Table
      of Contents





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM 10-Q**


**Mark
      One**





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





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





**OR**





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





**For
      the Transition Period from
            to**





**Commission
      File Number 000-51260**





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


(Exact
      name of registrant as specified in its charter)





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





**(310)
      312-0700**


(Registrant’s
      telephone number, including area code)





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





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





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





As
      of
      October 30, 2008 28,495,256 shares of the Registrant’s common stock were
      outstanding.











Table
        of Contents




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





INDEX
      TO
      FORM 10Q


**PAGE**PART
                  I
              FINANCIAL
                  INFORMATION
              3Item
                  1.
              Financial
                  Statements
              3Consolidated
                  Balance Sheet at September 30, 2008 (unaudited) and at December
                  31,
                  2007
              3Consolidated
                  Statements of Operations for the three and nine months ended September
                  30,
                  2008 (unaudited) and 2007 (unaudited)
              4Consolidated
                  Statements of Cash Flows for the nine months ended September 30,
                  2008
                  (unaudited) and 2007 (unaudited)
              5Notes
                  to Consolidated Financial Statements
              6Item
                  1A
              Risk
                  Factors
              17Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              24Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              30Item
                  4.
              Controls
                  and Procedures
              30PART
                  II
              OTHER
                  INFORMATION
              31Item
                  1.
              Legal
                  Proceedings
              31Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              31Item
                  3.
              Defaults
                  Upon Senior Securities
              32Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              32Item
                  5.
              Other
                  Information
              32Item
                  6.
              Exhibits
              32SIGNATURES
              32




2




Table
      of Contents




**PART I
      - FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS**





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





**September 30,**
            
            **December 31,****2008**
            
            **2007****(unaudited)****ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            200,844
            
            $
            339,600Accounts
                receivable
            
            
            670,757
            
            
            13,077Prepaids
                and other current assets
            
            
            267,607
            
            
            54,127Deposits
                on raw materials held for production
            
            
            361,350
            
            
            605,662Raw
                materials held for production
            
            
            993,075
            
            
            1,315,960Work
                in progress inventory
            
            
            2,560,965
            
            
            886,259Total
                current assets
            
            
            5,054,598
            
            
            3,214,685Property
                and equipment, net
            
            
            168,806
            
            
            193,185Deferred
                debt issuance cost
            
            
            476,319
            
            
            —Deposits
            
            
            90,944
            
            
            177,747Intangible
                assets, net
            
            
            1,606,721
            
            
            2,075,953Total
                assets
            
            $
            7,397,388
            
            $
            5,661,570**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable and accrued expenses
            
            $
            1,625,410
            
            $
            3,660,044Accounts
                payable - related parties
            
            
            595,365
            
            
            657,254Warranty
                reserve
            
            
            164,592
            
            
            27,816Deferred
                revenue
            
            
            1,036,494
            
            
            898,585Total
                current liabilities
            
            
            3,421,861
            
            
            5,243,6998%
                convertible debenture, net of $5,715,737 discount
            
            
            2,784,263
            
            
            —Warrant
                liability
            
            
            221,238
            
            
            —Total
                liabilities
            
            
            6,427,362
            
            
            5,243,699Commitments
                and contingencies
            
            
            —
            
            
            —STOCKHOLDERS’
                EQUITYPreferred
                stock $0.001 par value, 5,000,000 shares authorized, 0 (unaudited)
                and 0
                shares issued and outstanding
            
            
            —
            
            
            —Common
                stock $0.001 par value, 75,000,000 shares authorized, 28,495,256
                (unaudited) and 28,433,116 issued and outstanding
            
            
            28,495
            
            
            28,433Additional
                paid-in capital
            
            
            33,333,713
            
            
            28,456,621Accumulated
                deficit
            
            
            (32,392,182
            )
            
            (28,067,183
            )Total
                stockholders’ equity
            
            
            970,026
            
            
            417,871Total
                liabilities and stockholders’ equity
            
            $
            7,397,388
            
            $
            5,661,570





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




3




Table
      of Contents




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Three months**
              **ended**
              **September 30,**
              **2008**
            
            **Three months**
              **ended**
              **September 30,**
              **2007**
            
            **Nine months**
              **ended**
              **September 30,**
              **2008**
            
            **Nine months**
              **ended**
              **September 30,**
              **2007****(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**Revenues
            
            $
            840,098
            
            $
            159
            
            $
            1,857,523
            
            $
            2,669Cost
                of Goods Sold
            
            
            (984,024
            )
            
            (179,621
            )
            
            (2,054,232
            )
            
            (575,017
            )Gross
                Margin
            
            
            (143,926
            )
            
            (179,462
            )
            
            (196,709
            )
            
            (572,348
            )Operating
                expensesAdministrative
            
            
            1,306,148
            
            
            1,856,756
            
            
            4,355,576
            
            
            5,224,297Consulting
                fees
            
            
            169,996
            
            
            151,823
            
            
            424,521
            
            
            443,863Professional
                fees
            
            
            189,698
            
            
            285,928
            
            
            638,921
            
            
            769,522Research
                and development
            
            
            98,230
            
            
            442,130
            
            
            396,585
            
            
            911,540Unrecoverable
                payments to suppliers
            
            
            -
            
            
            1,546,428
            
            
            -
            
            
            1,546,428Total
                operating expenses
            
            
            1,764,072
            
            
            4,283,065
            
            
            5,815,603
            
            
            8,895,650Loss
                from operations
            
            
            (1,907,998
            )
            
            (4,462,527
            )
            
            (6,012,312
            )
            
            (9,467,998
            )Other
                income (expense):Change
                in fair value of warrant liability and other expense
            
            
            841,513
            
            
            -
            
            
            2,745,273
            
            
            -Interest
                income
            
            
            2,978
            
            
            31,609
            
            
            26,535
            
            
            174,301Interest
                expense
            
            
            (498,336
            )
            
            (11,899
            )
            
            (1,083,695
            )
            
            (12,148
            )Total
                other income
            
            
            346,155
            
            
            19,710
            
            
            1,688,113
            
            
            162,153Loss
                before provision for income taxes
            
            
            (1,561,843
            )
            
            (4,442,817
            )
            
            (4,324,199
            )
            
            (9,305,845
            )Provision
                for income taxes
            
            
            -
            
            
            (800
            )
            
            (800
            )
            
            (800
            )Net
                loss
            
            $
            (1,561,843
            )
            $
            (4,443,617
            )
            $
            (4,324,999
            )
            $
            (9,306,645
            )Basic
                and diluted loss per share
            
            $
            (0.05
            )
            $
            (0.16
            )
            $
            (0.15
            )
            $
            (0.33
            )Basic
                and diluted weighted-average common shares outstanding
            
            
            28,495,256
            
            
            28,420,616
            
            
            28,471,681
            
            
            28,416,981





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




4




Table
      of Contents




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For the Nine Months Ended**
              **September 30,****2008**
            
            **2007****(unaudited)**
            
            **(unaudited)**Cash flows from operating
                activities:Net
                loss
            
            $
            (4,324,999
            )
            $
            (9,306,645
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            530,552
            
            
            674,139Change
                in fair value of warrant liability
            
            
            (2,866,069
            )
            
            -Amortization
                of debt discount
            
            
            609,523
            
            
            -Amortization
                of deferred debt issuance cost
            
            
            51,181
            
            
            -Share-based
                compensation expense
            
            
            1,334,622
            
            
            806,257(Increase)
                decrease in Accounts receivable
            
            
            (657,680
            )
            
            (15,945
            )(Increase)
                decrease in Prepaids and other current assets
            
            
            41,100
            
            
            (3,984
            )(Increase)
                decrease in Deposits on raw materials held for production
            
            
            244,312
            
            
            497,247(Increase)
                decrease in Raw materials held for production
            
            
            322,885
            
            
            -(Increase)
                decrease in Work in progress inventory
            
            
            (1,674,706
            )
            
            (1,013,749
            )(Increase)
                decrease in Deposits
            
            
            86,803
            
            
            (106,503
            )Increase
                (decrease) in Accounts payable and accrued expenses
            
            
            (2,034,634
            )
            
            1,914,921Increase
                (decrease) in Accounts payable - related parties
            
            
            (61,889
            )
            
            (618,439
            )Increase
                (decrease) in Warranty reserve
            
            
            136,776
            
            
            -Increase
                (decrease) in Deferred revenue
            
            
            137,909
            
            
            480,070Net
                cash used in operating activities
            
            
            (8,124,314
            )
            
            (6,692,631
            )Cash
                flows from investing activities:Purchase
                of Property and Equipment
            
            
            (36,942
            )
            
            (92,436
            )Net
                cash used in investing activities
            
            
            (36,942
            )
            
            (92,436
            )Cash
                flows from financing activities:Gross
                proceeds from issuance of 8% convertible debenture
            
            
            8,500,000
            
            
            -Offering
                costs
            
            
            (527,500
            )
            
            (3,675
            )Proceeds
                from exercise of options / warrants
            
            
            50,000
            
            
            24,375Payments
                on capital lease
            
            
            -
            
            
            (7,495
            )Net
                cash provided by financing activities
            
            
            8,022,500
            
            
            13,205Net
                increase (decrease) in cash and cash equivalents
            
            
            (138,756
            )
            
            (6,771,862
            )Cash
                and cash equivalents, beginning of year
            
