**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM 10-Q/A**





**Mark
      One**





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





**For
      The Quarterly Period Ended March 31, 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)**10880
                Wilshire Blvd, Suite 950****Los
                Angeles, CA**
            
            **90024**(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
      May 7, 2008 28,535,256 shares of the Registrant’s common stock were
      outstanding.












**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





INDEX
      TO
      FORM 10Q





**PAGE**PART I
            FINANCIAL
                INFORMATION
            
            3Item
                1.
            Financial
                Statements
            
            3Condensed
                Consolidated Balance Sheets at March 31, 2008 (unaudited) and
                December 31, 2007
            
            3Restated
                Condensed Consolidated Statements of Operations for the three months
                ended
                March 31, 2008
              (unaudited)
                and March 31, 2007 (unaudited)
            
            4Condensed
                Consolidated Statements of Cash Flows for the three months ended
                March 31, 2008
              (unaudited)
                and March 31, 2007 (unaudited)
            
            5Notes
                to Condensed Consolidated Unaudited Financial Statements
            
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            19Item
                3.
            Controls
                and Procedures
            
            23PART II
            OTHER
                INFORMATION
            
            25Item
                1.
            Legal
                Proceedings
            
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            25Item
                3.
            Defaults
                Upon Senior Securities
            
            25Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            25Item
                5.
            Other
                Information
            
            26Item
                6.
            Exhibits
            
            26SIGNATURES
            
            26




EXPLANATORY
      NOTE





This
      amendment to the Company’s Form 10-Q, which was filed on May 13, 2008, corrects
      an error in the Consolidated Statements of Operations by reclassifying inventory
      write-offs and reserves from operating expenses to cost of goods sold. For
      the
      three months ended March 31, 2008, the reclassification resulted in an increase
      of $59,993 in cost of goods sold, a decrease of $59,993 in gross margin and
      a
      decrease of $59,993 in operating expenses. For the three months ended March
      31,
      2007, there was no change in cost of goods sold, gross margin or operating
      expenses. There was no effect on loss from operations, loss before provision
      for
      income taxes, net loss, or basic and diluted loss per share in either period.
      There is no cumulative effect on retained earnings and no change in any assets
      or liabilities. This amendment also revises management’s assessment of the
      Company’s disclosure controls and procedures in Item 3 – Controls and
      Procedures based on a more narrow interpretation of the Exchange Act Rules
      defining disclosure controls and procedures.




2




**PART I
      - FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL STATEMENTS**





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**March 31,**
            
            **December 31,****2008**
            
            **2007****(unaudited)****ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            300,902
            
            $
            339,600Accounts
                receivable
            
            
            237,016
            
            
            13,077Prepaids
                and other current assets
            
            
            53,575
            
            
            54,127Deposits
                on raw materials held for production
            
            
            575,408
            
            
            605,662Raw
                materials held for production
            
            
            1,193,501
            
            
            1,315,960Work
                in progress inventory
            
            
            1,368,613
            
            
            886,259Total
                current assets
            
            
            3,729,015
            
            
            3,214,685Property
                and equipment, net
            
            
            171,109
            
            
            193,185Deferred
                debt issuance cost
            
            
            282,258
            
            
            —Deposits
            
            
            128,366
            
            
            177,747Intangible
                assets, net
            
            
            1,918,388
            
            
            2,075,953Total
                assets
            
            $
            6,229,136
            
            $
            5,661,570**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESAccounts
                payable and accrued expenses
            
            $
            2,041,481
            
            $
            3,660,044Accounts
                payable - related parties
            
            
            595,365
            
            
            657,254Warranty
                reserve
            
            
            41,484
            
            
            27,816Deferred
                revenue
            
            
            967,653
            
            
            898,585Total
                current liabilities
            
            
            3,645,983
            
            
            5,243,6998%
                convertible debenture, net of $2,918,857 discount
            
            
            581,143
            
            
            —Warrant
                liability
            
            
            1,338,798
            
            
            —Total
                liabilities
            
            
            5,565,924
            
            
            5,243,699Commitments
                and contingenciesSTOCKHOLDERS’
                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, 28,433,116
                (unaudited) and 28,433,116 issued and outstanding
            
            
            28,433
            
            
            28,433Additional
                paid-in capital
            
            
            30,664,403
            
            
            28,456,621Accumulated
                deficit
            
            
            (30,029,624
            )
            
            (28,067,183
            )Total
                stockholders’ equity
            
            
            663,212
            
            
            417,871Total

                liabilities and stockholders’ equity
            
            $
            6,229,136
            
            $
            5,661,570





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




3





**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**





**Restated****Three months**
            
            **Three months****ended**
            
            **ended****March 31,
                2008**
            
            **March 31,
                2007****(unaudited)**
            
            **(unaudited)**Revenues
            
            $
            217,216
            
            $
            1,420Cost
                of Goods Sold
            
            
            (196,667
            )
            
