthorized,
                28,246,708(unaudited) and17,964,566
                shares issued and outstanding
            
            
            26,525
            
            
            17,965Additional
                paid-in capital
            
            
            42,290,622
            
            
            10,347,710Accumulated
                deficit
            
            
            (10,729,463
            )
            
            (6,866,947
            )Total
                stockholders' equity
            
            
            31,587,684
            
            
            3,498,728Total
                liabilities and stockholders' equity
            
            $
            32,933,434
            
            $
            3,821,363




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




3




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





Three
                months
              ended
              September
                30,
              2006
            
            Three
                months
              ended
              September
                30,
              2005
            
            Nine
                months
              ended
              September
                30,
              2006
            
            Nine
                months
              ended
              September
                30,
              2005(unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)Revenues
            
            $
            32,389
            
            $
            133
            
            $
            34,617
            
            $
            2,878Cost
                of Goods Sold
            
            
            —
            
            
            —
            
            
            —
            
            
            —Gross
                Margin
            
            
            32,389
            
            
            133
            
            
            34,617
            
            
            2,878Operating
                expensesAdministrative
            
            
            792,269
            
            
            283,339
            
            
            2,731,453
            
            
            791,950Consulting
                Fees
            
            
            21,250
            
            
            48,750
            
            
            63,750
            
            
            63,750Professional
                Fees
            
            
            202,905
            
            
            58,981
            
            
            757,200
            
            
            324,712Research
                and development
            
            
            221,824
            
            
            247,411
            
            
            565,471
            
            
            693,218Total
                operating expenses
            
            
            1,238,248
            
            
            638,481
            
            
            4,117,874
            
            
            1,873,630Loss
                from operations
            
            
            (1,205,859
            )
            
            (638,348
            )
            
            (4,083,257
            )
            
            (1,870,752
            )Other
                income (expense)Interest
                income
            
            
            135,796
            
            
            61
            
            
            224,180
            
            
            189Interest
                expense
            
            
            (242
            )
            
            (17,220
            )
            
            (1,043
            )
            
            (38,189
            )Total
                other income (expense)
            
            
            135,554
            
            
            (17,158
            )
            
            223,137
            
            
            (38,000
            )Income
                (loss) before provisionfor
                income taxes
            
            
            (1,070,305
            )
            
            (655,506
            )
            
            (3,860,120
            )
            
            (1,908,752
            )Provision
                for income taxes
            
            
            —
            
            
            —
            
            
            (2,400
            )
            
            (800
            )Net
                loss
            
            $
            (1,070,305
            )
            $
            (655,506
            )
            $
            (3,862,520
            )
            $
            (1,909,552
            )Basic
                and diluted loss per share
            
            $
            (0.04.
            )
            $
            (0.06
            )
            $
            (0.18
            )
            $
            (0.21
            )Weighed-averagecommon
                shares outstanding
            
            
            27,945,455
            
            
            10,893,500
            
            
            21,909,690
            
            
            9,053,985




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




4




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2006**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY**


(unaudited)




Series
                A Preferred
              Stock
            
            Common
                Stock
            
            Additional
              Paid-in
            
            AccumulatedShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit
            
            TotalBalance,
                December 31, 2005
            
            
            —
            
            $
            —
            
            
            17,964,566
            
            $
            17,965
            
            $
            10,347,710
            
            $
            (6,866,947
            )
            $
            3,498,728Exercise
                of warrants (unaudited)
            
            
            —
            
            
            —
            
            
            274,500
            
            
            275
            
            
            280,351
            
            
            —
            
            
            280,625Issuance
                of 3,785,500 shares ofCommon
                Stock (unaudited)
            
            
            —
            
            
            —
            
            
            3,785,500
            
            
            3,785
            
            
            11,352,715
            
            
            —
            
            
            11,356,500Offering
                costs (unaudited)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,027,318
            )
            
            —
            
            
            (1,027,318
            )Issuance
                of 4,500,000 shares ofCommon
                Stock issued inConnection
                with the acquisition (unaudited)Of
                certain assets of nCryptone (unaudited)
            
            
            
            
            
            
            
            
            4,500,000
            
            
            4,500
            
            
            19,737,000
            
            
            —
            
            
            19,741,500Stock
                compensation expense(unaudited)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            316,827
            
            
            —
            
            
            316,827Warrant
                compensation expense(unaudited)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,283,338
            
            
            —
            
            
            1,283,338Cashless
                exercise of warrants (unaudited)
            
            
            
            
            
            
            
            
            1,722,142Net
                loss for the nine monthsended
                September 30, 2006 (unaudited)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,862,520
            )
            
            (3,862,520
            )Balance,
                September 30, 2006 (unaudited)
            
            
            —
            
            $
            —
            
            
            28,246,708
            
            $
            26,525
            
            $
            42,290,622
            
            $
            (10,729,467
            )
            $
            31,587,680




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





5




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




For
                the Nine Months Ended
              September
                30,2006
            
            2005(unaudited)
            
            (unaudited)Cash
                flows from operating activitiesNet
                loss
            
            $
            (3,862,520
            )
            $
            (1,909,552
            )Adjustments
                to reconcile net loss to net cashused
                in operating activitiesDepreciation
                and amortization
            
            
            81,658
            
            
            51,864Stock
                compensation expense
            
            
            316,827
            
            
            —Warrant
                compensation expense
            
            
            838,845
            
            
            —(Increase)
                  decrease inAccounts
                  receivable
            
            
            13,297
            
            
            3,315Prepaid
                expenses and other current assets
            
            
            (34,852
            )
            
            29,235Deposits
                on raw materials held for production
            
            
            (1,006,465
            )
            
            (135,951
            )Raw
                materials held for production
            
            
            (648,509
            )
            
            —Payment
                for Rental Deposit
            
            
            (71,244
            )Increase
                  (decrease) inAccounts
                  payable and accrued expenses
            
            
            (125,574
            )
            
            780,063Accounts
                payable - related parties
            
            
            50,224
            
            
            190,831Deferred
                revenue
            
            
            105,383
            
            
            (3,058
            )Net
                cash used in operating activities
            
            
            (4,342,930
            )
            
            (993,253
            )Cash
                flows from investing activitiesPurchase
                of Property and Equipment
            
            
            (65,752
            )
            
            (269,702
            )Net
                cash used in investing activities
            
            
            (65,752
            )
            
            (269,702
            )Cash
                flows from financing activitiesGross
                Repayment from/of notes payable
            
            
            —
            
            
            (54,701
            )Proceeds
                from exercise of warrants
            
            
            280,625
            
            
            —Proceeds
                from Demand Notes
            
            
            —
            
            
            50,000Payable
                Related Parties
            
            
            —
            
            
            650,000Advance
                stock subscriptions
            
            
            —
            
            
            196,000Proceeds
                from 5/30/06 Common Stock offering
            
            
            11,356,500
            
            
            —Offering
                costs- 5/30/06 Common Stock offering
            
            
            (582,825
            )
            
            —Interest
                payable- related parties
            
            
            —
            
            
            21,183Interest
                paid
            
            
            —
            
            
            333Payments
                on capital lease
            
            
            (6,928
            )
            
            (6,405
            )Net
                cash provided by financing activities
            
            
            11,047,372
            
            
            856,410Net
                decrease in cash and cash equivalents
            
            
            6,638,689
            
            
            (406,545
            )Cash
                and cash equivalents, beginning of year
            
            
            3,277,532
            
            
            541,784Cash
                and cash equivalents, end of period
            
            $
            9,916,221
            
            $
            135,239




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







6




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**FOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
      (UNAUDITED)**




Supplemental
      disclosures of cash flow information





Interest
                paid
            
            $
            243
            
            $
            17,200Income
                tax paid
            
            $
            —
            
            $
            800




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





On
      June
      28, 2006 the Company exchanged 4,500,000 shares of its common stock for certain
      assets of nCryptone. Among the assets acquired were: intangible assets of
      $19,303,095, accounts receivable of $14,830, fixed assets of $25,619, and
      deposits on raw materials inventory of $397,956.





On
      June
      28, 2006, the Company entered into an agreement with nCryptone whereby for
      $1,000,010, the Company could acquire a license to nCryptone's buzzer patent
      exclusively for the Company's Sound Card, a card that emits a musical sound
      by
      pressing a button on the card. The license to the buzzer patent is royalty-free,
      and expires on November 2018 and the $1,000,010 is payable within one year
      of
      June 28, 2006.