            
            339,600
            
            
            8,270,096Cash
                and cash equivalents, end of period
            
            $
            200,844
            
            $
            1,498,234Supplemental
                disclosures of cash flow information:Interest
                paid
            
            $
            222,000
            
            $
            50Income
                tax paid
            
            $
            800
            
            $
            800Supplemental
                disclosure of non-cash investing and financing activities:Value
                of warrants issued as non-employee compensation included in prepaid
                expenses and other current assets
            
            $
            254,580
            
            $
            —Debt
                discount attributable to beneficial conversion feature
            
            $
            3,237,953
            
            $
            —Debt
                discount attributable to warrants
            
            $
            3,087,307
            
            $
            —





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


5


**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





**NOTES
      TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





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





**BASIS
      OF PRESENTATION**





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





The
      Company has a history of recurring losses from operations and has an accumulated
      deficit of $32,392,182 as of September 30, 2008. Sales of the InCard
      DisplayCard, the Company’s main product, are not expected to generate positive
      cash flow until 2009. As a result, there is substantial doubt about the
      Company’s ability to continue as a going concern. The accompanying consolidated
      financial statements have been prepared assuming that the Company will continue
      as a going concern. This basis of accounting contemplates the recovery of the
      Company’s assets and the satisfaction of liabilities in the normal course of
      business and does not include any adjustments to reflect the possible future
      effects on the recoverability and classification of assets or the amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern. There can be no assurances that funds
      will be available to the Company when needed or, if available, that such funds
      would be available under favorable terms. In the event that the Company is
      unable to generate adequate revenues to cover expenses and cannot obtain
      additional funds in the near future, the Company may seek protection under
      bankruptcy laws.




As
      of October 29, 2008 the Company has $276,133
      in cash. Combined with anticipated revenue collections and planned expense
      reductions, the Company believes this amount will last through year-end
      2008.





**COMPANY
      OVERVIEW**





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





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





**BASIS
      OF PRESENTATION**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, the 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.





The
      accompanying consolidated financial statements of Innovative Card
      Technologies, Inc. have been prepared pursuant to the rules and
      regulations of the Securities and Exchange Commission (“SEC”) regarding interim
      financial reporting. Accordingly, they do not include all of the information
      and
      footnotes required by generally accepted accounting principles for annual
      financial statements and should be read in conjunction with the consolidated
      financial statements for the: (i) year ended December 31, 2007, and notes
      thereto included in the Company’s Annual Report on Form 10-KSB, filed with
      the SEC on April 1, 2008; (ii) quarterly report for the period ended March
      31, 2008 on Form 10-Q filed with the SEC on May 12, 2008; and (iii) quarterly
      report for the period ended June 30, 2008 on Form 10-Q filed with the SEC on
      August 8, 2008, and amendments thereto. In the opinion of management, the
      accompanying consolidated financial statements contain all adjustments,
      consisting only of adjustments of a normal recurring nature, necessary for
      a
      fair presentation of the Company’s financial position as of September 30,
      2008, and its results of operations for the periods presented. These
      consolidated financial statements are not necessarily indicative of the results
      to be expected for the entire year.


6


**PRINCIPLES
      OF CONSOLIDATION**





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





**REVENUE
      RECOGNITION**





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





**INVENTORY**





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





**INTANGIBLE
      ASSETS AND LONG-LIVED ASSETS**





The
      cost
      incurred to acquire intangible assets, which are active and relate to products
      with a definitive life cycle, are amortized over the estimated useful life
      of
      three to five years. The Company assesses the carrying value of long-lived
      assets in accordance with SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets.” The Company assesses the impairment of
      identifiable intangibles and long-lived assets whenever events or changes in
      circumstances indicate that the carrying value may not be recoverable. Factors
      considered important that could trigger an impairment review include, but are
      not limited to, the following: a significant underperformance to expected
      historical or projected future operating results, a significant change in the
      manner of the use of the acquired asset or the strategy for the overall
      business, or a significant negative industry or economic trend. Based on
      anticipated future income and cash flows and other factors relevant in the
      opinion of the Company’s management, the buzzer patent was completely impaired
      during the year ended December 31, 2007. No impairment was recognized
      during the three months or nine months ended September 30,
      2008.





**CASH
      AND CASH EQUIVALENTS**





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





**MAJOR
      SUPPLIERS**





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





The
      Company obtains the display, a key component for the Company’s InCard
      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 InCard DisplayCard, delay production of the InCard DisplayCard
      for up to one year and impair the Company’s ability to manufacture and sell the
      InCard DisplayCard.





The
      Company assembles its InCard DisplayCard using a single source, NagraID,
      pursuant to a written agreement that expired on June 30, 2008. 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 InCard
      DisplayCard, delay production of the InCard DisplayCard for up to one year
      and
      impair the Company’s ability to manufacture and sell the InCard DisplayCard.
      From July 1, 2008 forward, the Company will contract with NagraID on a
      purchase order basis until such time as a new written agreement, which is
      currently under discussion, is entered into by the parties.




7


**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, prepaids and
      other current assets, accounts payable and accrued expenses including accounts
      payable to related parties, advances payable, deferred revenue and 8%
      convertible debenture. The book value of all financial instruments are
      representative of their fair values.





**RESEARCH
      AND DEVELOPMENT**





Research
      and development costs are charged to operations as incurred.





**LOSS
      PER SHARE**





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





Since
      their effect would have been anti-dilutive, common stock equivalents of
      6,095,820 warrants and 3,298,751 stock options were excluded from the
      calculation of diluted loss per share for the nine months ended
      September 30, 2008. Since their effect would have been anti-dilutive,
      common stock equivalents of 4,627,098 warrants and 3,194,498 stock options
      were
      excluded from the calculation of diluted loss per share for the nine months
      ended September 30, 2007.





**INCOME
      TAXES**





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





**STOCK
      INCENTIVE PLAN**





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





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




8


**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.





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





**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 $250,000. At times, cash balances are in excess
      of the insured limit.





**WARRANTS
      AND BENEFICIAL CONVERSION**


**FEATURE
      ON 8% CONVERTIBLE DEBENTURE**





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





**RECLASSIFICATION**





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





**RECENTLY
      ISSUED ACCOUNTING PRONOUNCEMENTS**





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


In
        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 adoption of SFAS No. 157 did not have a
        material impact on the Company’s financial position, results of operations or
        cash flows.
 
 In
        February 2007, the FASB issued Statement of Financial Accounting Standard
        No. 159, “The Fair Value Option for Financial Assets and Financial
        Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many
        financial instruments and certain other items at fair value. Unrealized gains
        and losses on items for which the fair value option has been elected are
        reported in earnings. SFAS 159 is effective for fiscal years beginning after
        November 15, 2007. The adoption of SFAS 159 did not have a material impact
        on the Company’s financial position, results of operations or cash
        flows.
 
 In
        December 2007 the FASB issued SFAS 160 “Non-controlling Interests in
        Consolidated Financial Statements—an amendment of ARB No. 51”. This Statement
        amends ARB 51 to establish accounting and reporting standards for the
        non-controlling interest in a subsidiary and for the deconsolidation of a
        subsidiary. It clarifies that a non-controlling interest in a subsidiary
        is an
        ownership interest in the consolidated entity that should be reported as
        equity
        in the consolidated financial statements. This Statement changes the way
        the
        consolidated income statement is presented. It requires consolidated net
        income
        to be reported at amounts that include the amounts attributable to both the
        parent and the non-controlling interest. It also requires disclosure, on
        the
        face of the consolidated statement of income, of the amounts of consolidated
        net
        income attributable to the parent and to the non-controlling interest. This
        Statement establishes disclosure requirements in the consolidated financial
        statements, which will enable users to clearly distinguish between the interests
        of the parent’s owners and the interests of the non-controlling owners of a
        subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
        those fiscal years, beginning on or after December 15, 2008; earlier adoption
        is
        prohibited. Management anticipates that the adoption of this standard will
        have
        no impact to the Company’s financial position, results of operations, or cash
        flows.
  In
        December 2007, the FASB issued No. 141 (revised 2007), “Business Combinations”,
        which replaces SFAS No. 141. SFAS 141R establishes principles and requirements
        for how an acquirer recognizes and measures in its financial statements the
        identifiable assets acquired and the liabilities assumed, any non-controlling
        interest in the acquiree and the goodwill acquired. This Statement also
        establishes disclosure requirements which will enable users to evaluate the
        nature and financial effects of the business combination. This Statement
        is
        effective for business combinations for which the acquisition date is on
        or
        after the beginning of the first annual reporting period beginning on or
        after
        December 15, 2008. Management anticipates that the adoption of this statement
        will have no impact to the Company’s financial position, results of operations,
        or cash flows.





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





**September 30,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Deposits
                on raw materials held for production (display and manufacturing
                component)
            
            $
            361,350
            
            $
            605,662TOTAL
            
            $
            361,350
            
            $
            605,662





These
      deposits for raw materials are held by two vendors, are not refundable and
      are
      made pursuant to agreements as discussed in Note 2 under Major
      Suppliers.