            0Gross
                Margin
            
            
            20,549
            
            
            1,420Operating
                expenses:Administrative
            
            
            1,403,598
            
            
            1,531,575Consulting
                fees
            
            
            120,098
            
            
            115,892Professional
                fees
            
            
            248,031
            
            
            343,023Research
                and development
            
            
            179,816
            
            
            296,329Total
                operating expenses
            
            
            1,951,543
            
            
            2,286,819Loss
                from operations
            
            
            (1,930,994
            )
            
            (2,285,399
            )Other
                income (expense):Change
                in fair value of warrant liability
            
            
            125,661
            
            
            0Interest
                income
            
            
            9,073
            
            
            79,540Interest
                expense
            
            
            (165,381
            )
            
            (148
            )Total
                other income (expense)
            
            
            (30,647
            )
            
            79,392Loss
                before provision for income taxes
            
            
            (1,961,641
            )
            
            (2,206,007
            )Provision
                for income taxes
            
            
            (800
            )
            
            (800
            )Net
                loss
            
            $
            (1,962,441
            )
            $
            (2,206,807
            )Basic
                and diluted loss per share
            
            $
            (0.07
            )
            $
            (0.08
            )Weighted-average
                common shares outstanding
            
            
            28,433,116
            
            
            28,410,689





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




4




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For the Three Months Ended**
              **March 31,****2008**
            
            **2007****(unaudited)**
            
            **(unaudited)**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,962,441
            )
            $
            (2,206,807
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            179,642
            
            
            220,643Change
                in fair value of warrant liability
            
            
            (125,661
            )
            
            —Amortization
                of debt discount
            
            
            80,062
            
            
            —Amortization
                of deferred debt issuance cost
            
            
            7,742
            
            
            —Share-based
                compensation expense
            
            
            673,321
            
            
            289,755(Increase)
                decrease in Accounts receivable
            
            
            (223,939
            )
            
            (9,545
            )(Increase)
                decrease in Prepaid expenses and other current assets
            
            
            552
            
            
            (4,999
            )(Increase)
                decrease in Deposits on raw materials held for production
            
            
            30,254
            
            
            48,241(Increase)
                decrease in Raw materials held for production
            
            
            122,459
            
            
            (194,225
            )(Increase)
                decrease in Work in progress inventory
            
            
            (482,354
            )
            
            —(Increase)
                decrease in Deposits
            
            
            49,381
            
            
            (102,881
            )Increase
                (decrease) in Accounts payable and accrued expenses
            
            
            (1,618,563
            )
            
            360,872Increase
                (decrease) in Accounts payable - related parties
            
            
            (61,889
            )
            
            (138,047
            )Increase
                (decrease) in Warranty reserve
            
            
            13,667
            
            
            —Increase
                (decrease) in Deferred revenue
            
            
            69,068
            
            
            352,825Net
                cash used in operating activities
            
            
            (3,248,698
            )
            
            (1,384,168
            )Cash
                flows from investing activities:
            
            
            —Purchase
                of Property and Equipment
            
            
            —
            
            
            (19,979
            )Net
                cash used in investing activities
            
            
            —
            
            
            (19,979
            )Cash
                flows from financing activities:Gross
                proceeds from issuance of 8% convertible debenture
            
            
            3,500,000
            
            
            —Payments
                on debt issuance cost
            
            
            (290,000
            )
            
            —Proceeds
                from exercise of warrants
            
            
            —
            
            
            24,375Payments
                on capital lease
            
            
            —
            
            
            (2,449
            )Net
                cash provided by financing activities
            
            
            3,210,000
            
            
            21,926Net
                decrease in cash and cash equivalents
            
            
            (38,698
            )
            
            (1,382,221
            )Cash
                and cash equivalents, beginning of year
            
            
            339,600
            
            
            8,270,096Cash
                and cash equivalents, end of period
            
            $
            300,902
            
            $
            6,887,875Supplemental
                disclosures of cash flow information:Interest
                paid
            
            $
            —
            
            $
            148Income
                tax paid
            
            $
            800
            
            $
            800Supplemental
                disclosure of non-cash financing activities:Debt
                discount attributable to beneficial conversion feature
            
            $
            1,534,460
            
            $
            —Debt
                discount attributable to warrants
            
            $
            1,464,459
            
            $
            —





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




5




**INNOVATIVE
      CARD TECHNOLOGIES, INC.**





**NOTES
      TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS**


**MARCH 31,
      2008**





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





**BASIS
      OF PRESENTATION**





The
      accompanying condensed consolidated financial statements of Innovative Card
      Technologies, Inc. (“ICT”) 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 $30,029,624 as of March 31, 2008. Sales of the ICT DisplayCard,
      the Company’s main product, are not expected to generate adequate revenue until
      the second half of 2008. As a result, there is substantial doubt about the
      Company’s ability to continue as a going concern. The accompanying condensed
      consolidated unaudited 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.