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




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





7





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**




**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


SEPTEMBER
      30, 2006




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




**GENERAL**




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




8




**NOTE
      1 - ORGANIZATION AND LINE OF BUSINESS (CONTINUED)**




**COMPANY
      OVERVIEW**




The
      Company (as defined in Note 2) researches, develops and markets technology-based
      card enhancements that enable issuers to improve card functionality, reduce
      attrition and increase acquisition rates of customers. It commenced sales of
      its
      first product, the LensCard, or a card embedded with a small magnifying lens,
      in
      1998. Since 2002, its core focus has been and continues to be research and
      development and marketing of its power inlay technology which brings power-based
      applications, including light, sound and display screens, to cards. Power inlay
      technology consists of a battery, circuit, and switch that can power
      applications on credit cards and other information-bearing plastic cards. The
      Company has devoted a significant majority of its efforts to complete the
      development of its power inlay technology, initiate marketing and raising the
      capital required to do so. The Company has generated limited revenues from
      licensing its LensCard product, most of which have terminated.




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




**BASIS
      OF PRESENTATION**




The
      consolidated interim financial statements of Innovative Card Technologies,
      Inc.,
      its wholly owned subsidiary, PSA Co. (the "Company"), Lens Card US, LLC,
      and Lens Card International Limited have been prepared in conformity
      with accounting principles generally accepted in the United States and are
      consistent in all material respects with those applied in the Company's annual
      report on Form 10-KSB for the year ended December 31, 2005. The preparation
      of
      consolidated financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and judgments that
      affect the amounts reported in the consolidated financial statements and
      accompanying notes. The actual results experienced by the Company may differ
      from management's estimates.




The
      interim financial information is unaudited, but reflects all normal recurring
      adjustments that are, in the opinion of management, necessary to fairly present
      the information set forth therein. The interim financial statements should
      be
      read in conjunction with the audited financial statements and related notes
      included in the Company's 2005 audited financial statements contained in Form
      10-KSB filed with the Securities and Exchange Commission on March 20, 2006.
      Interim results are not necessarily indicative of the results for a full year.





9




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





**PRINCIPLES
      OF CONSOLIDATION**




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




**REVENUE
      RECOGNITION**




The
      Company's revenue is partially derived from various royalty agreements and
      is
      recognized when sales are reported by the licensee. Deferred revenue consists
      of
      payments received in advance of revenue being reported by the licensee to the
      Company. The Company also derived revenue from contracts with clients relating
      to non recurring engineering engagements whereby for a fee, the Company creates
      a DisplayCard specifically for that client. If the Company is able to
      determine the costs of completing a non recurring engineering engagement, it
      will recognize revenues and costs according to the percentage of completion
      method. If the Company is unable to determine its costs for the non recurring
      engineering engagement, it will recognize revenue based upon the completed
      contract method.




**CASH
      AND CASH EQUIVALENTS**




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





**INVENTORY**




The
      Company records its raw materials inventory at the cost paid to the third party
      manufacturer. The Company records its Work in progress inventory at the cost
      paid to the third party manufacturer. Only third party costs are allocated
      to
      inventory. No internal costs are allocated to inventory.




**STOCK
      BASED COMPENSATION**




Effective
      with the Company's fiscal year that began on January 1, 2006, the Company has
      adopted the accounting and disclosure provisions of the Statement of Financial
      Accounting Standards ("SFAS") No. 123R, "SHARE-BASED PAYMENTS" using the
      modified prospective application transition method. This statement requires
      a
      public entity to measure the cost of employee services received in exchange
      for
      an award of equity instruments based on the grant-date fair value of the award.
      The cost will be recognized over the period during which an employee is required
      to provide service in exchange for the award, the vesting period. No
      compensation cost is recognized for equity instruments for which employees
      do
      not render the requisite service. During the nine months ended September 30,
      2006, the Company incurred $316,827 of compensation expense relating to the
      vesting of stock options which increased the Company's Additional Paid in
      Capital account.




**MAJOR
      SUPPLIERS**




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




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




10




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




**PROPERTY
      AND EQUIPMENT**




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




**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**




The
      Company's financial instruments include cash and cash equivalents, prepaid
      expenses and other current assets, due from related parties, accounts payable
      and accrued expenses and deferred revenue. The estimated fair value of such
      instruments approximate their carrying value because of the short term maturity
      of these instruments or the stated interest rates are indicative of market
      interest rates.




**RESEARCH
      AND DEVELOPMENT**




Research
      and development costs are charged to operations as incurred.




**LOSS
      PER SHARE**




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




Since
      their effect would have been anti-dilutive, common stock equivalents of
      4,772,198 warrants and 1,925,000 stock options were excluded from the
      calculation of diluted loss per share for the three and nine months ended
      September 30, 2006. Since their effect would have been anti-dilutive, common
      stock equivalents of 2,400,000 warrants and 1,235,000 stock options were
      excluded from the calculation of diluted loss per share for the three and nine
      months ended September 30, 2005.




**INCOME
      TAXES**




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




The
      significant components of the provision for income taxes for the nine months
      ended September 30, 2006 and 2005 were $2,400 and $800, respectively. This
      current provision contains no deferred state or federal income
      taxes.




Due
      to
      its current net loss position, the Company has provided a valuation allowance
      in
      full on its net deferred tax assets in accordance with SFAS 109 and in light
      of
      the uncertainty regarding ultimate realization of the net deferred tax
      assets.




**ESTIMATES**




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




**CONCENTRATIONS
      OF CREDIT RISK**




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




11





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




**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**




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




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




The
      correction of an error in previously issued financial statements is not an
      accounting change. However, the reporting of an error correction involves
      adjustments to previously issued financial statements similar to those generally
      applicable to reporting an accounting change retrospectively. Therefore, the
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed by this Statement.





12




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





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





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


In
        July
        2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for
        Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.
        FIN No. 48 clarifies the accounting for uncertainty in income taxes
        recognized in an enterprise’s financial statements in accordance with SFAS
        No. 109, Accounting for Income Taxes. It prescribes a recognition threshold
        and measurement attribute for the financial statement recognition and
        measurement of a tax position taken or expected to be taken in a tax return.
        This new standard also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure, and
        transition. The provisions of FIN No. 48 are to be applied to all tax
        positions upon initial adoption of this standard. Only tax positions that
        meet
        the more-likely-than-not recognition threshold at the effective date may
        be
        recognized or continue to be recognized upon adoption of FIN No. 48. The
        cumulative effect of applying the provisions of FIN No. 48 should be
        reported as an adjustment to the opening balance of retained earnings (or
        other
        appropriate components of equity or net assets in the statement of financial
        position) for that fiscal year. The provisions of FIN No. 48 are effective
        for fiscal years beginning after December 15, 2006. Earlier application is
        permitted as long as the enterprise has not yet issued financial statements,
        including interim financial statements, in the period of adoption. The Company
        believes that the adoption of FIN No. 48 will not have a material impact on
        the Company’s financial position, results of operations or cash
        flows.
  In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
        No. 157 clarifies the principle that fair value should be based on the
        assumptions market participants would use when pricing an asset or liability
        and
        establishes a fair value hierarchy that prioritizes the information used
        to
        develop those assumptions. Under the standard, fair value measurements would
        be
        separately disclosed by level within the fair value hierarchy. SFAS No. 157
        is effective for financial statements issued for fiscal years beginning after
        November 15, 2007, and interim periods within those fiscal years, with
        early adoption permitted. The Company is currently determining the effect,
        if
        any, the adoption of SFAS No. 157 will have on the Company’s financial
        statements.
  In
        September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
        Defined Benefit Pension and Other Postretirement Plan - an amendment of FASB
        Statement No. 87, 88, 106 and 132(R). SFAS No. 158 requires an
        employer to recognize the overfunded or underfunded status of a defined benefit
        postretirement plan as an asset or liability in its statement of financial
        position and recognize changes in the funded status in the year in which
        the
        changes occur. SFAS No. 158 is effective for fiscal years ending after
        December 15, 2006. The Company believes that the adoption of SFAS
        No. 158 will not have a material impact on the Company’s financial
        position, results of operations or cash flows.
 
 In
        September 2006, the SEC issued SAB No. 108, Considering the Effects of
        Prior Year Misstatements when Quantifying Misstatements in Current Year
        Financial Statements (“SAB 108”). SAB 108 requires that registrants quantify
        errors using both a balance sheet and income statement approach and evaluate
        whether either approach results in a misstated amount that, when all relevant
        quantitative and qualitative factors are considered, is material. SAB 108
        is not
        expected to have a material impact on the Company’s consolidated financial
        statements.
 **NOTE
        3 - DEPOSITS ON RAW MATERIALS HELD FOR PRODUCTION**




Deposits
      for raw materials held for production at September 30, 2006 and December 31,
      2005 consisted of the following and are stated at the amount
      deposited:




September
                30,
              2006
            
            December
                31,
              2005(unaudited)Deposits
                on raw materials held for production(display
                & manufacturing component)
            
            $
            1,504,422
            
            $
            100,000TOTAL
            
            $
            1,504,422
            
            $
            100,000





These
      deposits for raw materials are held with three vendors.