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





Raw
      materials held for production and work in progress inventory at
      September 30, 2008 and December 31, 2007 consisted of the following
      and are stated at the lower cost or market, net of inventory reserves of $0
      (unaudited) and $99,335, respectively:


9





**September 30,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Raw
                materials held for production
            
            $
            993,075
            
            $
            1,315,960Work
                in progress inventory
            
            
            2,560,965
            
            
            886,259TOTAL
            
            $
            3,554,040
            
            $
            2,202,219





**NOTE
      5 - PROPERTY AND EQUIPMENT**





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





**September 30,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Computer
                equipment
            
            $
            85,213
            
            $
            96,451Office
                equipment
            
            
            8,168
            
            
            8,168Furniture
                and fixtures
            
            
            1,607
            
            
            24,386Leasehold
                improvements
            
            
            
            
            
            5,608Production
                equipment
            
            
            312,386
            
            
            277,474407,374
            
            
            412,087Less
                accumulated depreciation and amortization
            
            
            (238,568
            )
            
            (218,902
            )TOTAL
            
            $
            168,806
            
            $
            193,185





Depreciation
      and amortization expense was $19,589 (unaudited) and $48,938 (unaudited) for
      the
      three months ended September  30, 2008 and 2007, respectively.





Depreciation
      and amortization expense was $61,321 (unaudited) and $140,370 (unaudited),
      for
      the nine months ended September  30, 2008 and 2007,
      respectively.





The
      Company wrote-off fully amortized leasehold improvements and disposed
      of fully depreciated property and equipment totaling $41,655 for the nine months
      ended September 30, 2008.





**NOTE
      6 - PROVISION FOR INCOME TAXES**





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





The
      provision for income taxes consisted of the following:





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




10


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





**Nine Months**
              **Ended**
              **September 30,**
            
            **Nine Months**
              **Ended**
              **September 30,****2008**
            
            **2007****(unaudited)**
            
            **(unaudited)**Federal
                income tax at statutory rates
            
            
            34
            %
            
            34
            %State
                income taxes, net of federal benefit
            
            
            8
            %
            
            6
            %Change
                in valuation allowance
            
            
            (43
            )%
            
            (40
            )%Tax
                credits
            
            
            1
            %
            
            0
            %Change
                in fair value of warrant liability and other
            
            
            0
            %
            
            0
            %Effective
                income tax rate
            
            
            0
            %
            
            0
            %





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





The
      Company adopted the provisions of the Financial Accounting Standards Board
      (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
      Taxes-an Interpretation of FASB Statement No. 109” (“FIN 48”), effective
      January 1, 2007. As part of the implementation of FIN 48, the Company made
      a comprehensive review of its portfolio of uncertain tax positions in accordance
      with recognition standards established by FIN 48. As a result of applying the
      provisions of FIN 48, there was no cumulative effect on retained
      earnings.





For
      the
      nine months ended September 30, 2008, the cumulative unrecognized tax
      benefit was $79,377 which was netted against  deferred tax assets with a
      full valuation allowance, and if recognized there will be no effect on the
      Company’s effective tax rate.





**NOTE
      7 - COMMITMENTS AND CONTINGENCIES**





**EMPLOYMENT
      AGREEMENT**





In
      March 2008, the Company entered into employment agreements with Steven
      Delcarson, its Chief Executive Officer, and Charles Caporale, its Chief
      Financial Officer. The initial term of each agreement is for one year from
      the
      executive’s date of hire and is renewable.





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





**LITIGATION**





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





**WARRANTY**





The
      Company guarantees the performance of its products for certain periods of time
      or usage, depending on the particular agreement with the customer. In order
      to
      properly match revenue and related expenses, the Company makes an estimate
      of
      the cost associated with fulfilling its warranty obligations at the time of
      sale.





**NOTE
      8 - 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.




11


**COMMON
      STOCK**





The
      Company has 75,000,000 authorized shares of $0.001 par value common
      stock.




**WARRANTS**





The
      following summarizes the warrant transactions:





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





**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 InCard stock, stock appreciation rights
      and performance shares to the Company’s employees, directors and
      consultants.





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





The
      2004
      Stock Incentive Plan was terminated concurrent with the approval of the 2007
      Equity Incentive Plan in December 2007. No further grants will be made from
      the 2004 Stock Incentive Plan. The termination does not affect the rights of
      holders of options previously granted and outstanding under the 2004 Stock
      Incentive Plan.


12


The
      following summarizes stock option transactions for the period
      shown:





**Nine Months Ended**
              **September  30, 2008****(unaudited)****ALL OPTIONS**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Outstanding
                at beginning of period
            
            
            2,184,498
            
            $
            1.97Options
                granted
            
            
            —
            
            $
            —Options
                forfeited
            
            
            (310,000
            )
            $
            4.26Options
                expired
            
            
            —
            
            $
            —Options
                exercised
            
            
            (50,000
            )
            $
            1.00Outstanding
                at end of period
            
            
            1,824,498
            
            $
            1.61Exercisable
                at end of period
            
            
            1,531,498
            
            $
            1.35





**Nine Months Ended**
              **September  30, 2008****(unaudited)****NON VESTED OPTIONS**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Non- vested at beginning of
                period
            
            
            585,000
            
            
            3.72Options
                granted
            
            
            —
            
            $
            —Options
                forfeited
            
            
            (216,000
            )
            $
            4.70Options
                expired
            
            
            —
            
            $
            —Options
                vested
            
            
            (76,000
            )
            $
            3.78Non-
                vested at end of period
            
            
            293,000
            
            $
            2.98





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





The
      weighted average remaining contractual lives of the options outstanding and
      options exercisable at September 30, 2008, were as follows:





**Options**
              **outstanding**
            
            **Options**
              **exercisable**September
                 30, 2008 (unaudited)
            
            
            6.10
                years
            
            
            5.95
                years





**2007
      EQUITY INCENTIVE PLAN**





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





The
      Company reserved a total of 4,000,000 shares of its common stock for issuance
      pursuant to the 2007 Equity Incentive Plan. A committee of the board of
      directors administers the 2007 Equity Incentive Plan. Stock options are
      generally granted with terms of up to ten years and vest over a period of five
      years under the 2007 Equity Incentive Plan. The administrator determines the
      exercise price of options granted under the 2007 Equity Incentive Plan, but
      the
      exercise price must not be less than 85% of the fair market value of the
      Company’s common stock on the date of grant. In the event the participant owns
      10% or more of the voting power of all classes of the Company’s stock, the
      exercise price must not be less than 110% of the fair market value per share
      of
      the Company’s common stock on the date of grant. With respect to all incentive
      stock options, the exercise price must at least be equal to the fair market
      value of the Company’s common stock on the date of grant. The term of an
      incentive stock option may not exceed 10 years, except that with respect to
      any
      participant who owns 10% of the voting power of all classes of the Company’s
      outstanding stock or the outstanding stock of any parent or subsidiary of the
      Company, the term must not exceed five years and the exercise price must equal
      at least 110% of the fair market value on the grant date. The administrator
      determines the term of all other options; however, no option will have a term
      in
      excess of 10 years from the date of grant.





Without
      further stockholder approval, the 2007 Equity Incentive Plan may not issue
      incentive stock options after September 2017. A summary of stock option
      activity and weighted average exercise prices for the nine months ended
      September  30, 2008 is as follows:


13





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





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





The
      weighted average remaining contractual lives of the options outstanding and
      options exercisable at September  30, 2008, were as follows:





**Options**
              **outstanding**
            
            **Options**
              **exercisable**September
                 30, 2008 (unaudited)
            
            
            9.51
                years
            
            
            9.75
                years





The
      Company recorded $1,175,849 (unaudited) and $806,257 (unaudited) of compensation
      expense for employee stock options during the nine month periods ending
      September  30, 2008 and September  30, 2007, respectively which is
      included in the administrative expense category. At September 30, 2008, there
      was a total of $1,621,310 of unrecognized compensation costs related to the
      non-vested share-based compensation arrangements under the 2004 and 2007 Plans.
      The cost is expected to be recognized over a weighted average period of 1.1
      years. The fair value of shares vested in both Plans during the nine month
      period ended September 30, 2008 was approximately $82,410 (unaudited). The
      aggregate intrinsic value of total outstanding options and total exercisable
      options was $0 (unaudited) and $0 (unaudited), respectively as of September
      30,
      2008.





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.




14


The
      Black
      Scholes assumptions used are listed below:





**Nine Months**
              **Ended Sept. 30,**
            
            **Nine Months**
              **Ended Sept. 30,****2008**
            
            **2007**Risk
                free interest rate
            
            
            2.98%
                to 3.91
            %
            
            4.97
            %Dividends
            
            
            -
            
            
            -Volatility
                factor
            
            
            88%
                to 132
            %
            
            200
            %Expected
                life
            
            
            10
                years
            
            
            10
                yearsAnnual
                forfeiture rate
            
            
            0
            %
            
            0
            %





**NOTE
      9 - RELATED PARTY TRANSACTIONS**





**ACCOUNTS
      PAYABLE - RELATED PARTIES**





Accounts
      payable - related parties at September 30, 2008 is $595,365 (unaudited), which
      is due to nCryptone, SA, payable in January 2009 and bears interest at the
      rate of 6.36% per annum. Accounts payable - related parties at December 31,
      2007 was $657,254 comprised of $642,733 due to nCryptone, SA, and due in
      January 2009 and $14,521 due to Blakely, Sokoloff, Taylor &
Zafman, LLP (BSTZ), a law firm in which former director George Hoover is a
      partner, for legal services related to our intellectual property. BSTZ is not
      a
      related party at September 30, 2008.