**COMPANY
      OVERVIEW**





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




**NOTE
      1A - RESTATEMENT**




This
      amendment to the Company’s Form 10-Q, which was filed on May 13, 2008, restates
      its Consolidated Statements of Operations for the three months ended March
      31,
      2008 to correct the following error in the Consolidated Statements of Operations
      previously filed:




The
      Company erroneously recorded inventory write-offs as a component of operating
      expenses instead of as a component of cost of cost of goods sold..




The
      net
      effect of the correction of this error was to:




·
            Increase
                the Company's reported cost of goods sold for the three months ended
                March
                31, 2008 by $59,993 from $136,674 to $196,667.




·
            Decrease
                the Company’s reported gross margin for the three months ended March 31,
                2008 by $59,993 from $80,542 to $20,549.




6




·
            Decrease
                the Company's reported operating expenses for the three months ended
                March
                31, 2008 by $59,993, from $2,011,536 to $1,951,543.




The
      correction of the error has resulted in no change in the Company's reported
      Consolidated Balance Sheet as of March 31, 2008 and Consolidated Statement
      of
      Cash Flows for the three months ended March 31, 2008.




7




Following
      is the reconciliation of the Company's restatement of the Consolidated Statement
      of Operations for the three months ended March 31, 2008 :





Three months ended
              March 31, 2008 (As
              restated)
            
            Three months ended
              March 31, 2008 (As
              reported)Revenues
            
            $
            217,216
            
            $
            217,216Cost
                of Goods Sold
            
            
            (196,667
            )
            
            (136,674
            )Gross
                Margin
            
            
            20,549
            
            
            80,542Operating
                expensesAdministrative
            
            
            1,403,598
            
            
            1,403,598Consulting
                Fees
            
            
            120,098
            
            
            120,098Inventory
                write-offs and reserves
            
            
            0
            
            
            59,993Professional
                Fees
            
            
            248,031
            
            
            248,031Research
                and development
            
            
            179,816
            
            
            179,816Total
                operating expenses
            
            
            1,951,543
            
            
            2,011,536Loss
                from operations
            
            
            (1,930,994
            )
            
            (1,930,994
            )Other
                income (expense)Change
                in fair value of warranty
            
            
            125,661
            
            
            125,661Interest
                income
            
            
            9,073
            
            
            9,073Interest
                expense
            
            
            (165,381
            )
            
            (165,381
            )Total
                other income (expense)
            
            
            (30,647
            )
            
            (30,647
            )Loss
                before provision  for income taxes
            
            
            (1,961,641
            )
            
            (1,961,641
            )Provision
                for income taxes
            
            
            (800
            )
            
            (800
            )Net
                loss
            
            $
            (1,962,441
            )
            $
            (1,962,441
            )Basic
                and diluted loss per share
            
            $
            (0.07
            )
            $
            (0.07
            )Weighted-average common
                shares outstanding
            
            
            28,433,116
            
            
            28,433,116




**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 condensed consolidated unaudited financial statements of Innovative
      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 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. In the opinion of management, the accompanying
      condensed 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 March 31, 2008, and
      its results of operations for the periods presented. These condensed
      consolidated unaudited financial statements are not necessarily indicative
      of
      the results to be expected for the entire year.





**PRINCIPLES
      OF CONSOLIDATION**





The
      condensed consolidated unaudited 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.




8




**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





**COMPREHENSIVE
      INCOME**





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





**INVENTORY**





The
      Company values its inventory at the lower of cost (first-in, first-out) or
      market. 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 ended March 31, 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 ICT DisplayCard,
      from a single source, SmartDisplayer, pursuant to the Company’s agreement with
      SmartDisplayer. The Company believes that alternative sources for this component
      in the event of a disruption or discontinuation in supply would not be available
      on a timely basis, which could disrupt Company operations relating to the ICT
      DisplayCard, delay production of the ICT DisplayCard for up to one year and
      impair the Company’s ability to manufacture and sell the ICT
      DisplayCard.




9





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





**PROPERTY
      AND EQUIPMENT**





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





**FAIR
      VALUE OF FINANCIAL INSTRUMENTS**





The
      Company’s financial instruments include cash and cash equivalents, prepaid
      expenses and other current assets, accounts payable and accrued expenses
      including accounts payable to related parties, advances payable, and deferred
      revenue. 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 equivalent shares are excluded from the
      computation if their effect is anti-dilutive.





Since
      their effect would have been anti-dilutive, common stock equivalents of
      5,314,598 warrants and 3,549,675 stock options were excluded from the
      calculation of diluted loss per share for the three months ended March 31,
      2008. Since their effect would have been anti-dilutive, common stock equivalents
      of 4,627,098 warrants and 2,315,998 stock options were excluded from the
      calculation of diluted loss per share for the three months ended March 31,
      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 a result 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 other than an uncertain tax position relating to the limitations
      imposed on tax loss carryforwards by Internal Revenue Code Section 382. As
      a result of applying the provisions of FIN 48, there was no cumulative effect
      on
      retained earnings.