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




Raw
      materials and work in progress inventory held for production at September 30,
      2006 and December 31, 2005 consisted of the following and is stated at the
      lower
      of cost or market:




September
                30,
              2006
            
            December
                31,
              2005(unaudited)Raw
                materials held for production(battery
                component)
            
            $
            226,904
            
            $
            172,497Work
                in progress inventory
            
            
            594,101
            
            
            —TOTAL
            
            $
            821,005
            
            $
            172,497





13




**NOTE
      5 - PROPERTY AND EQUIPMENT**




Property
      and equipment at September 30, 2006 and December 31, 2005 consisted of the
      following:




September
                30,
              2006
            
            December
                31,
              2005(unaudited)Computer
                equipment
            
            $
            26,678
            
            $
            16,939Office
                equipment
            
            
            8,168
            
            
            8,168Furniture
                and fixtures
            
            
            18,270
            
            
            18,270Production
                equipment, capital lease
            
            
            32,598
            
            
            32,598Leasehold
                improvements
            
            
            5,610
            
            
            5,610Production
                equipment
            
            
            351,335
            
            
            269,698442,659
            
            
            351,283Less
                accumulated depreciation and amortization
            
            
            (191,678
            )
            
            (110,019
            )TOTAL
            
            $
            250,981
            
            $
            241,264




Depreciation
      and amortization expense was $35,514 (unaudited), $29,731 (unaudited), $81,658
      (unaudited) and $51,864 (unaudited), for the three and nine months ended
      September 30, 2006 and 2005, respectively.




**NOTE
      6 - GOODWILL AND INTANGIBLE ASSET VALUATION**




Upon
      the
      completion of the acquisition of nCryptone on June 28, 2006, the Company
      allocated the purchase price in accordance with the signed agreement with
      nCryptone assigning a temporary value of $19,303,095 to intangible assets and
      $1,000,010 to a patent license fee. The amounts assigned to goodwill and the
      patent license fee are being reviewed by the Company to determine the fair
      values and estimated useful lives of the intangible assets. The $1,000,010
      patent license fee will be amortized over the life of the patent (12 years
      through November 2018). The Company has retained a third party valuation firm
      to
      assist the Company with the valuation of the intangible assets and patent
      license fee. The Company has received the report from the third party valuation
      firm and is in the process of determining the accounting treatment of the
      intangible assets. The total purchase price of the DisplayCard assets of
      nCryptone is summarized as follows:




Common
                Stock:
            
            $
            19,741,500Total
                Purchase Price:
            
            $
            19,741,500




The
      valuation of the DisplayCard assets of nCryptone was estimated as of the
      acquisition date and the purchase price is subject to future adjustments. If
      the
      valuation is less than the value of the common stock as initially documented
      by
      the parties, the purchase price will be adjusted downward accordingly. Any
      such
      adjustment will be recorded as an adjustment to intangible assets and
      reflected in the final purchase price allocation.




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





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







The
      Company has received the valuation analysis from the
      third party valuation firm and once The Company determines the accounting
      treatment, The Company may revise the allocation accordingly.




**NOTE
      7 - PROVISION FOR INCOME TAXES**




The
      Company has no material temporary differences that would result in deferred
      taxes. The Company does, however, have loss carryforwards which may result
      in
      deferred tax assets in the future. At September 30, 2006, the Company has
      approximately $7,475,242 (unaudited) and $7,558,134 (unaudited) in federal
      and
      state loss carryforwards available to offset taxes through December 31, 2025
      and
      2011, respectively.




The
      Company's deferred tax asset at September 30, 2006 of $3,247,892 (unaudited)
      consists of loss carryforwards, state taxes, and deferred revenue and has been
      offset entirely by a valuation allowance. The valuation allowance account has
      been increased by $1,604,243 during the nine months ended September 30,
      2006.  The availability of the net operating losses to offset future
      taxable income may be limited as a result of ownership changes in 2006 or prior
      years with the acquisition of nCryptone in 2006, pursuant to Internal Revenue
      Code Section 382. In addition, utilization of the net operating loss
      carryforwards would also be subject to annual usage limitation, as defined.
      Net
      operating loss limitations under Section 382 may significantly impact the timing
      and amount of future income tax obligations, if any. The amount of such
      limitation, if any, has not yet been determined.




**NOTE
      8 - COMMITMENTS AND CONTINGENCIES**




**LEASE**




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





On
      September 14, 2006. the Company entered into a sublease with sublandlord Bergman
      & Dacey, Inc. which commences on October 1, 2006 and expires on July 31,
      2009. The Company deposited $71,244 and paid the first month's rent for October
      2006. The lease requires minimum monthly payments of $16,788.60, and requires
      the Company to pay 32.5% of additional rents charged to Bergman & Dacey.
      Additional rents include building common area operating expenses, taxes and
      insurance. The minimum rent increases 3% on October 1st each year. Future
      minimum lease payments shall be $33,577 in the fourth quarter of 2006 and
      $202,974, $209,063 and $124,677 in calendar years 2007, 2008 and 2009
      respectively.




Rent
      expense was $8,482 (unaudited), $8,993 (unaudited), $24,723 (unaudited) and
      $28,047 (unaudited) for the three and nine months ended September 30, 2006
      and
      2005, respectively.




14




**REVENUE
      SHARING AGREEMENTS**




In
      1998,
      Universal Magnifier LLC, a California limited liability company, was founded
      by
      Alan Finkelstein, the inventor of the LensCard, and Luc Berthoud for the purpose
      of licensing the LensCard in the United States. In January 1999, Universal
      Magnifier LLC merged into LensCard US LLC, a Delaware limited liability company
      that was organized on January 7, 1999 for the purpose of changing Universal
      Magnifier's name and place of organization. In 1995, Universal Magnifier
      International Limited, an international business company under the laws of
      the
      British Virgin Islands, was founded for the purpose of licensing the LensCard
      worldwide other than the United States. In October 1998, Universal Magnifier
      International Limited changed its name to LensCard International Limited. In
      exchange for the rights to exploit the LensCard patents, trademarks and related
      intangibles, LensCard US LLC and LensCard International Limited agreed to make
      royalty payments to Alan Finkelstein and Bradley Ross.




On
      April
      2, 2004, Alan Finkelstein, Bradley Ross and Michael Paradise, who owned one
      percent of Mr. Finkelstein's interest in the royalty payments, collectively
      transferred their rights to the royalty payments to the company in exchange
      for
      an aggregate of 5,500,000 shares of the company's common stock. The company
      then
      immediately transferred these royalty rights to PSA Co, Inc., a Delaware
      corporation, in exchange for 25,000 shares of PSA Co's common stock, or all
      of
      its outstanding common stock, causing PSA Co to become our wholly owned
      subsidiary. As of June 30, 2004, these royalty payments accounted for 100%
      of
      the company's revenue on a consolidated basis.




On
      April
      6, 2004, LensCard US LLC exchanged all of its outstanding membership interests
      the company for 1,000,000 shares of the Company's common stock. Effective April
      6, 2004, LensCard International Limited merged with and into our company. As
      a
      result of this reorganization and merger, the company owns the intellectual
      property rights to the LensCard and is obligated to make payments related to
      these rights to PSA Co, our wholly owned subsidiary.




As
      of
      Septemer 30, 2006, sales have not been sufficient to require any payments
      pursuant to the above agreements to PSA Co., the Company's wholly owned
      subsidiary. Any future payments that may be required will be recorded as a
      reduction of revenue.




**PATENT
      AND TRADEMARK LICENSE AGREEMENTS**




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




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






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




**EMPLOYMENT
      AGREEMENT**




The
      Company entered into an Employment Agreement with Alan Finkelstein, its Director
      and President; the initial term of three years, began January 1, 1998 and has
      since January 1, 2000 renewed for successive one year terms. As of September
      30,
      2006, the termination date is December 31, 2006. However, the agreement
      automatically renews if not terminated. Mr. Finkelstein earns $16,667 as a
      monthly salary.