**CONSULTING
      AGREEMENTS**





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





The
      Company was a party to a Consulting Agreement with Forest Finkelstein, the
      son
      of Alan Finklestein during the years ended December 31, 2007, 2006 and
      2005. The agreement was cancelled in December 2007. The Company paid
      Mr. Finklestein $0 (unaudited) and $63,750 (unaudited), respectively,
      during the nine months ended September 30, 2008 and 2007. Forest
      Finkelstein is not a related party at September 30, 2008.





**LEGAL
      SERVICES**





The
      Company receives legal services from Blakely, Sokoloff, Taylor and Zafman,
      LLP,
      a law firm that George Hoover, a former director of the Company, is a partner
      in. During the nine months ended September 30, 2007, the Company paid
      $108,991 (unaudited) to this entity for legal services rendered. Blakely,
      Sokoloff, Taylor & Zaffman is not a related party at September 30,
      2008.





**NOTE
      10 - CONCENTRATION OF SUPPLIERS AND SIGNIFICANT CUSTOMERS**





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





Three
      customers account for 83% of the Company’s revenues for the nine months ended
      September 30, 2008 and 65% of the Company’s accounts receivable at
      September 30, 2008





**NOTE
      11 - 8% SENIOR SECURED CONVERTIBLE DEBENTURES**





On
      January 8, 2008, the Company entered into a Securities Purchase Agreement
      (the “Purchase Agreement”) with 13 institutional and accredited investors (the
“Purchasers”). Pursuant to the terms of the Purchase Agreement, the Purchasers
      purchased $3.5 million of the Company’s 8% Senior Secured Convertible Debenture
      (“Debenture”). The Debenture: (i) bears interest at 8% per year, paid
      quarterly in cash or registered common stock, at the Company’s discretion;
      (ii) has a maturity of January 8, 2011, (iii) is convertible at
      the holder’s option into shares of common stock at $2.50 per share, (iv) is
      secured by all of the Company’s and its subsidiary’s assets including inventory,
      receivables, unencumbered equipment and intellectual property under the terms
      of
      a Security Agreement, and (v) has a forced conversion feature which allows
      the Company to force the conversion of the Debenture if the Company’s common
      stock trades above $5.00 for 20 consecutive trading days and certain other
      conditions are met. The Company also issued to the Purchasers five-year common
      stock purchase warrants to purchase 700,000 shares of common stock at an
      exercise price of $2.75 per share (the “Warrants”). The Company used the net
      proceeds of the financing for working capital requirements and to pay down
      certain obligations. The Debenture also contains customary events of default
      provisions. As part of the transaction, the Company agreed to: (i) cut its
      monthly burn rate to $600,000 (ii) be compliant with NASDAQ listing
      requirements; and (iii) obtain shareholder approval prior to effectuating a
      reverse stock split.





Both
      the
      conversion price under the Debenture and the exercise price of the Warrants
      are
      subject to “full-ratchet” price protection in the event of stock issuances below
      their respective conversion or exercise prices and have been reset to $2.48
      and
      $2.728 respectively as a result of the April financing discussed below. The
“full-ratchet” price protection does not apply to issuances of stock options and
      stock issuances to officers, directors, employees and consultants. Both the
      conversion price of the Debenture and the Warrant strike price were reset
      following the April 15, 2008 financing described below.




15


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





The
      Company is accounting for the Warrants, issued in connection with the Debenture,
      as derivative liabilities in accordance with SFAS 133, “Accounting for
      Derivative Instruments and Hedging Activities” and EITF 00-19. The warrant
      liability was valued at $1,464,459 at warrant issuance date. In accordance
      with
      EITF 00-19, the value of Warrants has been recorded as liability subject to
      marked-to-market revaluation at each period end. At September 30, 2008, the
      warrant liability was valued at $86,617. The Company recorded a gain on the
      change in fair value of warrant liability of $1,377,842. The Company uses the
      Black Scholes model to value the liability. The assumptions used at
      January 8, 2008 and September 30, 2008 included expected volatility of
      118% and 88%, a risk free interest rate of 3.16% and 2.98% and expected life
      of
      5 and 4.3 years, respectively.





The
      discount attributable to the issuance date intrinsic value of the conversion
      feature and fair value of Warrants totaling $2,998,918 is being amortized using
      the effective interest method over the term of the Debenture. During the nine
      months ended September 30, 2008, $302,813 of this discount was amortized to
      interest expense.





In
      connection with this Debenture, the Company incurred financing cost of $290,000.
      This financing cost was capitalized and amortized over the life of the Debenture
      using the effective interest method. During the nine months ended
      September 30, 2008, $29,282 of the capitalized financing cost was amortized
      to interest expense.





As
      part
      of the transaction, the Company granted the investors registration rights with
      regard to: (i) the common shares issuable upon conversion of the
      Debentures; (ii) the common shares underlying the Warrants; and
      (iii) the common shares issuable as interest payments pursuant to the
      Debentures. Pursuant to the registration rights agreement, the Company was
      required to use its best efforts to file a registration statement by
      June 7, 2008 and have it be declared effective by August 7, 2008. The
      registration statement covering the registrable shares was timely filed and
      declared effective on July 3, 2008. The Company has a continuing obligation
      to use its best efforts to maintain the registration statement effective until
      such time as all the registrable securities are eligible for resale without
      volume or manner-of-sale restrictions and without current public information
      pursuant to Rule 144.





On
      April 15, 2008, the Company entered into a Securities Purchase Agreement
      with EMC Corporation (“EMC”). Pursuant to the terms of the agreement, EMC
      purchased $5 million of the Company’s 8% Senior Secured Convertible Debenture
      (“Debenture”). The Debenture: (i) bears interest at 8% per year, paid
      quarterly in cash or, subject to certain conditions, registered shares of the
      Company’s common stock; (ii) has a maturity of April 15, 2011,
      (iii) is convertible at EMC’s option into shares of the Company’s common
      stock at $2.48 per share, (iv) is secured by all of the Company’s assets,
      including inventory, receivables, unencumbered equipment and intellectual
      property, and (v) has a forced conversion feature which allows the Company
      to force the conversion of the Debenture if the Company’s common stock trades
      above $5.00 for 20 consecutive trading days. Such a forced conversion may be
      limited by contractual restrictions on the amount of the Company’s common stock
      which EMC may own and certain other conditions. The Company also agreed to
      issue
      EMC five-year Common Stock Purchase Warrants to purchase 1,008,064 shares of
      the
      Company’s common stock at an exercise price of $2.728 per share. The Company is
      using the net proceeds of the financing for working capital requirements and
      to
      pay down certain obligations. The Debenture also contains customary events
      of
      default provisions. As part of the transaction, the Company agreed to:
      (i) maintain monthly burn rate at $600,000 or below, (ii) be compliant
      with NASDAQ listing requirements; and (iii) obtain shareholder approval
      prior to effectuating a reverse stock split and for the issuance of additional
      shares of the Company’s common stock. Both the conversion price of the Debenture
      and the exercise price of the Warrants are subject to “full-ratchet” price
      protection in the event of stock issuances below their respective conversion
      or
      exercise prices, except for specified exempted issuances including grants of
      stock options and stock issuances to officers, directors, employees and
      consultants. The Company agreed to grant registration rights to EMC, by filing
      a
      registration statement covering the shares of common stock issuable upon the
      conversion of the Senior Secured Convertible Debenture, exercise of the Common
      Stock Purchase Warrant, and issuable by the Company as interest payments by
      June 7, 2008, and to obtain effectiveness of that registration statement by
      August 7, 2008. The Company’s officers, directors, and 10% shareholders
      also executed agreements prohibiting the sales of the Company’s common stock by
      them until October 31, 2008. In connection with the transaction, the
      Company also secured voting agreements from its officers, directors and 10%
      shareholders approving the transaction in the event that the Company is required
      to seek such approval pursuant to the rules of the NASDAQ.




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





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




16


The
      Company is accounting for the Warrants, issued in connection with the Debenture,
      as derivative liabilities in accordance with SFAS 133, “Accounting for
      Derivative Instruments and Hedging Activities” and EITF 00-19. The warrant
      liability was valued at $1,622,848 at warrant issuance date. In accordance
      with
      EITF 00-19, the value of Warrants has been recorded as liability subject to
      marked-to-market revaluation at each period end. At September 30, 2008, the
      warrant liability was valued at $134,622. The Company recorded a gain on the
      change in fair value of warrant liability of $1,488,226. The Company uses the
      Black-Scholes model to value the liability. The assumptions used at
      April 15, 2008 and September 30, 2008 included expected volatility of
      80% and 88%, a risk free interest rate of 2.68% and 2.98% and expected life
      of 5
      and 4.5 years, respectively.





The
      discount attributable to the issuance date intrinsic value of the conversion
      feature and fair value of Warrants totaling $3,326,342 is being amortized using
      the effective interest method over the term of the Debenture. During the nine
      months ended September 30, 2008, $306,710 of this discount was amortized to
      interest expense.





In
      connection with this Debenture, the Company incurred financing cost of $237,500.
      This financing cost was capitalized and amortized over the life of the Debenture
      using the effective interest method. During the nine months ended
      September 30, 2008, $21,899 of the capitalized financing cost was amortized
      to interest expense.





As
      part
      of the transaction, the Company granted the investors registration rights with
      regard to: (i) the common shares issuable upon conversion of the
      Debentures; (ii) the common shares underlying the Warrants; and
      (iii) the common shares issuable as interest payments pursuant to the
      Debentures. Pursuant to the registration rights agreement, the Company was
      required to use its best efforts to file a registration statement by
      June 7, 2008 and have it be declared effective by August 7, 2008. The
      registration statement covering the registrable shares was timely filed and
      declared effective on July 3, 2008. The Company has a continuing obligation
      to use its best efforts to maintain the registration statement effective until
      such time as all the registrable securities are eligible for resale without
      volume or manner-of-sale restrictions and without current public information
      pursuant to Rule 144.