In
      2007,
      the Company adopted SFAS No. 48, “Accounting for Uncertainty in Income
      Taxes” and identified an uncertain tax position relating to the limitation
      imposed on tax loss carryforwards by Internal Revenue Code 382.




10




**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 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 it equity instructions
      for goods or services. It also addresses transactions in which an entity incurs
      liabilities in exchange for goods or services. It also addresses transactions
      in
      which an entity incurs liabilities in exchange for goods or services that are
      based on the fair value of entity’s equity instruments or that may be settled by
      the issuance of those equity instruments. This Statement is effective for public
      entities that file as small business issuers as of the beginning of the first
      interim or annual reporting period that begins after December 15, 2005. The
      Company has adopted this statement for the year ended December 31,
      2006.





**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 $100,000. 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.




11




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





**March 31,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Deposits
                on raw materials held for production (display and manufacturing
                component)
            
            $
            575,408
            
            $
            605,662TOTAL
            
            $
            575,408
            
            $
            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 AND WORK IN PROGRESS INVENTORY HELD FOR
      PRODUCTION**





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





**March 31,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Raw
                materials held for production
            
            $
            1,193,501
            
            $
            1,315,960Work
                in progress inventory
            
            $
            1,368,613
            
            $
            886,259TOTAL
            
            $
            2,562,114
            
            $
            2,202,219





**NOTE
      5 - PROPERTY AND EQUIPMENT**





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





**March 31,**
              **2008**
            
            **December 31,**
              **2007****(unaudited)**Computer
                equipment
            
            $
            96,451
            
            $
            96,451Office
                equipment
            
            
            8,168
            
            
            8,168Furniture
                and fixtures
            
            
            24,386
            
            
            24,386Leasehold
                improvements
            
            
            5,608
            
            
            5,608Production
                equipment
            
            
            277,474
            
            
            277,474412,087
            
            
            412,087Less
                accumulated depreciation and amortization
            
            
            (240,978
            )
            
            (218,902
            )TOTAL
            
            $
            171,109
            
            $
            193,185





Depreciation
      and amortization expense was $22,076 (unaudited) and $44,675 (unaudited), for
      the three months ended March 31, 2008 and 2007, respectively.





**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.




12




The
      provision for income taxes consisted of the following:





**Three Months**
            
            **Three Months****Ended**
              **March 31,**
            
            **Ended**
              **March 31,****2008**
            
            **2007****(unaudited)**
            
            **(unaudited)**Current
                Provision:Federal
            
            
            —
            
            
            —State
            
            $
            800
            
            $
            800Total
                Current Provision
            
            $
            800
            
            $
            800Deferred
                provision (benefit)Federal
            
            
            
            
            
            —State
            
            
            
            
            
            —Total
                deferred portion (benefit)
            
            
            
            
            
            —Total
                provision for income taxes
            
            $
            800
            
            $
            800





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





**Three Months**
              **Ended**
              **March 31,**
            
            **Three Months**
              **Ended**
              **March 31,****2008**
            
            **2007****(unaudited)**
            
            **(unaudited)**Federal
                income tax at statutory rates
            
            
            34
            %
            
            34
            %State
                income taxes, net of federal benefit
            
            
            6
            %
            
            6
            %Change
                in valuation allowance
            
            
            (40
            )%
            
            (41
            )%Tax
                credits
            
            
            0
            %
            
            0
            %Other
            
            
            0
            %
            
            1
            %Effective
                income tax rate
            
            
            0
            %
            
            0
            %





Utilization
      of the 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 $952,937 for the three months ended
      March 31, 2008. No such adjustment was recorded in the three months ended
      March 31, 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 a result 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
      three months ended March 31, 2008, the cumulative unrecognized tax benefit
      was
      $79,352, 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 an employment agreement with Steven
      Delcarson, its Chief Executive Officer. The initial term is for one year and
      is
      renewable.





In
      March 2008, the Company entered into an employment agreement with Charles
      Caporale, its Chief Financial Officer. The initial term is for one year and
      is
      renewable.





**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.




13




**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.





**COMMON
      STOCK**





The
      Company has 75,000,000 authorized shares of $0.001 par value common stock.
      During the three months ended March 31, 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 is convertible
      at the holder’s option into shares of common stock at $2.50 per share. The
      Purchase Agreement 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”).