**NOTE
      9 - STOCKHOLDERS' EQUITY**




**PREFERRED
      STOCK**




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




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




15




**NOTE
      9 - STOCKHOLDERS' EQUITY (continued)**




**WARRANTS**




The
      following summarizes the warrant transactions:





Warrants
              Outstanding
            
            Weighted-Average
              Exercise
                PriceOutstanding,December
                31, 2005 (unaudited)
            
            
            6,833,133
            
            $
            1.16Granted
                during 2006  (unaudited)
            
            
            363,565
            
            
            3.51Exercised
                during 2006  (unaudited)
            
            
            (2,424,500
            )
            $
            1.00Outstanding,
                September 30, 2006  (unaudited)
            
            
            4,772,198
            
            $
            1.42




During
      the nine months ended September 30, 2006, warrant holders exercised 2,424,500
      warrants resulting in the issuance of 1,996,639 shares of common stock and
      proceeds to the Company of $280,625 (unaudited). Fewer common shares were issued
      because of the “net exercise” of certain of these warrants.




The
      Company recognized $0  (unaudited) in general and administrative fees
      and $0  (unaudited) in offering costs relating to the issuance of
      warrants during the three months ended September 30, 2006.




**2004
      STOCK INCENTIVE PLAN**




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




The
      Company reserved a total of 2,215,000 shares of its common stock for issuance
      pursuant to the 2004 Stock Incentive Plan. The board of directors, or a
      committee of the board, administers the 2004 Stock Incentive Plan. Stock options
      are generally granted with terms of up to ten years and vest over a period
      of
      five years under the 2004 Stock Incentive Plan. The administrator determines
      the
      exercise price of options granted under the 2004 Stock Incentive Plan, but
      the
      exercise price must not be less than 85% of the fair market value of the
      Company's common stock on the date of grant. In the event the participant owns
      10% or more of the voting power of all classes of the Company's stock, the
      exercise price must not be less than 110% of the fair market value per share
      of
      the Company's common stock on the date of grant. With respect to all incentive
      stock options, the exercise price must at least be equal to the fair market
      value of the Company's common stock on the date of grant. The term of an
      incentive stock option may not exceed 10 years, except that with respect to
      any
      participant who owns 10% of the voting power of all classes of the Company's
      outstanding stock or the outstanding stock of any parent or subsidiary of the
      Company, the term must not exceed five years an the exercise price must equal
      at
      least 110% of the fair market value on the grant date. The administrator
      determines the term of all other options; however, no option will have a term
      in
      excess of 10 years from the date of grant.




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




The
      following summarizes stock option transactions for the period shown:





Nine
                Month Period Ended
              September
                30, 2006
              (unaudited)ALL
                OPTIONS
            
            
            
            WEIGHTED
              AVERAGE
              EXERCISE
              PRICEOutstanding
                at beginning of period
            
            
            1,625,000
            
            $
            1.00Options
                granted
            
            
            300,000
            
            
            3.14Options
                forfeited
            
            
            —
            
            
            —Options
                expired
            
            
            —
            
            
            —Options
                exercised
            
            
            —
            
            
            —Outstanding
                at end of period
            
            
            1,925,000
            
            $
            1.33Exercisable
                at end of nine month period
            
            
            560,000
            
            $
            1.00




Nine
                Months Period Ended
              September
                30, 2006
              (unaudited)NON-VESTED
                OPTIONS
            
            
            
            WEIGHTED
              AVERAGE
              EXERCISE
              PRICENon-vested
                at beginning of period
            
            
            1,115,000
            
            $
            1.00Options
                granted
            
            
            300,000
            
            
            3.14Options
                forfeited
            
            
            —
            
            
            —Options
                expired
            
            
            —
            
            
            —Options
                vested
            
            
            (50,000
            )
            
            1.00Non-vested
                at end of nine month period
            
            
            1,365,000
            
            $
            1.47




The
      weighted average grant-date fair value of options granted during the nine month
      period ended September 30, 2006 was $3.14.




The
      weighted average remaining contractual lives of the options outstanding and
      options exercisable at September 30, 2006, were 7.89 years and 7.23 years,
      respectively.


The
      Company recorded $316,827 of compensation expense for employee stock options
      during the nine month period ending September 30, 2006. At September 30, 2006,
      there was a total of $1,623,974 of unrecognized compensation costs related
      to
      the non-vested share-based compensation arrangements under the 2004 Plan. The
      cost is expected to be recognized over a weighted average period of 3.2 years.
      The total fair value of shares vested during the nine month period ended
      September 30, 2006 was approximately $69,800. The aggregate intrinsic value
      of
      total outstanding options and total exercisable options was $6,103,050 and
      $1,849,700, respectively as of September 30, 2006.




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





16




**NOTE
      9 - STOCKHOLDERS' EQUITY (continued)**




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





Nine
                Months
              Ended
              September
                30, 2005
            
            Three
                Months
              Ended
              September
                30, 2005(unaudited)
            
            (unaudited)Net
                loss:As
                reported
            
            $
            (1,909,522
            )
            $
            (655,506
            )Less:
                  Total share-based
                  employee compensation expensedetermined
                  under fair value method for employee stock options, net of
                  tax
            
            
            (168,750
            )
            
            (56,250
            )Pro
                forma net loss
            
            $
            (2,078,272
            )
            $
            (711,756
            )Basic
                  and diluted loss per Share:As
                reported
            
            $
            (0.21
            )
            $
            (0.06
            )Pro
                forma
            
            $
            (0.23
            )
            $
            (0.07
            )




The
      Black
      Scholes assumptions used are listed below:





Nine
                Months
              Ended
              September
                30, 2005(unaudited)Risk
                free interest rate
            
            
            3.49
            %Dividends
            
            
            —Volatility
                factor
            
            
            200
            %Expected
                life
            
            
            10
                yearsAnnual
                forfeiture Rate
            
            
            0
            %




**NOTE
      10 - RELATED PARTY TRANSACTIONS**




**ACCOUNTS
      PAYABLE - RELATED PARTIES**




Accounts
      payable - related parties at December 31, 2005 and September 30, 2006 consisted
      of amounts due for legal, expense reimbursement, and license fees and were
      $15,000 and $1,065,234 (unaudited), respectively. As of December 31, 2005 and
      September 30, 2006, $5,000 and $50,000 (unaudited) is owed to Blakely, Sokoloff,
      Taylor & Zafman, LLP (BSTZ), a law firm which, the Company's director,
      George Hoover, is a partner in, $10,000 and $ 0 (unaudited) is owed to Alan
      Finkelstein, a related party, and $0 and $1,015,234 (unaudited) is owed to
      nCryptone, S.A., respectively. The September 30, 2006 amounts are currently
      due
      to BSTZ and nCryptone, S.A..




**CONSULTING
      AGREEMENTS**




The
      Company entered into Consulting Agreements with Forest Finkelstein, who is
      a
      related party. During the nine months ended September 30, 2006 and 2005, the
      Company paid $63,750 (unaudited) and $5,000 (unaudited), respectively, to Forest
      Finkelstein.




**LEGAL
      SERVICES**




The
      Company receives legal services from Blakely, Sokoloff, Taylor and Zafman,
      LLP,
      a law firm that George Hoover, a director of the Company, is a partner in.
      During the nine months ended September 30, 2006 and 2005, the Company paid
      $148,846 (unaudited) and $99,633 (unaudited), respectively, to this entity
      for legal services rendered.




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




On
      October 3, 2006, a warrant holder exercised 88,950 warrants resulting in the
      issuance of 88,950 shares of common stock for proceeds of
      $111,187.50.





On
      October 16, 2006, a warrant holder exercised 28,650 warrants resulting in the
      issuance of 28,650 shares of common stock for proceeds of $35,812.50.





17




**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS.**




The
      following Management's Discussion and Analysis of our Financial Condition and
      Results of Operations should be read in conjunction with the consolidated
      financial statements and notes thereto included as part of this Quarterly
      Report. This report contains forward-looking statements that are based upon
      current expectations. We sometimes identify forward-looking statements with
      such
      words as "may", "will", "expect", "anticipate", "estimate", "seek", "intend",
      "believe" or similar words concerning future events. The forward-looking
      statements contained herein, include, without limitation, statements concerning
      future revenue sources and concentration, gross profit margins, selling and
      marketing expenses, research and development expenses, general and
      administrative expenses, capital resources, additional financings or borrowings
      and additional losses and are subject to risks and uncertainties including,
      but
      not limited to, those discussed below and elsewhere in this Form 10-QSB,
      particularly in "Factors That May Affect Results," that could cause actual
      results to differ materially from the results contemplated by these
      forward-looking statements. We also urge you to carefully review the risk
      factors set forth in other documents we file from time to time with the
      Securities and Exchange Commission.