**NOTE
      12- SUBSEQUENT EVENT**





On
      October 23, 2008, the Company met with the NASDAQ Listings Qualification Panel
      (the “Panel”) concerning its appeal of the NASDAQ staff’s determination to
      delist the Company for failure to comply with the minimum $35 million market
      value of listed securities requirement set forth in Marketplace Rule
      431(c)(3)(B). The Company had earlier failed to regain compliance with the
      requirement in the cure period provided by NASDAQ. The delisting action has
      been
      stayed pending a final written decision by the Panel. In the event the Company
      is delisted, it will be in default under the Securities Purchase Agreements
      and
      Debentures discussed in Note 11 above.





On
      October 1, 2008, the Company obtained waivers from debtholders representing
      82%
      of the $8.5 million debt outstanding to defer the quarterly interest payment
      due
      to be paid on October 1, 2008 and January 1, 2009. In lieu of cash, the
      debtholders agreed to receive payment in the form of an increase in the
      principal amount of the Debenture equal to the applicable interest payment
      plus
      a deferral fee equal to 10% of such payment.





On
      October 31, 2008, the Company’s chief financial officer resigned.





**ITEM
      1A.**  **RISK
      FACTORS**





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





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





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





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




17


***Our
      independent registered public accounting firm has raised concerns about our
      ability to continue as a going concern.***





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





***We
      may currently be operating in the “zone of insolvency” and as a result our
      directors’ fiduciary duty may be to creditors and
      shareholders.***





Generally,
      a corporation’s directors owe a fiduciary duty to the corporation’s shareholders
      and not to its creditors. The duties of the directors to creditors do not expand
      beyond the relevant contractual terms. However, when a corporation is operating
      in the “zone of insolvency,” some courts have concluded that the fiduciary duty
      of directors shifts to include creditors. Delaware courts have taken the
      position that directors of a corporation operating in the zone of insolvency
      continue to owe a fiduciary duty to the corporation’ shareholders but also to
      its creditors. If we become insolvent, management and the directors will be
      required to consider their duties with regard to both shareholders and creditors
      in their decision making process.





***We
      have an accumulated deficit of $32,392,182 as of September 30, 2008 and we
      may never achieve profitability***





We
      have
      incurred significant net losses every year since our inception, including net
      losses of $4,324,999, $14,333,622 and $6,866,614 for the nine months ended
      September 30, 2008 and for the fiscal years ending December 31, 2007
      and 2006, respectively. As of September 30, 2008, we had an accumulated
      deficit of $32,392,182. These losses have resulted principally from expenses
      incurred in our research and development programs and general and administrative
      expenses. To date we have not generated significant revenues. We have used
      capital raised in October 2005, May 2006, January 2008 and
      April 2008 to sustain operations through the date of this report. We
      anticipate that we will continue to incur substantial operating losses based
      on
      projected sales revenues less manufacturing, general and administrative and
      other operating costs for an indefinite period of time. However, we cannot
      assure you that we will ever be profitable.




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





We
      believe that our current cash, combined with anticipated revenue collections,
      will be enough to fund our operations through the end of this year.  We
      currently do not have any binding commitments for, or readily available sources
      of additional financing, and we cannot assure you that such funding will be
      available at all or available on terms acceptable to us. If we are unable to
      raise additional capital we may be forced to file for bankruptcy.





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





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





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





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





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


18




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


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


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


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


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


·
            increases
                in prices of key components.





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





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





·
            mass
                produce the InCard DisplayCard at significantly lower
                cost;


·
            continue
                to fund research and development
                endeavors;


·
            complete
                development of new products; and


·
            successfully
                introduce and commercialize new
                products.





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





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





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





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





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





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




19


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





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





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


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


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





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





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





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





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





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





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





Our
      power
      inlay technology has not been produced in mass production quantities as of
      yet.
      We are applying our own resources and working in cooperation with other
      companies that have specialized technical expertise related to the power inlay
      technology for thin, flexible non-payment cards. We expect to enter into
      agreements that will grant us ownership or exclusive license rights to the
      manufacturing process of the power inlay technology for use in credit and other
      information-bearing plastic cards. Failure to secure or maintain exclusive
      rights or failure to successfully transition to full scale production, without
      the use of proprietary technology of others, may have a material negative effect
      on our business strategy and operations.





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





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





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


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


20





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


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





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





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





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





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





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





**Risks
      Related to our Securities**





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





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





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





As
      of
      October 30, 2008, we have 28,495,256 shares of common stock outstanding. Of
      these shares, 25,674,809 can be traded pursuant to a prospectus or via a
      transaction pursuant to Rule 144 under the Securities Act of 1933. On a
      fully diluted basis, including shares issuable upon exercise of warrants and
      stock options, we have 43,358,572 shares.





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





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





Our
      certificate of incorporation currently authorizes our board of directors to
      issue up to 75,000,000 shares of common stock and 5,000,000 shares of preferred
      stock. As of October 30, 2008, after taking into consideration our outstanding
      common and preferred shares, our board of directors will be entitled to issue
      up
      to 46,504,744 additional common shares and 5,000,000 preferred shares. The
      power
      of the board of directors to issue these shares of common stock, preferred
      stock
      or warrants or options to purchase shares of our stock is generally not subject
      to stockholder approval.




21




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





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





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





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


·
            prohibit
                stockholders from calling special
                meetings;


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


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


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





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





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





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





***Our
      management has concluded that, as of December 31, 2007, our disclosure
      controls and procedures were not effective in recording, processing, summarizing
      and reporting, on a timely basis, information required to be disclosed by the
      Company in the reports that it files or submits under the Exchange Act and
      were
      not effective in ensuring that information required to be disclosed by the
      Company in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the Company’s management, as appropriate to
      allow timely decisions regarding required disclosure. If we fail to implement
      new or improved disclosure controls, investors could lose confidence in the
      reliability of our financial statements, which could result in a decrease in
      the
      value of our common stock.***





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




22




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





As
      directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
      rules requiring public companies to include a report of management on
      internal control over financial reporting in their Annual Reports on
      Form 10-K. This report is required to contain an assessment by management
      of the effectiveness of a company’s internal control over financial reporting.
      Our non-affiliated market capitalization qualified us as a non-accelerated
      filer
      until the end of the 2007 fiscal year. As a result, we were required to include
      our management’s report on internal control over financial reporting in our
      Annual Report on Form 10-KSB for the 2007 fiscal year and were not required
      to include our auditors’ attestation report on our internal control over
      financial reporting. Based on our June 30, 2008 market capitalization, we
      will once again become a non-accelerated filer for our 2008 filing on Form
      10-K
      and will not be required to include our auditor’s attestation report in that
      filing. As discussed in Item 8A to our Annual Report on Form 10-KSB/A filed
      with the SEC on June 18, 2008, we have concluded that, as of
      December 31, 2007, our internal control over financial reporting was not
      effective and have identified a number of material weaknesses in our internal
      control over financial reporting. While we intend to remedy these weaknesses
      during the current fiscal year, we may be unable to do so. If we fail to
      implement required new or improved controls there may be an adverse reaction
      in
      the financial markets due to a loss of confidence in the reliability of our
      financial statements, which could cause the market price of our common stock
      to
      decline.





***If
      we trigger an “event of default” under our debentures issued in
      January 2008 and April 2008, the debenture holders could require us to
      repay the loan in full and force a sale of all of our assets to do so, which
      could cause our common shareholders to incur a total loss on their investments
      in us.***





Our
      debt
      agreements, entered into in January 2008 and April 2008 in connection
      with the sale of our 8% Senior Secured Debentures, require us to adhere to
      certain covenants relating to continued NASDAQ listing and the level of
      operating expense cash burn to avoid triggering an “event of default.” Failure
      to remain in compliance could prompt investors to call the debentures and demand
      immediate repayment. We have been notified that our listed securities are
      subject to delisting from The NASDAQ Capital Market due to our failure to comply
      with Marketplace Rule 4310(c)(3)(B). We appealed the finding and a hearing
      was held on October 23, 2008 with the NASDAQ Hearings Panel (the “Panel”).
      The delisting action has been stayed pending a final written decision by the
      Panel. If we lose our appeal we will be delisted which will result in an event
      of default under the debentures. In such instance, we could be forced to seek
      bankruptcy protection which would result in a total loss of our common
      shareholders’ investment.