**WARRANTS**





The
      following summarizes the warrant transactions:





**Warrants**
              **Outstanding**
            
            **Weighted-Average**
              **Exercise Price**December 31,
                2007
            
            
            4,614,598
            
            $
            1.43Issued
                during 2008  (unaudited)
            
            
            700,000
            
            $
            2.75Exercised
                during 2008  (unaudited)
            
            
            —
            
            
            —Outstanding,
                March 31, 2008  (unaudited)
            
            
            5,314,598
            
            $
            1.60





**2004
      STOCK INCENTIVE PLAN**





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





The
      Company reserved a total of 2,351,000 shares of its common stock for issuance
      pursuant to the 2004 Stock Incentive Plan. The board of directors, or a
      committee of the board, administers the 2004 Stock Incentive Plan. Stock options
      are generally granted with terms of up to ten years and vest over a period
      of
      five years under the 2004 Stock Incentive Plan. The administrator determines
      the
      exercise price of options granted under the 2004 Stock Incentive Plan, but
      the
      exercise price must not be less than 85% of the fair market value of the
      Company’s common stock on the date of grant. In the event the participant owns
      10% or more of the voting power of all classes of the Company’s stock, the
      exercise price must not be less than 110% of the fair market value per share
      of
      the Company’s common stock on the date of grant. With respect to all incentive
      stock options, the exercise price must at least be equal to the fair market
      value of the Company’s common stock on the date of grant. The term of an
      incentive stock option may not exceed 10 years, except that with respect to
      any
      participant who owns 10% of the voting power of all classes of the Company’s
      outstanding stock or the outstanding stock of any parent or subsidiary of the
      Company, the term must not exceed five years 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.




14




The
      following summarizes stock option transactions for the period
      shown:





**Three Months Ended**
              **March 31, 2008****(unaudited)****ALL
                OPTIONS**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Outstanding
                at beginning of period
            
            
            2,184,498
            
            $
            1.97Options
                granted
            
            
            —
            
            $
            —Options
                forfeited
            
            
            (90,000
            )
            $
            2.73Options
                expired
            
            
            —
            
            $
            —Options
                exercised
            
            
            
            
            $
            —Outstanding
                at end of period
            
            
            2,094,498
            
            $
            1.94Exercisable
                at end of period
            
            
            1,609,498
            
            $
            1.40





**Three Months Ended**
              **March 31, 2008****(unaudited)****NON VESTED OPTIONS**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Non-
                vested at beginning of period
            
            
            585,000
            
            $
            3.72Options
                granted
            
            
            
            
            $Options
                forfeited
            
            
            (40,000
            )
            $
            3.93Options
                expired
            
            
            —
            
            $
            —Options
                vested
            
            
            (60,000
            )
            $
            3.60Non-
                vested at end of period
            
            
            485,000
            
            $
            3.72





The
      weighted average grant-date fair value of options granted during the three
      month
      periods ended March 31, 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 March 31, 2008, were as follows:





**Options**
              **outstanding**
            
            **Options**
              **exercisable**March 31,
                2008 (unaudited)
            
            
            6.59
                years
            
            
            6.41
                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 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.




15





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 three months ended
      March 31, 2008 is as follows:





**2008****ALL OPTIONS**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Outstanding
                at beginning of period
            
            
            68,511
            
            $
            2.76Options
                granted
            
            
            1,386,666
            
            $
            2.23Options
                forfeited
            
            
            —
            
            
            —Options
                expired
            
            
            —
            
            
            —Options
                exercised
            
            
            —
            
            
            —Outstanding
                at end of period
            
            
            1,455,177
            
            $
            2.26Exercisable
                at end of period
            
            
            —
            
            
            —





**2008****NON VESTED OPTIONS**
            
            
            
            **WEIGHTED**
              **AVERAGE**
              **EXERCISE**
              **PRICE**Non-
                vested at beginning of period
            
            
            68,511
            
            $
            2.76Options
                granted
            
            
            1,386,666
            
            $
            2.23Options
                forfeited
            
            
            —
            
            
            —Options
                expired
            
            
            —
            
            
            —Options
                vested
            
            
            —
            
            
            —Non-
                vested at end of period
            
            
            1,455,177
            
            $
            2.26





The
      weighted average remaining contractual lives of the options outstanding at
      March 31, 2008 was 9.96 years.





The
      Company recorded $673,321 (unaudited) and $289,755 (unaudited) of compensation
      expense for employee stock options during the three month periods ending
      March 31, 2008 and March 31, 2007, respectively which is included in
      the administrative expense category. At March 31, 2008, there was a total
      of $4,154,538 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 1.55 years. The
      total fair value of shares vested during the three month period ended
      March 31, 2008 was approximately $216,000 (unaudited). The aggregate
      intrinsic value of total outstanding options and total exercisable options
      was
      $2,294,830 (unaudited) and $1,952,947(unaudited), respectively as of
      March 31, 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.