**OVERVIEW**




Since
      2002, our core focus has been and continues to be on research and development
      and marketing of our power inlay technology that is designed to bring
      power-based applications, including light, sound and display screens, to ISO
      compliant cards. Power inlay technology consists of a battery, circuit, and
      switch that can power applications on credit cards and other information-bearing
      plastic cards. We have devoted a majority of our efforts to complete the
      development of our power inlay technology, initiate marketing and raising the
      financing required to do so and fund our expenses. We have generated limited
      revenues that derive from licensing agreements of our LensCard product, most
      of
      which have terminated, and initial sales of the LightCard. At this time, we
      have
      no plans to renew the LensCard licensing agreements or to further market or
      sell
      the LensCard, unless requested by a customer. We are actively pursuing sales
      of
      our DisplayCard.




Since
      inception, we have been unprofitable. We incurred a net loss of $3,862,520
      during the nine months ended September 30, 2006. As of September 30, 2006,
      we
      had an accumulated deficit of $10,729,463. Our continued existence is dependent
      upon our ability to obtain additional financing. We anticipate that the sales
      of
      our LightCard, SoundCard, and DisplayCard will not be sufficient enough to
      sustain our operations, and further anticipate that after such introduction
      we
      will continue to incur net losses due to our costs exceeding our revenues for
      an
      indefinite period of time. Our capital requirements for the next 12 months,
      as
      they relate to retaining and obtaining key personnel, implementation of a sales
      force for our products, and further research and development relating to the
      production of our power inlay technology, have been and will continue to be
      significant. To date, our operations have been funded primarily through equity
      financings totaling $21,769,316. We believe that we will have enough funding
      to
      meet our cash needs and continue our operations for the next twelve
      months.





Our
      first
      product, the LightCard, or a financial card that has a light with or without
      a
      magnifying lens, has been fully developed. Presently, we are able to produce
      20,000 LightCards per month. If the demand for the LightCard is substantial
      and
      we decide to increase production capacity, we may be able to increase our
      capacity up to 100,000 total cards per month if we are able to order and have
      additional production equipment delivered, installed, and operational within
      six
      months. However, our ability to produce up to 100,000 LightCards per month
      is
      limited to the amount of component parts we are able to procure. One of these
      key components of our power inlay technology, which provides the power to our
      cards, is the battery which is presently available from only one supplier,
      Solicore, Inc. Our projected cost to manufacture LightCards is unknown at this
      time, as we have not produced the LightCards on a mass production basis.
      Additionally, if there is no demand for the LightCard by banks that issue
      financial cards we will have no benefit from the LightCard.




Our
      second product, the SoundCard, or a financial card that emits a monophonic
      tone
      such as "Happy Birthday" or "Jingle Bells", has been fully developed. The
      SoundCard and DisplayCard are being produced using a similar manufacturing
      process. Since, the market demand for the DisplayCard significantly outpaces
      market demand for the SoundCard, we are devoting all of our resources to
      manufacturing the DisplayCard and therefore do not anticipate allocating any
      resources to build the SoundCard in the near future. However, if the demand
      for
      the SoundCard is substantial and we decide to increase our production capacity,
      we may be able to increase capacity up to 400,000 SoundCards per month within
      five months. However, our ability to produce up to 200,000 SoundCards per month
      is limited to the amount of component parts we are able to procure. One of
      these
      key components of our power inlay technology, which provides the power to our
      cards, is the battery and presently available from only one supplier, Solicore,
      Inc. Our projected cost to manufacture the SoundCards is unknown at this time,
      as we have not produced the SoundCards on a mass production basis. Additionally,
      if there is no demand for the SoundCard by banks that issue financial cards
      we
      will have no benefit from the SoundCard.




Our
      third
      power-based card enhancement, the DisplayCard with one time password, or
      DisplayCard OTP, will be available for issuance on a limited quantity basis
      in
      the end of 2006. We estimate that we will be initially able to produce 200,000
      DisplayCard OTP per month. If the demand for the DisplayCard OTP is substantial
      and we decide to increase our production capacity, we may be able to increase
      capacity up to 400,000 DisplayCard OTP per month within five months. Our ability
      to produce the DisplayCard OTP is limited to the component parts we are able
      to
      procure. Two of these key components of the DisplayCard OTP are the battery,
      presently available from only one supplier, Solicore, Inc. and the display,
      presently available from only one supplier, SmartDisplayer. Our projected cost
      to manufacture the DisplayCard OTP is unknown at this time, as we have not
      produced the DisplayCard OTP on a mass production basis. Additionally, if there
      is no demand for the DisplayCard OTP by banks that issue financial cards or
      other entities that issue non-financial cards we will have no benefit from
      the DisplayCard OTP.




Our
      other
      products that are designed to use the power inlay technology are still in the
      early stages of development. At this time, we are unable to determine when
      the
      other products will become fully developed, manufactured and sold to banks
      that
      issue financial cards or other entities that issue non-financial
      cards.





18




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




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




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




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




We
      anticipate that the majority of our revenues in the coming year will come from
      financial cards that contain a display. We intend to sell these DisplayCards
      through resellers who will then sell the DisplayCards to banks that issue
      financial cards or other entities that issue non-financial cards.




We
      currently have no arrangements with any companies with regard to revenue sharing
      or licensing fees for financial cards that contain a light and magnifying lens.
      We have agreements with two banks that issue financial cards for the LensCard
      product, one which expired on December 31, 2004. The revenue generated from
      the
      LensCard agreements is negligible, and we expect that the sales of the LensCard
      will have no impact on our results of operations. We have entered into two
      reseller agreements for the DisplayCard, one with Gemplus (now Gemalto) and
      the
      other with nCryptone. To date, these agreements have generated no
      revenue.




Deferred
      revenue is recorded when the payments from the credit card issuers are received
      by us prior to the sale of the LensCard to the credit card issuers' customers
      or
      as deposits are received from third parties for the development of
      products.




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





19




**RESULTS
      OF OPERATIONS**




**COMPARISON
      OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30,
      2005**




**OVERVIEW**




Our
      financial results for the three months ended September 30, 2006 reflect a net
      loss of $1,070,304, or $0.04 per share (basic and diluted), compared to a net
      loss of $655,508, or $0.06 per share (basic and diluted), for the three months
      ended September 30, 2005.




The
      major
      factors contributing to our increased net loss of $1,070,305 during the third
      quarter of 2006 were administrative expenses, professional fees and research
      and
      development expenses relating to new products and improving existing products.




Revenue.
      Revenue consists of royalties from the LensCard.




Total
      revenue increased from $133 for the three months ended September 30, 2005 to
      $32,389 for the three months ended September 30, 2006. The increase resulted
      primarily from recognition of deferred revenue on LensCard royalties received
      from a terminated licensing agreement.




Administrative.
      Administrative expense consists of travel and marketing expenses, compensation
      expense, administrative fees, fees relating to public and investor relations
      and
      depreciation expense.




Administrative
      expense increased from $284,141 for the three months ended September 30, 2005
      to
      $792,265 for the three months ended September 30, 2006. Administrative expense
      increased primarily due to the hiring of additional employees, insurance costs,
      compensation expenses relating to the vesting of employee and director's stock
      options, and travel expenses relating to business development. We anticipate
      that administrative expenses will increase in as we incur increased costs
      associated with establishing our operations.




Consulting
      expense. Consulting expense consists of payments made to independent contractors
      that provide services for the company.




Consulting
      expense decreased from $48,750 for the three months ended September 30, 2005
      to
      $21,250 for the three months ended September 30, 2006. Consulting expense
      primarily decreased as a consultant had received a retroactive consulting fee
      in
      the third quarter of 2005 as approved by our board of directors. We anticipate
      that our consulting expense will remain relatively constant as we do not
      presently have the intention of hiring additional outside consultants.




Professional
      fees expense. Professional fees consist of amounts paid to our outside counsel,
      auditors and other outside services rendered to us.




Professional
      fees expense increased from $58,981 for the three months ended September 30,
      2005 to $202,905 for the three months ended September 30, 2006. Professional
      fees expense increased due to legal fees for the maintenance and establishment
      of the company's intellectual property rights and the legal and accounting
      fees
      relating to our requirements to operate as a public company. We anticipate
      that
      professional fees will continue to increase as we will continue to incur greater
      costs in maintaining and establishing our intellectual property rights as well
      as costs of operating as a public company.




Research
      and Development. Research and development expense consists primarily of costs
      relating to the development of new credit card enhancements.