***Failure
      to satisfy NASDAQ Capital Market listing requirements will result in our common
      stock being delisted from the NASDAQ Capital Market.***





Our
      common stock is currently listed on the NASDAQ Capital Market under the symbol
      “INVC.” For continued inclusion on the NASDAQ Capital Market, we must maintain,
      among other requirements, the market value of our listed securities above
      $35,000,000 or approximately $1.23 per share based on current shares
      outstanding.   On July 16, 2008 we were informed by NASDAQ that
      we did not meet the continued listing requirement.  Specifically, the
      market value of our listed securities is below $35,000,000 as required for
      continued inclusion by Marketplace Rule 4310(c)(3)(B). Therefore, in
      accordance with Marketplace Rule 4310(c)(8)(C), we were provided until
      August 15, 2008 to regain compliance. On August 19, 2008, we received
      a notice of non-compliance from the Listing Qualifications Staff (the “Staff”)
      of The NASDAQ Stock Market indicating that we did not regain compliance with
      the
      minimum $35,000,000 market value of listed securities requirement set forth
      in
      Marketplace Rule 4310(c)(8)(B). As a result, our securities are subject to
      delisting from The NASDAQ Capital Market. The Company appealed the determination
      of the Staff and scheduled a hearing for October 23, 2008 with the NASDAQ
      Hearings Panel (the “Panel”). Additionally, the Company does not meet the
      alternative listing requirements provided for in Marketplace
      Rules 4310(c)(3)(A) or 4310(c)(3)(C) dealing with shareholders’ equity
      and net income requirements, respectively. On October 23, 2008, the Company
      met
      with the Panel concerning its appeal of the NASDAQ staff’s determination to
      delist the Company as the Company had failed to regain compliance with the
      requirement. The Panel has taken the Company’s appeal under advisement. The
      delisting action has been stayed pending a final written decision by the Panel.





In
      the
      event the Company is delisted, it will be in default under the Securities
      Purchase Agreements and Debentures discussed in Note 11 to our financial
      statements. If our common stock were delisted from the NASDAQ Capital Market,
      the trading of our common stock, if any, may be conducted in the
      over-the-counter market in the so-called “pink sheets” or, if available, the
      National Association of Securities Dealer’s “Electronic Bulletin Board.”
Consequently, broker-dealers may be less willing or able to sell and/or make
      a
      market in our common stock. Additionally, an investor would find it more
      difficult to dispose of, or to obtain accurate quotations for the price of,
      our
      common stock. A delisting would likely also make it more difficult for us to
      raise funds through the sale of our securities.





23





**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 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, particularly our: (i) annual report on
      Form 10-KSB for the year ended December 31, 2007 filed with the SEC on
      April 1, 2008 (ii) quarterly report for the period ended March 31, 2008 on
      Form
      10-Q filed with the SEC on May 12, 2008; and (iii) quarterly report for the
      period ended June 30, 2008 on Form 10-Q filed with the SEC on August 8, 2008,
      and amendments thereto.





**OVERVIEW**





Since
      2002, we have continued to develop our power inlay technology that is designed
      to bring power-based applications to the enterprise market and on-line banking
      market. Our present focus is the InCard DisplayCard power inlay technology
      which
      consists of a battery, circuit, and switch that can power applications on credit
      card sized cards and other information-bearing plastic cards. We have devoted
      a
      majority of our efforts to completing the development of our power inlay
      technology, initiating marketing and raising the financing required to do so
      and
      fund our expenses. We have generated limited revenues. Prior to the fourth
      quarter of 2007 these revenues derived primarily from licensing agreements
      of
      our LensCard product, most of which have terminated. At this time, we have
      no
      plans to renew the LensCard licensing agreements or to further market or sell
      the LensCard, unless requested by a customer.





Since
      inception, we have been unprofitable. We incurred net losses of $4,324,999
      and
      $9,306,645 for the nine months ending September 30, 2008 and 2007,
      respectively. As of September 30, 2008, we had an accumulated deficit of
      $32,392,182. Our continued existence is dependent upon our ability to generate
      sales of the InCard DisplayCard or, if we are unable to do so in sufficient
      quantity to cover our expenses, to obtain additional financing. We further
      anticipate that after such introduction of the InCard DisplayCard in 2008,
      we
      will continue to incur net losses due to our costs exceeding our revenues for
      an
      indefinite period of time. Our capital requirements for the next 12 months
      for
      acquisition of inventory, retention and hiring of key personnel, implementation
      of a sales force for our products, and further research and development relating
      to the production of our power inlay technology will continue to be significant.
      In addition, our gross margin is greatly impacted by production volume. At
      low
      levels of production our gross margin is in the single digits and may be
      negative. At the higher volume levels our gross margin can be as high as 35%
      to
      40%. To date, our operations have been funded primarily through equity and
      debt
      financings totaling $30,303,691.





We
      believe that our current cash, combined with anticipated revenue collections,
      will be adequate to fund our operations through the end of 2008. If we are
      unable to raise additional financing by that date, we may be forced to curtail
      our operations or seek bankruptcy protection. We anticipate that we will not
      be
      able to generate sales of the InCard DisplayCard in quantities that will sustain
      a positive cash flow until the second half of 2009 to support our cash needs
      since the breakeven volume is higher than originally
      anticipated.





Our
      backlog, which consists of orders received but not yet shipped, totals $940,000
      at September 30, 2008, most of which we expect to deliver in the fourth
      quarter of 2008 and the first quarter of 2009. Our backlog at October 29, 2008
      totals $1.2 million.





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




24




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





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





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





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





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





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





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





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





Warranty
      expense. We estimate the cost associated with meeting our warranty obligations
      for the sale of our products. The initial estimate and changes to the estimate
      are charged to cost of goods sold at the time of sale of the
      product.





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





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





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





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





25





**RESULTS
      OF OPERATIONS**





**COMPARISON
      OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30,
      2007**





**OVERVIEW**





Our
      financial results for the three months ended September 30, 2008 reflect a
      net loss of $1,561,843, or $0.05 per share (basic and diluted), compared to
      a
      net loss of $4,443,617, or $0.16 per share (basic and diluted), for the three
      months ended September 30, 2007.





The
      major
      factors contributing to the reduction in our net loss of $2,881,774 during
      the
      three month period ended September 30, 2008 were a decrease in operating
      expenses, excluding unrecoverable payments to suppliers, of $972,565, the
      write-off in the 2007 period of $1,546,428 for unrecoverable payments to
      suppliers and an increase in interest expense of $486,437. Offsetting this
      was
      $841,513 of other income associated with the revaluation of our warrant
      liability.





*Revenue.*





In
      the
      2008 period, revenue is from the sale of the InCard DisplayCard and the
      clamshell. In the 2007 period, revenue consists of royalties from the LensCard.
      We believe that future revenue will be primarily from the sales of the InCard
      DisplayCard; revenue from LensCard royalties is expected to be
      negligible.





Total
      revenue increased from $159 for the three months ended September 30, 2007
      to $840,098 for the three months ended September 30, 2008. The increase is
      attributable to sales of the InCard DisplayCard and the clamshell in the current
      period. For the three months ended September 30, 2007, revenue was from
      LensCard royalties.





*Cost
      of goods sold*





Cost
      of
      goods sold increased to $984,024 for the three months ended September 30,
      2008 from $179,621 for the same period in the prior year. The components of
      cost
      of goods sold are as follows:





**3 mos. ended**
              **September 30,**
              **2008**
            
            **3 mos. ended**
              **September 30, 2007**Cost of finished goods
                sold
            
            $
            757,607
            
            $
            —Inventory
                write-off (scrap)
            
            
            150,673
            
            
            179,621Warranty
                reserve
            
            
            75,744
            
            
            —Total
                cost of goods sold
            
            $
            984,024
            
            $
            179,621





No
      cost
      of goods sold is associated with LensCard royalties.





*Administrative.*





Administrative
      expense consists of travel, marketing expenses, compensation expense,
      administrative fees and depreciation and amortization expense. Administrative
      expense decreased by $550,608 (29.7%) to $1,306,148 for the three months ended
      September 30, 2008 from $1,856,756 for the three months ended
      September 30, 2007. The major contributors to the reduction in
      administrative expenses were a reduction in marketing costs, a reduction in
      due
      diligence expenses related to our planned acquisition in the 2007 period of
      one
      of our suppliers, a reduction in travel and entertainment expenses, a reduction
      in rent and a reduction in depreciation and amortization. Offsetting this was
      an
      increase in salary and related expenses. We anticipate that administrative
      expenses will remain relatively flat for the remainder of 2008.





26





*Consulting
      Expense.*





Consulting
      expense consists of payments made to independent contractors that provided
      services to us. Consulting expense increased by $18,173 (12.0%) to $169,996
      for
      the three months ended September 30, 2008 from $151,823 in the 2007 period.
      We anticipate that our consulting expense will stay flat or decline for the
      remainder of 2008.





*Professional
      Fees Expense.*





Professional
      fees consist of amounts paid to our outside counsel, auditors and other outside
      services rendered to us. Professional fees expense decreased by $96,230 (33.7%)
      to $189,698 for the three months ended September 30, 2008 from $285,928 for
      the three months ended September 30, 2007. We anticipate that professional
      fees will remain fairly steady for the remainder of 2008.





*Research
      and Development.*





Research
      and development expense consists primarily of costs relating to further
      development of the InCard DisplayCard. Research and development costs decreased
      by $343,900 (77.8%) to $98,230 for the three months ended September 30,
      2008 from $442,130 for the three months ended September 30, 2007 primarily
      due to a shift in focus from R&D to manufacturing. Research and development
      expenses have declined each quarter in 2008 and we expect they will remain
      essentially unchanged in the fourth quarter of 2008.




*Unrecoverable
      Payments to Suppliers*




Unrecoverable
      payments to suppliers consist of payments made to third party suppliers for
      deposits that we no longer expect to utilize, purchase orders that we do not
      expect to fulfill and accrued expenses to satisfy irrevocable purchase orders.
      In the three months ended September 30, 2007 we expensed $1,546,428 to recognize
      the diminished value of deposits that were made on the basis of production
      volume that will not be reached. There was no equivalent expense in the 2008
      period.