16




The
      Black
      Scholes assumptions used are listed below:





**2008**
            
            **2007**Risk
                free interest rate
            
            
            3.45%
                to 3.91%
            
            
            4.97
            %Dividends
            
            
            —
            
            
            —Volatility
                factor
            
            
            128%
                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 March 31, 2008 is comprised of $595,365 due to
      nCryptone, SA and payable in January 2009. Accounts payable - related
      parties at December 31, 2007 is comprised of $642,733 due to nCryptone, SA,
      $600,000 of which is 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 March 31,
      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 will be paid $12,270 per month plus certain other
      reimbursements for assisting us with transitioning our new Chief Financial
      Officer. However, if Mr. Tchaikovsky obtains full-time employment during
      the term of the Consulting Agreement, the Consulting Agreement will
      automatically terminate and no further payments will be due from the Company
      to
      Mr. Tchaikovsky. The Company entered into a Separation Agreement with
      Mr. Tchaikovsky whereby Mr. Tchaikovsky fully released the Company in
      consideration for Mr. Tchaikovsky becoming vested in his remaining 60,000
      unvested options and extending the termination 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 and $21,250, respectively, during the three months ended
      March 31, 2008 and 2007. Forest Finkelstein is not a related party at March
      31, 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 three months ended March 31, 2007, the Company paid $62,074
      (unaudited), respectively, to this entity for legal services rendered. Blakely,
      Sokoloff, Taylor & Zaffman is not a related party at March 31,
      2008.





**NOTE
      10 - CONVERTIBLE DEBENTURE**





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 expects to use
      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.




17




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
      beneficial conversion feature were met. The intrinsic value of the beneficial
      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 March 31, 2008, the
      warrant liability was valued at $1,338,798. The Company recorded a gain on
      the
      change in fair value of warrant liability of $125,661. The Company uses the
      Black Scholes model to value the liability. The assumptions used at
      January 8, 2008 and March 31, 2008 included expected volatility of
      118% and 118% and a risk free interest rate of 3.16% and 2.46%,
      respectively.





The
      discount attributable to the issuance date intrinsic value of the beneficial
      conversion feature and fair value of Warrants totaling $2,998,919 is being
      amortized using the effective interest method over the term of the Debenture.
      During the three months ended March 31, 2008, $80,062 of this discount was
      amortized to 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 three months ended
      March 31, 2008, $7,742 of the capitalized financing cost was amortized to
      expense.





The
      Company agreed to grant registration rights to the investors, by filing a
      registration statement covering the shares of common stock issuable upon the
      conversion of the Debenture, exercise of the Warrants, and issuable as interest
      payments, within 30 days of the closing, and obtaining effectiveness of the
      registration statement within 90 days after the closing. An amendment to the
      registration rights agreement gives the Company until June 7, 2008 to file
      the initial registration statement.





**NOTE
      11** – **SUBSEQUENT EVENT**





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
      expects to use 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 are required to seek such approval pursuant to the
      rules of the NASDAQ.





18





**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 Form 10-KSB for the year
      ended December 31, 2007.





**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 ICT 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 $1,962,441
      and
      $2,206,807 for the three months ending March 31, 2008 and 2007,
      respectively. As of March 31, 2008, we had an accumulated deficit of
      $30,029,624. Our continued existence is dependent upon our ability to generate
      sales of the ICT 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 ICT 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
      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. 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 for the next 12 months. We anticipate
      that we will not be able to generate sales of the ICT DisplayCard in substantial
      quantities until the second half of 2008 to support our cash needs since the
      sales cycle for that product is longer than originally anticipated.





We
      are
      providing information about our backlog for the first time as part of our
      discussion and analysis of financial condition and results of operations. Our
      backlog, which consists of orders received but not yet shopped, totals $1.2
      million at March 31, 2008.





We
      raised
      $3,500,000 of operating capital in January 2008 (see Equity and Debt
      Financings and Accounts Payable in this Item 2) and $5,000,000 in
      April 2008 (see Note 11 Subsequent Event) 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.





**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.




19




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





We
      anticipate that the majority of our revenues in the coming year will come from
      the ICT DisplayCard. We intend to sell these cards through resellers. We do
      not
      recognize revenue when we sell the ICT 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 a ICT 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.





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).




20




**RESULTS
      OF OPERATIONS**





**COMPARISON
      OF THE THREE MONTH PERIODS ENDED MARCH 31, 2008 AND MARCH 31,
      2007**





**OVERVIEW**





Our
      financial results for the three months ended March 31, 2008 reflect a net
      loss of $1,962,441, or $0.07 per share (basic and diluted), compared to a net
      loss of $2,206,807, or $0.08 per share (basic and diluted), for the three months
      ended March 31, 2007.





The
      major
      factors contributing to our decreased net loss of $1,962,441 during the first
      quarter of 2008 were a reduction in operating expenses combined with an
      increased margin from the sale of the ICT DisplayCard.





Revenue.
      In the 2008 period, revenue is from the sale of the ICT 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 ICT DisplayCard; revenue from
      LensCard royalties is expected to be negligible.