Research
      and development costs decreased from $247,411 for the three months ended
      September 30, 2005 to $221,824 for the three months ended September 30, 2006
      due
      to a decrease in materials spending that was used for the research and
      development of the LightCard, SoundCard, and DisplayCard. We expect our research
      and development expenses to increase as we continue to invest in developing
      new
      credit card enhancements.




Interest
      income. Interest income increased from $61 for the three months ended September
      30, 2005 to $135,796 for the three months ended September 30, 2006 due to an
      increased operating cash balance that was earning interest during the three
      months ended September 30, 2006.




Interest
      expense. Interest expense decreased from $17,220 for the three months ended
      September 30, 2005 to $242 for the three months ended September 30, 2006
      primarily due to lower debt during the three months ended September 30,
      2006.




20






**COMPARISON
      OF THE NINE MONTHS PERIODS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30,
      2005**




**OVERVIEW**




Our
      financial results for the nine months ended September 30, 2006 reflect a net
      loss of $3,862,520, or $0.18 per share (basic and diluted), compared to a net
      loss of $1,909,552, or $0.21 per share (basic and diluted), for the nine months
      ended September 30, 2005.




The
      major
      factors contributing to our increased net loss of $3,862,520 during the third
      quarter of 2006 were administrative expenses, professional fees and research
      and
      development expenses relating to new products and improving existing products.




Revenue.
      Revenue consists of royalties from the LensCard.




Total
      revenue increased from $2,878 for the nine months ended September 30, 2005
      to
      $34,617 for the nine months ended September 30, 2006. The increase resulted
      primarily from additional royalty revenue recognized from the LensCard. LensCard
      revenues continue to be minimal as we have not been actively marketing the
      LensCard product or licensing the LensCard product to third
      parties.




Administrative.
      Administrative expense consists of travel and marketing expenses, compensation
      expense, administrative fees, fees relating to public and investor relations
      and
      depreciation expense.




Administrative
      expense increased from $791,950 for the nine months ended September 30, 2005
      to
      $2,713,453 for the nine months ended September 30, 2006. Administrative expense
      increased primarily due toexpenses relating to the issuance of warrants to
      firms
      performing investor relations services, additional employees hired, insurance
      costs, compensation expense relating to the vesting of employee and director's
      stock options, and travel expenses relating to business development. We
      anticipate that administrative expense will increase in absolute dollars as
      we
      incur increased costs associated with establishing our operations.




Consulting
      expense. Consulting expense consists of payments made to independent contractors
      that provide services for the company.




Consulting
      expense remained the same at $63,750 for the nine months ended September 30,
      2005 and September 30, 2006. We anticipate that our consulting expense will
      remain the same as we do not presently have the intention of hiring additional
      outside consultants.




Professional
      fees expense. Professional fees consist of amounts paid to our outside counsel,
      auditors and other outside services rendered to us.




Professional
      fees expense increased from $324,712 for the nine months ended September 30,
      2005 to $757,200 for the nine months ended September 30, 2006. Professional
      fees
      expense increased due to legal fees relating to the acquisition of the
      DisplayCard assets of nCryptone, legal fees for the maintenance and
      establishment of the company's intellectual property rights and the legal and
      accounting fees relating to our requirements to operate as a public company.
      We
      anticipate that professional fees will continue to increase as we will continue
      to incur greater costs in maintaining and establishing our intellectual property
      rights as well as costs of operating as a public company.




Research
      and Development. Research and development expense consists primarily of costs
      relating to the development of new credit card enhancements.




Research
      and development costs decreased from $693,218 for the nine months ended
      September 30, 2005 to $565,471 for the nine months ended September 30, 2006
      due
      to a decrease in materials spending that was used for the research and
      development of the LightCard, SoundCard, and DisplayCard. However, we expect
      our
      research and development expenses to increase as we continue to invest in
      developing variations on the DisplayCard and new card enhancements.




Interest
      income. Interest income increased from $189 for the nine months ended September
      30, 2005 to $224,180 for the nine months ended September 30, 2006 due to an
      increased operating cash balance that was earning interest during the nine
      months ended September 30, 2006.




Interest
      expense. Interest expense decreased from $38,189 for the nine months ended
      September 30, 2005 to $1,043 for the nine months ended September 30, 2006 since
      there was insignificant debt outstanding during the nine months ended September
      30, 2006.




21





**LIQUIDITY
      AND CAPITAL RESOURCES**




Our
      principal sources of liquidity had been cash and cash equivalent balances,
      which
      were $3,277,532 at December 31, 2005 and $9,916,221 as of September 30, 2006.
      Since our inception, we have incurred significant losses, and as of December
      31,
      2005 and September 30, 2006 we had an accumulated deficit of $6,866,947 and
      $10,729,463, respectively.




Net
      cash
      used in operating activities was $4,342,930 for the nine months ended September
      30, 2006 as compared with $993,253 for the nine months ended September 30,
      2005.
      This significant increase in cash used was primarily due to a greater net loss,
      not deferring payables, and additional purchases of raw materials held for
      production and deposits for raw materials held for production.




Net
      cash
      used in investing activities was $65,752 for the nine months ended September
      30,
      2006 as compared with $269,702 for the nine months ended September 30, 2005.
      The
      decrease was due to less production equipment being purchased during the nine
      months ended September 30, 2006.




Net
      cash
      provided by financing activities was $11,047,372 for the nine months ended
      September 30, 2006 as compared to $856,410 for the nine months ended September
      30, 2005. The increase occurred because of $11,356,500 in gross proceeds from
      the private offering that took place during the nine months ended September
      30,
      2006.




**EQUITY
      AND DEBT FINANCINGS AND ACCOUNTS PAYABLE**




To
      date,
      our operations have been funded primarily through equity financings totaling
      $21,769,316. We believe that we will have enough funding to meet our cash needs
      and continue our operations for the next twelve months.




On
      December 23, 2003, we entered into a Securities Purchase Agreement with Bristol
      Capital, LLC under which we were to sell a unit that consisted of 500,000 shares
      of our common stock and warrants to purchase 2,400,000 shares of our common
      stock at an exercise price of $1.00 per share in exchange for $50,000. The
      closing was contingent upon Bristol Capital, LLC introducing potential investors
      to us and these potential investors or investment funds affiliated with Bristol
      Capital purchasing a minimum of $1,500,000 worth of our series A preferred
      stock
      at a price per share of $1.00 before February 1, 2004. As of May 5, 2004, the
      parties waived this closing contingency under the Securities Purchase Agreement.
      On May 5, 2004, we received $50,000 from Bristol Capital, LLC and issued 500,000
      shares of our common stock and warrants to purchase 2,400,000 shares of our
      common stock pursuant to the Securities Purchase Agreement. On March 1, 2006,
      we
      received $50,000 as a result of 50,000 of the 2,400,000 warrants being exercised
      by a warrant holder. On April 3, 2006, we received $200,000 as a result of
      50,000 of the 2,400,000 warrants being exercised by a warrant holder. On July
      17, 2006, the holders of the remaining 2,150,000 warrants cashlessly exercised
      their warrants resulting in the issuance of 1,722,142 shares of Common Stock
      being issued. We received $0 as a result of these 2,150,000 warrants being
      cashlessly exercised.




From
      April 7, 2004 to October 18, 2004, we issued 2,568,500 shares of Series A
      preferred stock at a price per share of $1.00 to a number of investors pursuant
      to a private placement, including the conversion of $340,000 worth of
      convertible promissory notes into 340,000 shares of series A preferred stock
      that were issued on April 7, 2004, and raised gross proceeds of
      $2,568,500.




On
      May
      24, 2004, we obtained a loan in the amount of $246,128. We were required to
      pay
      interest at a rate equal to a prime rate set by City National Bank, which was
      4.0%, on the loan. Beginning on December 31, 2004, we paid this loan in 10
      principal payments of $6,837, but did not make the one final principal and
      interest payment of $158,090 on the maturity date of July 31, 2005. City
      National Bank then extended this loan until April 30, 2006. Additionally, on
      May
      24, 2004, we renewed three notes payable, each in the amount of $150,000, from
      City National Bank that were originally dated April 22, 2003, July 16, 2003
      and
      September 24, 2003. Of the three notes payable, one had an interest rate of
      4.1%, one had an interest rate of 3.1% and one had an interest rate of 1.9%.
      Beginning on December 31, 2004, we were required to pay monthly interest
      payments on amounts drawn from the notes payable, with all outstanding principal
      and accrued and unpaid interest due on April 30, 2006. Prior to each note
      payable being fully repaid, we had drawn the full amount, $150,000 on each
      note
      payable, for an aggregate amount of $450,000 drawn through October 18, 2005.
      On
      October 19, 2005, we repaid all outstanding notes to City National Bank,
      including interest, totaling $595,629. We have no further borrowing capacity
      relating to any of these notes. As of September 30, 2006 we owed $0 relating
      to
      these notes from City National Bank.