*Change
      in fair value of warrant liability and other expense*





Due
      to
      the decline in our stock price, the valuation of our warrant liability decreased
      by $841,513 in the 2008 period. We had no warrant liability at
      September 30, 2007.





*Interest
      income/expense*





Interest
      income decreased to $2,978 for the three months ended September 30, 2008
      from $31,609 for the three months ended September 30, 2007 due to the
      reduced cash on hand during the 2008 period. Interest expense increased to
      $498,336 for the three months ended September 30, 2008 from $11,899 for the
      three months ended September 30, 2007. The 2008 period interest relates to
      our $8.5 million 8% senior secured convertible debentures issued in
      January and April 2008 and includes the amortization of debt discount
      and issuance costs. We had no debt during the 2007 period but we did incur
      interest for a trade account payable to a related party.





**COMPARISON
      OF THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30,
      2007**





**OVERVIEW**





Our
      financial results for the nine months ended September 30, 2008 reflect a
      net loss of $4,324,999 or $0.15 per share (basic and diluted), compared to
      a net
      loss of $9,306,645, or $0.33 per share (basic and diluted), for the nine months
      ended September 30, 2007.





The
      major
      factors contributing to the reduction in our net loss of $4,981,646 for the
      nine
      months ended September 30, 2008 were an improvement in gross margin of
      $375,639, a decrease in operating expenses, excluding unrecoverable payments
      to
      suppliers, of $1,533,619 and a decrease in the fair value of our warrant
      liability of $2,910,806 as a result of the decline in our stock price.
      Offsetting this was an increase of $1,071,547in interest expense associated
      with
      our 2008 financings.





*Revenue.*





In
      the
      2008 period, revenue is from the sale of the InCard DisplayCard. In the 2007
      period, revenue consists of royalties from the LensCard. We believe that future
      revenue will be primarily from the sales of the InCard DisplayCard; revenue
      from
      LensCard royalties is expected to be negligible. Total revenue increased from
      $2,669 for the nine months ended September 30, 2007 to $1,857,523 for the
      nine months ended September 30, 2008. The increase is attributable to sales
      of the InCard DisplayCard and the clamshell in the current period. For the
      nine
      months ended September 30, 2007, revenue was from LensCard
      royalties.





27





*Cost
      of goods sold*





Cost
      of
      goods sold increased to $2,054,232 for the nine months ended September 30,
      2008 from $575,017 for the same period in the prior year. The components of
      cost
      of goods sold are as follows:





**9 mos ended**
              **September 30,**
              **2008**
            
            **9 mos ended**
              **September 30, 2007**Cost of
                finished goods sold
            
            $
            1,604,244
            
            $
            —Inventory
                write-off (scrap)
            
            
            289,580
            
            
            575,017Warranty
                reserve
            
            
            160,408
            
            
            —Total
                cost of goods sold
            
            $
            2,054,232
            
            $
            575,017





No
      cost
      of goods sold is associated with LensCard royalties.





*Administrative.*





Administrative
      expense consists of compensation expense, travel, marketing expenses,
      administrative fees and depreciation and amortization expense. Administrative
      expense decreased by $868,721 (16.6%) from $5,224,297 for the nine months ended
      September 30, 2007 to $4,355,576 for the nine months ended
      September 30, 2008. The major contributors to the reduction in
      administrative expenses were a reduction in due diligence expenses related
      to
      our planned acquisition in the 2007 period of one of our suppliers, a reduction
      in travel and entertainment expenses, a reduction in marketing expenses and
      a
      reduction in depreciation. Offsetting this was an increase in salary and related
      expenses and charges relating to a warrant issuance to our investor relations
      consultant. We anticipate that administrative expenses will remain relatively
      flat for the remainder of 2008.





*Consulting
      expense.*





Consulting
      expense consists of payments made to an independent contractor that provided
      services to us. Consulting expense decreased by $19,342 (4.4%) from $443,863
      for
      the nine months ended September 30, 2007 to $424,521 for the same period in
      2008. We anticipate that our consulting expense will stay flat or decline for
      the remainder of 2008.





*Professional
      Fees Expense.*





Professional
      fees consist of amounts paid to our outside counsel, auditors and other outside
      services rendered to us. Professional fees expense decreased by $130,601
      (17.0%) from $769,522 for the nine months ended September 30, 2007 to
      $638,921 for the nine months ended September 30, 2008. Professional fees
      expense decreased as the result of a reduction in audit and accounting fees.
      We
      anticipate that professional fees will remain fairly steady for the remainder
      of
      the year.





*Research
      and Development.*





Research
      and development expense consists primarily of costs relating to the development
      of new card enhancements. Research and development costs decreased from $911,540
      for the nine months ended September 30, 2007 to $396,585 for the nine
      months ended September 30, 2008 due to the termination of our agreement
      with nCryptone for technical support and a shift in focus from R&D to
      manufacturing.





*Change
      in fair value of warrant liability and other expense*





Due
      to
      the decline in our stock price, the valuation of our warrant liability decreased
      by $2,866,069 in the 2008 period. We had no warrant liability at
      September 30, 2007. We also recognized a loss on the sublet of our previous
      office space of $120,796.





*Interest
      income/expense.*





Interest
      income decreased from $174,301 for the nine months ended September 30, 2007
      to $26,535 for the nine months ended September 30, 2008 due to the reduced
      cash on hand during the 2008 period. Interest expense increased from $12,148
      for
      the nine months ended September 30, 2007 to $1,083,695 for the nine months
      ended September 30, 2008 and includes the amortization of debt discount and
      debt issuance cost. The 2008 period interest relates to our $8.5 million 8%
      senior secured convertible debentures issued in January and
      April 2008. We had no equivalent debt during the 2007 period.





28





**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      principal sources of liquidity have been cash and cash equivalent balances,
      which were $200,844 at September 30, 2008 and $1,498,234 as of
      September 30, 2007. Since our inception, we have incurred significant
      losses, and as of September 30, 2008 and 2007 we had an accumulated deficit
      of $32,392,182 and $23,040,207, respectively.





Net
      cash
      used in operating activities was $8,124,314 for the nine months ended
      September 30, 2008 as compared with $6,692,631 for the nine months ended
      September 30, 2007. This increase in cash used was primarily due to an
      increased use of working capital to build inventory in anticipation of increased
      sales and reduce trade accounts payable to a more current level.





Net
      cash
      used in investing activities was $36,942 for the nine months ended
      September 30, 2008 as compared with $92,436 for the nine months ended
      September 30, 2007. We purchased less production and testing equipment in
      the 2008 period.





Net
      cash
      provided by financing activities was $8,022,500 for the nine months ended
      September 30, 2008 as compared to $13,205 for the nine months ended
      September 30, 2007. The increase is the result of our issuance of $8.5
      million of 8% senior secured convertible debentures in January and
      April 2008.





**EQUITY
      AND DEBT FINANCINGS AND ACCOUNTS PAYABLE**





To
      date,
      our operations have been funded primarily through equity and debt financings
      totaling $30,303,691. We believe that our current cash, combined with
      anticipated revenue collections, will be sufficient to fund our
      operations through the end of 2008. If we are able to successfully
      sell the InCard DisplayCard in substantial quantities during the fourth quarter
      of 2008, we may be able to continue operations through the spring of 2009.
      Our
      significant equity and debt financings from January 1, 2006 through
      May 6, 2008 are described below.





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. In connection with the transaction, T.R.
      Winston & Company served as placement agent for the securities sold 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 warrant issued to T.R.
      Winston & Company has full ratchet anti-dilution protection, for so
      long as it is outstanding, in the event we issue common shares or common share
      equivalents for a price less than $3.00 per share. No adjustment is required
      in
      the event of certain exempt issuances as more fully contained in the warrant.
      The warrant exercise price was reset following the April 15, 2008 financing
      described below.





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





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





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





29





**FUTURE
      NEEDS**





We
      believe that our current cash of $276,133 as of October 29, 2008, combined
      with
      anticipated revenue collections, will provide us with sufficient resources
      to
      fund our operations through the end of 2008. If we are able to successfully
      sell
      the InCard DisplayCard in substantial quantities during the third and fourth
      quarters of 2008 we may be able to continue operations through the spring of
      2009. If we need additional capital, we do not have any binding commitments
      for,
      or readily available sources of, additional financing. Additional financing,
      whether through public or private equity or debt financing, arrangements with
      stockholders or other sources to fund operations, may not be available, or
      if
      available, may be on terms unacceptable to us. 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.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**





Not
      applicable.





**ITEM
      4. CONTROLS AND PROCEDURES**





(a) Evaluation
      of disclosure controls and procedures. As of December 31, 2007, 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 not 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.





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





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





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





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





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





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





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





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




30




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





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





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





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





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





(b) Changes
      in internal controls over financial reporting.





Through
      September 30, 2008 we have made the following changes in internal control over
      financial reporting:





Beginning
      in April 2008 we instituted a monthly financial closing process. A formal
      report, including balance sheet, results of operations and analyses of key
      accounts, was prepared by the accounting manager, reviewed and signed off by
      the
      CFO and distributed to the CEO and the board of directors.





Beginning
      in April 2008 we established a standard listing of recurring journal
      entries that are reviewed and signed off by the CFO as part of the monthly
      closing process.





We
      instituted a formal purchasing policy in May 2008 that requires the use of
      purchase orders for all inventory purchases.