Total
      revenue increased from $1,420 for the three months ended March 31, 2007 to
      $217,216 for the three months ended March 31, 2008. The increase is
      attributable to sales of the ICT DisplayCard in the current period. For the
      three months ended March 31, 2007, revenue was from LensCard
      royalties.





Cost
      of
      goods sold - Cost of goods sold increased to $196,667 for the three months
      ended
      March 31, 2008 from $0 for the same period in the prior year. Included in cost
      of goods sold is $59,993 of inventory write-offs for obsolescence and scrap.
      No
      cost of goods sold is associated with LensCard royalties.





Administrative.
      Administrative expense consists of travel and marketing expenses, compensation
      expense, administrative fees and depreciation and amortization
      expense.





Administrative
      expense decreased to $1,403,598 for the three months ended March 31, 2008
      from $1,531,575 for the three months ended March 31, 2007. Administrative
      expense decreased as a result of the reversal of an accrual established at
      December 31, 2007 for an anticipated stock award offset by an increase in
      share-based compensation expense and salary expense. We anticipate that
      administrative expenses will increase in 2008 as we incur increased costs
      associated with establishing our operations.





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





Consulting
      expense increased to $120,098 for the three months ended March 31, 2008
      from $115,892 in the 2007 period. We anticipate that our consulting expense
      will
      likely continue to increase slightly as we utilize consultants in situations
      where the workload doesn’t support a full time hire.





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 to $248,031 for the three months ended March 31,
      2008 from $343,023 for the three months ended March 31, 2007. The decrease
      is primarily attributable to a reduction in audit and audit related charges
      and
      a reduction in legal fees associated with a proposed acquisition of one of
      our
      major suppliers in 2007. We anticipate that professional fees may increase
      as a
      result of needing to assess our internal controls relating to Sarbanes-Oxley
      in
      2008 and the related legal costs associated with being a public
      company.





Research
      and Development. Research and development expense consists primarily of costs
      relating to further development of the ICT DisplayCard.





Research
      and development costs decreased to $179,816 for the three months ended
      March 31, 2008 from $296,329 for the three months ended March 31, 2007
      primarily due to a one-time charge in the 2007 period for relocation expenses
      for nCryptone consultants. We expect our research and development expenses
      to
      increase as we continue to invest in quality control measures designed to
      improve our ability to deliver defect-free products.





Interest
      income. Interest income decreased to $9,073 for the three months ended
      March 31, 2008 from $79,540 for the three months ended March 31, 2007
      due to the reduced cash on hand in the first quarter of 2008.




21




Interest
      expense. Interest expense increased to $165,381 for the three months ended
      March 31, 2008 from $148 for the three months ended March 31, 2007.
      The 2008 period interest relates to our $3.5 million 8% senior secured
      convertible debenture issued in January 2008. We had no debt during the
      2007 period.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Our
      principal sources of liquidity have been cash and cash equivalent balances,
      which were $300,902 at March 31, 2007 and $6,887,875 as of March 31,
      2007. Since our inception, we have incurred significant losses, and as of
      March 31, 2008 and 2007 we had an accumulated deficit of $30,029,624 and
      $15,940,368, respectively.





Net
      cash
      used in operating activities was $3,248,698 for the three months ended
      March 31, 2008 as compared with $1,384,168 for the three months ended
      March 31, 2007. This increase in cash used was primarily due to a decrease
      in accounts payable. Capital raised in January 2008 was used to pay down trade
      accounts payable for inventory and other expenses. In addition, we have
      increased inventory in anticipation of being able to generate substantial sales
      of the DisplayCard beginning in the second half of 2008 and reducing the lead
      time required for finished product.





Net
      cash
      used in investing activities was $0 for the three months ended March 31,
      2008 as compared with $19,979 for the three months ended March 31, 2007. No
      production equipment was purchased in the 2008 period.





Net
      cash
      provided by financing activities was $3,210,000 for the three months ended
      March 31, 2008 as compared to $21,926 for the three months ended
      March 31, 2007. The increase is the result of our issuance of $3.5 million
      of 8% senior secured convertible debentures in January 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 we have enough funding to meet our cash
      needs and continue our operations for the next 12 months if we are able to
      successfully sell the ICT DisplayCard in substantial quantities. 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. T.R. Winston & Company served as
      placement agent for the securities sold in this transaction and received a
      net
      commission of 5% of the total gross proceeds and a warrant to purchase 113,565
      shares of our common stock at an exercise price of $3.30 per share that expire
      on May 30, 2011. The shares of common stock we issued and the shares of
      common stock underlying warrants issued on May 30, 2006 have full ratchet
      anti-dilution protection for 12 months if we issue securities for a price less
      than $3.00 per share. If during 12 months following May 30, 2006, we obtain
      additional capital through the issuance of equity securities, other than the
      issuance of shares of common stock or securities convertible into or
      exchangeable for common stock of InCard in connection with (i) any mergers
      or acquisitions of securities, business, property or other assets
      (ii) joint ventures or other strategic corporate transactions,
      (iii) any other transaction, the primary purpose of which is not to raise
      capital for the company, (iv) the exercise of an option or warrant or the
      conversion of a security outstanding as of May 30, 2006, or (v) any
      employee benefit plan that has been adopted by our board and our shareholders,
      the holders of these then-existing shares will receive full ratchet
      anti-dilution protection.