On
      June
      22, 2004, we issued 275,000 shares of series A preferred stock to Alan
      Finkelstein, Bradley Ross and Luc Berthoud in a conversion of $275,000 in
      unsecured advances due to Alan Finkelstein, Bradley Ross and Luc Berthoud.
      The
      conversion was made at $1.00 per share.




On
      October 14, 2004, we ordered production equipment from a manufacturer costing
      124,400 Euros. The equipment was delivered and installed on April 15, 2005.
      As
      of December 31, 2005, we owe the manufacturer $0 for the equipment and related
      installation costs.




On
      October 25, 2004, we ordered additional production equipment from another
      manufacturer costing $81,900. The equipment was delivered and installed on
      June
      22, 2005. As of December 31, 2005, we owe this manufacturer $0 for the equipment
      and related installation costs.




On
      November 30, 2004, we entered into a capital lease for production equipment
      that
      cost $32,598 with CNC Associates, Inc. that was personally guaranteed by our
      chief executive officer, Alan Finkelstein. The lease requires minimum monthly
      payments of $866 and expires on October 31, 2007.




22





In
      March
      2005, we obtained loans in the form of secured demand promissory notes totaling
      $500,000 from Bristol Investment Fund, Ltd. and Union Finance International,
      Corp. Union Finance International Corp. loaned us $333,000 on June 30,2005
      while
      Bristol Investment Fund, Ltd. loaned us $167,000 on March 30, 2005 for the
      combined total of $500,000. The secured demand promissory notes created security
      interests in our assets, excluding assets subject to liens, leases,
      encumbrances, defenses or other claims. The secured demand promissory notes
      were
      payable without notice by the demand of Union Finance International Corp. or
      Bristol Investment Fund, Ltd. There was no further borrowing capacity under
      both
      of the secured demand promissory notes. On October 11, 2005, Union Finance
      International Corp. transferred its $333,000 loan plus interest to BSR
      Investments, Ltd. On October 19, 2005, BSR Investments, Ltd. converted the
      loan
      plus interest totaling $347,816 into 347,816 shares of common stock and a
      warrant to purchase up to 173,908 shares of our common stock at an exercise
      price of $1.25 per share. On October 20, 2005 the loan, including interest,
      amounting to $174,504 obtained from Bristol Investment Fund, Ltd. was repaid.
      As
      of June 30, 2006, we owed Bristol Investment Fund, Ltd. and BSR Investments,
      Ltd. $0 relating to these secured demand promissory notes. There is no further
      borrowing capacity relating to any of these notes.




In
      August
      2005, we obtained loans in the form of secured demand promissory notes totaling
      $200,000 from Bradley Ross and Rodger Bemel. Bradley Ross loaned us $150,000
      and
      Rodger Bemel loaned us $50,000 on August 31, 2005 for the combined total of
      $200,000. The secured demand promissory notes were secured by our assets,
      excluding assets subject to liens, leases, encumbrances, defenses or other
      claims. The secured demand promissory notes were payable without notice by
      the
      demand of Bradley Ross or Rodger Bemel. There was no further borrowing capacity
      under both of the secured demand promissory notes. On October 19, 2005 we repaid
      the principal amounts owed to both Bradley Ross and Rodger Bemel in full. As
      of
      June 30, 2006, we owed Bradley Ross and Rodger Bemel $0 relating to these
      secured demand promissory notes. There is no further borrowing capacity relating
      to any of these notes.





On
      October 19, 2005, we completed a private equity financing pursuant to which
      we
      raised gross proceeds of $6,500,000 and converted $571,066 of indebtedness.
      The
      transaction was a unit offering, pursuant to which each investor or debt holder
      received a unit comprised of one share of restricted common stock and warrants
      convertible into 0.50 shares of restricted common stock, resulting in the
      placement of an aggregate 7,071,066 shares of restricted common stock and
      warrants convertible into an additional 3,535,533 shares of restricted common
      stock. The warrants have an exercise price of $1.25 per share and expire on
      October 19, 2010. Twenty-five investors participated in the transaction. Each
      and all of the investors in this financing qualified as an "accredited investor"
      as that term is defined in the Securities Act of 1933, as amended. The financing
      was arranged by TR Winston & Company, a fund manager, which received a net
      commission of 6% of the total gross proceeds and a warrant to purchase 780,000
      shares of the Company's common stock at an exercise price of $1.25 per share
      that expires on October 19, 2010. Additionally, we issued a warrant to purchase
      117,600 shares of our common stock at an exercise price of $1.25 per share
      that
      expires on October 19, 2010 to C.E. Unterberg, Towbin, LLC pursuant to a letter
      agreement we had previously entered into with C.E. Unterberg, Towbin, LLC.
      The
      following conditions were all met with respect to this transaction: (1) we
      did
      not advertise this issuance in any public medium or forum, (2) we did not
      solicit any investors with respect to this issuance, (3) we did not publicize
      any portion of the purchase or sale of the shares issued, (4) none of the shares
      issued were offered in conjunction with any public offering, (5) neither us
      nor
      any of the investors paid any fees to any finder or broker-dealer other than
      T.R. Winston & Company who acted solely as placement agent and was paid a
      transaction fee by us in conjunction with this issuance. There are no material
      relationships between the Company, the investors or their respective affiliates.





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




**FUTURE
      NEEDS**




We
      have
      made and will continue to make commitments to our various suppliers for the
      purchase of DisplayCards. We anticipate that the sales of our products will
      not
      be sufficient to sustain our operations. Although we are in discussions with
      various investment banks, we currently do not have any binding commitments
      for,
      or readily available sources of, additional financing. In the event that
      additional financing is required, whether through public or private equity
      or
      debt financing, arrangements with stockholders or other sources to fund
      operations, may not be available, or if available, may be on terms unacceptable
      to us. If we issue additional equity securities to raise funds, the ownership
      percentage of our existing stockholders would be reduced. New investors may
      demand rights, preferences or privileges senior to those of existing holders
      of
      our common stock. Debt incurred by us would be senior to equity in the ability
      of debt holders to make claims on our assets. The terms of any debt issued
      could
      impose restrictions on our operations. If adequate funds are not available
      to
      satisfy our capital requirements, our operations and liquidity could be
      materially adversely affected.




23




**ITEM
      3. CONTROLS AND PROCEDURES**




(a)
      Evaluation of disclosure controls and procedures. As of the end of the period
      covered by this report, we carried out an evaluation, under the supervision
      and
      with the participation of our management, including our Chief Executive Officer
      and Chief Financial Officer, of the effectiveness of the design and operation
      of
      our disclosure controls and procedures, as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon
      that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective as of the end of
      the
      applicable period to ensure that information required to be disclosed by us
      in
      reports that we file or submit under the Exchange Act (i) is recorded,
      processed, summarized and reported within the time periods specified in
      Securities and Exchange Commission rules and forms and (ii) is accumulated
      and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate to allow timely decisions regarding required
      disclosures.




(b)
      Changes in internal controls over financial reporting. There was no change
      in
      our internal control over financial reporting during our most recent fiscal
      quarter that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.




**PART
      II - OTHER INFORMATION**




**ITEM
      1. LEGAL PROCEEDINGS**




Not
      Applicable




**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**


On
      May
      30, 2006, the Company completed a private equity financing pursuant to which
      the
      Company raised gross proceeds of $11,356,500. The transaction was a common
      stock
      offering, resulting in the placement of an aggregate 3,785,500 shares of
      restricted common stock. Eighteen investors participated in the transaction.
      Each and all of the investors in this financing qualified as an “accredited
      investor” as that term is defined in the Securities Act of 1933, as amended. The
      financing was arranged by TR Winston & Company, a fund manager, which
      received a net commission of 5% of the total gross proceeds and a warrant to
      purchase 113,565 shares of the Company’s common stock at an exercise price of
      $3.30 per share that expires on May 30, 2011.