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





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





**PART II
      - OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





Not
      Applicable





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





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





·
            On
                January 8, 2008, we sold $3.5 million of our 8% Senior Secured
                Convertible Debentures. As part of the transaction, we issued the
                purchasers common stock purchase warrants to purchase 700,000 of
                our
                common shares. For a more detailed description of the transaction,
                refer
                to Note 11 of our financials contained in this report. We incorporate
                by
                reference the disclosure of the transaction and accompanying documents
                as
                contained in our Current Report on Form 8-K filed with the SEC on
                January 9, 2008.




31




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





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





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





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





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





**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





**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:
                October 31, 2008
            
            /s/ Steven
                R. DelcarsonSteven
                R. DelcarsonChief
                Executive OfficerDate:
                October 31, 2008
            
            /s/ Charles
                M. CaporaleCharles
                M. CaporaleChief
                Financial Officer





32





**EXHIBIT
      INDEX**





2.1(2)
            
            Exchange
                agreement by and among the registrant, LensCard US, LLC, Alan Finkelstein,
                Forest Finkelstein, Bradley Ross and Luc Berthoud, dated April 1,
                20042.2(2)
            
            Exchange
                agreement by and among the registrant, Alan Finkelstein,  Bradley
                Ross and Michael Paradise, dated April 1, 20042.3(2)
            
            Exchange
                agreement between the registrant and its wholly-owned subsidiary,
                PSACo, Inc., dated April 1, 20042.4(2)
            
            Merger
                agreement between the registrant and LensCard International Limited,
                a
                British Virgin Islands International Business Company, dated April 6,
                20043.1(2)
            
            Amended
                and Restated Certificate of incorporation of the registrant, as currently
                in effect3.2(2)
            
            Amended
                and Restated Bylaws of the registrant, as currently in
                effect3.3(12)
            
            Certificate
                of Amendment of Amended and Restated Certificate of
                Incorporation.10.1(2)
            
            2004
                Stock Incentive Plan10.2(2)
            
            Sublease
                agreement between registrant and Bemel & Ross for premises at
                11601 Wilshire Blvd.,#2160, Los Angeles, California 90025, dated
                January 5, 200310.3(2)
            
            Guaranty
                of lease between Alan Finkelstein and Bemel & Ross, dated
                January 5, 200310.4(3)
            
            Form of
                common stock warrant, as amended on September 7,
                2005.10.5(2)
            
            Securities
                purchase agreement between registrant and Bristol Capital, LLC dated
                December 23, 200310.5(a) (2)
            
            Waiver
                of section 2.3 of the securities purchase agreement between registrant
                and
                Bristol Capital, LLC





10.6(2)
            
            Shares
                for debt agreement between registrant and Alan Finkelstein, dated
                September 22, 200410.7(2)
            
            Shares
                for debt agreement between registrant and Bradley Ross, dated
                September 22, 200410.8(2)
            
            Shares
                for debt agreement between registrant and Luc Berthoud, dated
                September 22, 200410.9(2)
            
            Promissory
                note (loan no. 00003) between registrant and City National Bank,
                dated
                May 24, 200410.10(2)
            
            Promissory
                note (loan no. 00005) between registrant and City National Bank,
                dated
                May 24, 200410.11(2)
            
            Promissory
                note (1oan no. 00004) between registrant and City National Bank,
                dated
                May 24, 200410.12(2)
            
            Promissory
                note (loan no. 00006) between registrant and City National Bank,
                dated
                May 24 ,200410.13(2)
            
            Commercial
                guaranty between Alan Finkelstein and City National Bank dated
                May 24, 200410.14(2)
            
            Commercial
                guaranty between Bradley Ross and City National Bank dated May 24,
                200410.15(2)
            
            Commercial
                guaranty between Luc Berthoud and City National Bank dated May 24,
                200410.16(2)
            
            Offer
                letter between registrant and Murdoch Henretty dated July 28,
                200410.17(2)
            
            Employment
                agreement between registrant and Alan Finkelstein dated
                January 199810.18(2)
            
            Strategic
                Alliance Agreement between registrant and Visa International Service
                Association dated May 26, 200410.19(2)
            
            Secured
                Demand Promissory Note between registrant and Union Finance International
                Corp. dated March 31, 200510.20(2)
            
            Secured
                Demand Promissory Note between registrant and Bristol Investment
                Fund,
                Ltd. dated March 30, 200510.21(2)
            
            Capital
                Lease Agreement between registrant and CNC Associates, Inc. dated
                November 30, 2004




33




10.22(2)
            
            Guaranty
                between Alan Finkelstein and CNC Associates, Inc. dated
                November 30, 200410.23(2)
            
            Security
                Agreement between registrant and Union Finance International Corp.
                dated
                March 31, 2005 (See Exhibit 10.19)10.24(2)
            
            Security
                Agreement between registrant and Bristol Investment Fund, Ltd. dated
                March 30, 2005 (See Exhibit 10.20)10.25(2)
            
            Secured
                Demand Promissory Note between registrant and Bradley Ross dated
                August 31, 200510.26(2)
            
            Secured
                Demand Promissory Note between registrant and Rodger Bemel dated
                August 31, 200510.27(2)
            
            Joint
                Development Agreement between registrant and nCryptone dated July 25,
                200510.28(2)
            
            Agreement
                between registrant and SmartDisplayer Technology, Inc. dated
                July 25, 200510.29(5)
            
            Form of
                Lock-Up agreement by and between registrant’s directors and executive
                officers pursuant to the private placement dated October 19,
                200510.30(4)
            
            Form of
                Warrant pursuant to private placement dated October 19,
                200510.31(4)
            
            Registration
                Rights Agreement by and between the registrant and each investor
                pursuant
                to the private placement dated October 19,
                2005





10.32(4)
            
            Side
                Letter Agreement between the registrant, T.R. Winston & Company
                and investors pursuant to the private placement dated October 19,
                200510.33(6)
            
            Letter
                of Intent by and between VASCO Data Security, nCryptone and Registrant,
                dated October 28, 2005.10.34(9)
            
            Form of
                Warrant to TR Winston dated as of May 30, 2006.10.35(9)
            
            Form of
                Securities Purchase Agreement dated May 30, 2006.10.36(9)
            
            Form of
                Registration Rights Agreement dated May 30, 2006.10.37(10)
            
            Asset
                Agreement dated September 28, 2006 by and between Registrant
                NCryptone, SA and its shareholders.10.38(10)
            
            Registration
                Rights Agreement dated September 28, 2006 by and between Registrant
                and NCrytone, SA10.39(10)
            
            License
                Agreement dated September 28, 2006 by and between Registrant as
                licensor and NCryptone, SA as licensee10.40(10)
            
            License
                Agreement dated September 28, 2006 by and between NCryptone, SA as
                licensor and Registrant as licensee.10.41(11)
            
            Sublease
                between Registrant as sublessee and Bergman and Dacey, Inc. as
                sublessor.10.42(8)
            
            Indemnification
                Agreement10.43(7)
            
            Code
                of Ethics10.44(13)
            
            Separation
                and Release Agreement dated October 29, 2007 between Bennet P.
                Tchaikovsky and Registrant10.45(13)
            
            Consulting
                Services Agreement dated October 29, 2007 between Registrant and
                Bennet P. Tchaikovsky10.46(13)
            
            Indemnity
                Agreement dated October 29, 2007 between Registrant and Bennet P.
                Tchaikovsky10.47(14)
            
            2007
                Equity Incentive Plan10.48(15)
            
            Form of
                Indemnity Agreement10.49(16)
            
            Alan
                Finkelstein Severance and Resignation Letter10.50(17)
            
            Form of
                Securities Purchase Agreement, dated as of January 8,
                2008




34




10.51(17)
            
            Form of
                8% Senior Secured Convertible Debenture issued January 8,
                200810.52(17)
            
            Form of
                Common Stock Purchase Warrant issued January 8,
                200810.53(17)
            
            Form of
                Registration Rights Agreement, dated as of January 8,
                200810.54(17)
            
            Form of
                Security Agreement, dated as of January 8, 200810.55(17)
            
            Form of
                Subsidiary Guarantee, dated as of January 8, 200810.56(17)
            
            Form of
                Voting Agreement, dated as of January 8, 200810.57(17)
            
            Form of
                Lock-Up Agreement, dated as of January 8, 200810.58(18)
            
            Employment
                Agreement dated March 27, 2008 between Registrant and Steven R.
                Delcarson10.59(18)
            
            Employment
                Agreement dated March 27, 2008 between Registrant and Charles M.
                Caporale21.1(2)
            
            List
                of subsidiaries





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





(1)
            Filed
                herewith.


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


(3)
            Previously
                filed by the registrant on Form 8-K with the Securities and Exchange
                Commission on September 7,
                2005.


(4)
            Previously
                filed by the registrant on Form 8-K, as amended, with the Securities
                and Exchange Commission on October 25,
                2005.


(5)
            Previously
                filed by the registrant on Form SB-2 (File No. 333-129564) with
                the Securities and Exchange Commission on November 8,
                2005.


(6)
            Previously
                filed by the registrant on Form 8-K with the Securities and Exchange
                Commission on November 18,
                2005.


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


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


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


(10)
            Previously
                filed by the registrant on Form SB-2 (File No. 333-135715) with
                the SEC on July 12, 2006.


(11)
            Previously
                filed by the registrant on Form 10QSB with the SEC on
                November 13, 2006.


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


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


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


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


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


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


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




35