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





On
      January 8, 2008, we entered into a 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.




22




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.





**FUTURE
      NEEDS**





We
      believe that our current cash of $3,538,941 as of May 5, 2008, combined
      with anticipated revenue collections, will provide us with sufficient resources
      for the next twelve months if we are able to successfully sell the ICT
      DisplayCard in substantial quantities. This capital would not be sufficient
      to
      finance any additional activity. 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. CONTROLS AND PROCEDURES**





(a) Evaluation
      of disclosure controls and procedures.


As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our management, including our
      Chief Executive Officer and Chief Financial Officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures, as defined
      in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of 1934, as amended. Based upon that evaluation, our Chief Executive Officer
      and
      Chief Financial Officer concluded that our disclosure controls and procedures
      were 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.




23




·
            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.





·
            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 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.
                The total expense recognized in the fourth quarter for the modifications
                made for these three terminated officers/directors was $1,108,000,
                which
                was included in the December 31, 2007 financial statements***.***




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
      the date of this amendment we have made the following changes in internal
      control over financial reporting:





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





Beginning
      in April 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 that requires the use of purchase
      orders for all inventory purchases.





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




24




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, pursuant to our 2007 Equity Incentive Plan, we issued
                an
                option to purchase 60,000 common shares at $2.49 per share to one
                of our
                consultants. The option has a vesting period of three years (vesting
                1/3
                per year) and a duration of 10
                years.





·
            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 10 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.





·
            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 twelve 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 twelve 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




25




**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:
                May 12, 2008
            
            /s/ Steven
                R. DelcarsonSteven
                R. DelcarsonChief
                Executive OfficerDate:
                May 12, 2008
            
            /s/ Charles
                M. CaporaleCharles
                M. CaporaleChief
                Financial Officer





**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





26




10.6(2)
            
            Shares
                for debt agreement between registrant and Alan Finkelstein, dated
                June 22, 200410.7(2)
            
            Shares
                for debt agreement between registrant and Bradley Ross, dated
                June 22, 200410.8(2)
            
            Shares
                for debt agreement between registrant and Luc Berthoud, dated
                June 22, 200410.9(2)
            
            Promissory
                note (loan no. 00003) between registrant and City National Bank,
                dated
                May 24, 200410.10(2)
            
            Promissory
                note (loan no. 00005) between registrant and City National Bank,
                dated
                May 24, 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, 200410.22(2)
            
            Guaranty
                between Alan Finkelstein and CNC Associates, Inc. dated
                November 30, 200410.23(2)
            
            Security
                Agreement between registrant and Union Finance International Corp.
                dated
                March 31, 2005 (See Exhibit 10.19)10.24(2)
            
            Security
                Agreement between registrant and Bristol Investment Fund, Ltd. dated
                March 30, 2005 (See Exhibit 10.20)10.25(2)
            
            Secured
                Demand Promissory Note between registrant and Bradley Ross dated
                August 31, 200510.26(2)
            
            Secured
                Demand Promissory Note between registrant and Rodger Bemel dated
                August 31, 200510.27(2)
            
            Joint
                Development Agreement between registrant and nCryptone dated July 25,
                200510.28(2)
            
            Agreement
                between registrant and SmartDisplayer Technology, Inc. dated
                July 25, 200510.29(5)
            
            Form of
                Lock-Up agreement by and between registrant’s directors and executive
                officers pursuant to the private placement dated October 19,
                200510.30(4)
            
            Form of
                Warrant pursuant to private placement dated October 19,
                200510.31(4)
            
            Registration
                Rights Agreement by and between the registrant and each investor
                pursuant
                to the private placement dated October 19,
                2005




27




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 June 28, 2006 by and between Registrant NCryptone, SA
                and its shareholders.10.38(10)
            
            Registration
                Rights Agreement dated June 28, 2006 by and between Registrant and
                NCrytone, SA10.39(10)
            
            License
                Agreement dated June 28, 2006 by and between Registrant as licensor
                and NCryptone, SA as licensee10.40(10)
            
            License
                Agreement dated June 28, 2006 by and between NCryptone, SA as
                licensor and Registrant as licensee.10.41(11)
            
            Sublease
                between Registrant as sublessee and Bergman and Dacey, Inc. as
                sublessor.10.42(8)
            
            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,
                200810.51(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




28




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




29