On
      June
      28, 2006, the Company purchased from nCryptone all intellectual property
      relating to the DisplayCard under the July 25, 2005 Joint Development Agreement
      with nCryptone, all nCryptone intellectual property relating to the DisplayCard,
      all tangible assets relating to the DisplayCard and assumed certain accounts
      payable directly allocable to the DisplayCard. The purchase price was 4,500,000
      shares of common stock (valued at $19,741,500) and an agreement to pay $1
      million1 within one year from closing for a license relating to nCryptone's
      buzzer patent for use in the Company's SoundCard. There was no relationship
      between any officers, directors, and/or affiliates of the Company and the
      officers, directors, and or affiliates of nCryptone.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




Not
      Applicable




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




Not
      Applicable




**ITEM
      5. OTHER INFORMATION**




Not
      Applicable





24





**ITEM
      6. EXHIBITS**




(a)
      Exhibits




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




**SIGNATURES**




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




**INNOVATIVE
                CARD TECHNOLOGIES, INC.**Date:
                November 13, 2006
            
            /s/ John
              A.
              Ward, IIIJohn
              A. Ward, IIIChairman and
                CEO


Date:
                November 13, 2006
            
            /s/ Bennet
              P.
              TchaikovskyBennet
              P. TchaikovskyChief
                Financial Officer





25





Exhibit
      Index




Exhibit
                Number
            
            Description2.1(1)
            
            Exchange
                agreement by and among the registrant, LensCard US, LLC, Alan Finkelstein,
                Forest Finkelstein, Bradley Ross and Luc Berthoud, dated April 1,
                20042.2(1)
            
            Exchange
                agreement by and among the registrant, Alan Finkelstein, Bradley
                Ross and
                Michael Paradise, dated April 1, 20042.3(1)
            
            Exchange
                agreement between the registrant and its wholly-owned subsidiary,
                PSACo,
                Inc., dated April 1, 20042.4(1)
            
            Merger
                agreement between the registrant and LensCard International Limited,
                a
                British Virgin Islands International Business Company, dated April
                6,
                20043.5(1)
            
            Amended
                and Restated Certificate of Incorporation of the
                registrant3.7(1)
            
            Amended
                and Restated Bylaws of the registrant10.1(1)*
            
            2004
                stock incentive plan10.2(1)
            
            Sublease
                agreement between registrant and Bemel & Ross for premises at 11601
                Wilshire Blvd., #2160, Los Angeles, California 90025, dated January
                5,
                200310.3(1)
            
            Guaranty
                of lease between Alan Finkelstein and Bemel & Ross, dated January 5,
                200310.4(2)
            
            Form
                of common stock warrant, as amended10.5(1)
            
            Securities
                purchase agreement between registrant and Bristol Capital, LLC dated
                December 23, 200310.5(a)(1)
            
            Waiver
                of section 2.3 of the securities purchase agreement between registrant
                and
                Bristol Capital, LLC10.6(1)
            
            Shares
                for debt agreement between registrant and Alan Finkelstein, dated
                June 22,
                200410.7(1)
            
            Shares
                for debt agreement between registrant and Bradley Ross, dated June
                22,
                200410.8(1)
            
            Shares
                for debt agreement between registrant and Luc Berthoud, dated June
                22,
                200410.9(1)
            
            Promissory
                note (loan no. 00003) between registrant and City National Bank,
                dated May
                24, 200410.10(1)
            
            Promissory
                note (loan no. 00005) between registrant and City National Bank,
                dated May
                24, 200410.11(1)
            
            Promissory
                note (loan no. 00004) between registrant and City National Bank,
                dated May
                24, 200410.12(1)
            
            Promissory
                note (loan no. 00006) between registrant and City National Bank,
                dated May
                24, 200410.13(1)
            
            Commercial
                guaranty between Alan Finkelstein and City National Bank dated May
                24,
                200410.14(1)
            
            Commercial
                guaranty between Bradley Ross and City National Bank dated May 24,
                2004




26





10.15(1)
            
            Commercial
                guaranty between Luc Berthoud and City National Bank dated May 24,
                200410.16(1)*
            
            Offer
                letter between registrant and Murdoch Henretty dated July 28,
                200410.17(1)*
            
            Employment
                agreement between registrant and Alan Finkelstein dated January
                199810.18(1)+
            
            Strategic
                Alliance Agreement between registrant and Visa International Service
                Association dated May 26, 200410.19(1)
            
            Secured
                Demand Promissory Note between registrant and Union Finance International
                Corp. dated March 31, 200510.20(1)
            
            Secured
                Demand Promissory Note between registrant and Bristol Investment
                Fund,
                Ltd. dated March 30, 200510.21(1)
            
            Capital
                Lease Agreement between registrant and CNC Associates, Inc. dated
                November
                30, 200410.22(1)+
            
            Guaranty
                between Alan Finkelstein and CNC Associates, Inc. dated November
                30,
                200410.23(1)
            
            Security
                Agreement between registrant and Union Finance International Corp.
                dated
                March 31, 2005 (See Exhibit 10.19)10.24(1)
            
            Security
                Agreement between registrant and Bristol Investment Fund, Ltd. dated
                March
                30, 2005 (See Exhibit 10.20)10.25(3)
            
            Secured
                Demand Promissory Note between registrant and Bradley Ross dated
                August
                31, 200510.26(3)
            
            Secured
                Demand Promissory Note between registrant and Roger Bemel dated August
                31,
                200510.27+(6)
            
            Joint
                Development Agreement between registrant and nCryptone dated July
                25,
                200510.28+(6)
            
            Agreement
                between registrant and SmartDisplayer Technology, Co., Inc. dated
                July 25,
                200510.29(4)
            
            Form
                of Lock-Up agreement by and between registrant's directors and executive
                officers pursuant to the private placement dated October 19,
                200510.30(5)
            
            Form
                of Warrant pursuant to private placement dated October 19,
                200510.31(5)
            
            Registration
                Rights Agreement by and between the registrant and each investor
                pursuant
                to the private placement dated October 19, 200510.32(4)
            
            Side
                Letter Agreement between the registrant, T.R. Winston & Company and
                investors pursuant to the private placement dated October 19,
                200510.33+(8)
            
            Letter
                of Intent by and between VASCO Data Security, nCryptone and Registrant
                in
                2005.10.34
                (9)
            
            Securities
                Purchase Agreement dated as of May 30, 2006.10.35(9)
            
            Warrant
                issued to TR Winston dated as of May 30, 2006.10.36(9)
            
            Registration
                Rights Agreement by and between registrant and each investor 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.




27




10.39
                (10)
            
            License
                Agreement dated June 28, 2006 by and between Registrant as licensor
                and
                NCryptone, SA as licensee10.40
                (10)
            
            License
                Agreement dated June 28, 2006 by and between NCryptone, SA as licensor
                and
                Registrant as licensee.10.41
            
            Sublease
                dated September 14, 2006 by and between Registrant as sublessee and
                Bergman & Dacey, Inc. or sublessor.31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification by the Chief Executive
                Officer31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification by the Chief Financial
                Officer32.1
            
            Certification
                by the Chief Executive Officer and Chief Financial Officer pursuant
                to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.







(1)
      Incorporated by reference to the exhibit of the same number to the Registrant's
      Registration Statement on Form SB-2 (File No. 333-119814) filed with the
      Securities and Exchange Commission on October 19, 2004, as amended.





28





(2)
      Incorporated by reference to the exhibit to the Registrant's Form 8-K filed
      with
      the Securities and Exchange Commission on September 7, 2005




(3)
      Incorporated by reference to the exhibit to the Registrant's Form 8-K filed
      with
      the Securities and Exchange Commission on September 6, 2005




(4)
      Incorporated by reference to the exhibit to the Registrant's Registration
      Statement on Form SB-2 (File No. 333-129564) filed with the Securities and
      Exchange Commission on November 8, 2005.




(5)
      Incorporated by reference to the exhibit to the Registrant's Form 8-K filed
      with
      the Securities and Exchange Commission on October 25, 2005, as
      amended.




(6)
      Incorporated by reference to the exhibit to the Registrant's Amendment No.
      1 to
      Form SB-2 (File No. 333-129564) filed with the Securities and Exchange
      Commission on March 17, 2006.




(7)
      Incorporated by reference to the exhibit to the Registrant's Form 10-KSB filed
      with the Securities and Exchange Commission on March 20, 2006.




(8)
      Incorporated by reference to the exhibit to the Registrant's Form 8-K filed
      with
      the Securities and Exchange Commission on November 18, 2005.





(9)
      Incorporated by reference to Form 8-K filed with the Securities and Exchange
      Commission on May 31, 2006.





(10)
      Incorporated by reference to the Registrant’s Registration Statement on Form
      SB-2 (File No. 333-135715 filed with the Securities and Exchange Commission
      on
      July 12, 2006).







*
      Identifies a management contract or compensatory plan of arrangement required
      to
      be filed as an exhibit to this report.




+
      Confidential treatment granted as to certain portions, which portions were
      omitted and filed separately with the Securities and Exchange
      Commission.




29