Our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

· Overview. Discussion of our business and overall analysis of financial and other highlights affecting the company in order to provide context for the remainder of MD&A.

· Critical Accounting Policies. Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

· Results of Operations. Analysis of our financial results comparing 2008 to 2007.

· Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including the credit quality of our investment portfolio and potential sources of liquidity.

The various sections of this MD&A contain a number of forward-looking statements. Words such as "expects," "goals," "plans," "believes," "continues," "may," and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the "Overview" section (see also "Risk Factors" in Part I, Item 1A of this Form 10-K). Our actual results may differ materially.

Overview

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

On February 20, 2009, as a result of our common shares being delisted from the NASDAQ Capital Market, we defaulted on our debt agreements entered into in January 2008 and April 2008 in connection with the sale of our 8% Senior Secured Debentures. Accordingly investors can call the debentures and demand immediate repayment. Our inability to repay the outstanding balance can result in our debenture holders exercising their remedies under the accompanying security agreements and foreclosing on substantially all of our assets. In such instance, we could be forced to seek bankruptcy protection or the debenture holders could take our assets as satisfaction of their indebtedness. In either instance, this will result in a total loss of our common shareholders' investment. At present, we are attempting to modify the terms of our 8% Senior Secured Debentures in order to present the holders foreclosure on our assets. There can be no assurance that we will be able to modify the terms of such debentures or that if we do, that such modification will allow us to continue operating.

Since inception, we have been unprofitable. We incurred net losses of $8,929,537 and $14,333,622 for the twelve months ending December 31, 2008 and 2007, respectively. As of December 31, 2008, we had an accumulated deficit of $36,996,720. Our continued existence is dependent upon our ability to generate sales of the InCard DisplayCard or, if we are unable to do so in sufficient quantity to cover our expenses, to obtain additional financing. In 2008, we made our first significant sale of InCard DisplayCards; however we anticipate that we will continue to incur net losses due to our costs exceeding our revenues. Management cannot yet predict when we will achieve an operating profit or net income. Our capital requirements for the next 12 months consist of the acquisition of inventory, retention and hiring of key personnel, implementation of a sales force for our products, and further research and development relating to the production of our power inlay technology. These expenditures are anticipated to be significant. In addition, our gross margin is greatly impacted by production volume. At low levels of production our gross margin is in the single digits and may be negative. At the higher volume levels our gross margin rises. To date, our operations have been funded primarily through equity and debt financings.

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

Our backlog, which consists of orders received but not yet shipped, totals $4.45 million at December 31, 2008, most of which we expect to deliver in 2009.

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

Critical Accounting Policies

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

Revenue recognition.

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

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

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

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

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

Accounts receivable allowances.

Our sales to date have been to large credit card issuers and we have been successful in collecting for products and services. We perform a regular review of our customer activity and associated credit risks and do not require collateral from our customers. At December 31, 2008, based on our review of customer activity, we recorded an allowance for doubtful accounts of $60,000.

Warranty expense.

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

Inventory.

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

Research and Development.

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

Valuation of Intangible Assets and Long-Lived Assets.

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

Stock Based Compensation.

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

Results of Operations

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future due to the occurrence of material recurring and nonrecurring events.

Revenue

Revenue totaled $2,828,581 in 2008 and $445,000 in 2007.

Change in 2008 Versus 2007 2008 2007 $ % Revenue $ 2,828,581 $ 445,000 $ 2,383,581 536 %

The increase in revenue in 2008 as compared to 2007 was attributable to sales of the InCard DisplayCard and the clamshell. In 2007 revenue consisted of royalties from LensCard. We believe that future revenue will be primarily from the sales of the InCard DisplayCard, while revenue from LensCard royalties is expected to be negligible. The increase in revenue in 2008 was attributed to an improvement in our supply chain, allowing us to ship more quality products. Specifically, we made advances in the card's electronics, including the battery and display module. By improving the quality, more customers were interested in the product and we had a lower return rate.

Cost of Goods Sold

Cost of goods sold totaled $4,350,975 in 2008 and $851,637 in 2007.

Change in 2008 Versus 2007 2008 2007 $ % Cost of Goods Sold $ 4,350,975 $ 851,637 $ 3,499,338 411 %

The increase of cost of goods sold in 2008 compared to 2007 was attributed to increased sales of the InCard DisplayCard. Cost of goods sold consists of costs to manufacture in the amount of $2.4 million, inventory write-offs and reserve adjustments in the amount of $1.7 million and warranty expense of $227,024. The improvement in our gross margin percentage was attributable to the advances we made in the supply chain, resulting in fewer rejects. The primary reason for this was an improvement in the firmware used in producing the product.

Operating Expenses

Operating expense totaled $8,727,651 in 2008 and $14,088,503 in 2007.

                                                                          Change in 2008
                                                                            Versus 2007
                                        2008             2007               $             %
Operating Expenses
Administrative                       $ 5,461,782     $  8,389,987     $ (2,928,205 )      -35 %
Consulting Fees                          612,414          641,884          (29,470 )       -5 %
Impairment                             1,450,888        1,000,010          450,878         45 %
Unrecoverable payment to suppliers             -        1,546,428       (1,546,428 )     -100 %
Professional Fees                        734,680        1,157,781         (423,101 )      -37 %
Research and development                 467,887        1,352,413         (884,526 )      -65 %

Total expense                        $ 8,727,651     $ 14,088,503     $ (5,360,852 )      -38 %

Administrative Expenses

Administrative expenses totaled $5,461,782 in 2008 compared with $8,389,987 in 2007. The decrease of $2,928,205 or 35% from 2007 to 2008 was attributed to a conscious cutback in expenses of the Company. Specifically, there was a significant staff reduction in June, and again in November. Overall, we believe administrative spending was excessive in 2007 and during the first half of 2008. Prospectively we are actively monitoring our spending and avoiding all unnecessary spending. Administrative expenses consist of travel, marketing, compensation, administrative fees, and depreciation and amortization expense.

Consulting Fees

Consulting fees expense totaled $612,414 in 2008, as compared to $641,884 in 2007. The decrease of $29,470, or 5%, from 2007 to 2008 was primarily attributable to a reduction in the value of warrants granted to contractors. As our stock price decreased in the second half of 2008, the warrants we had granted to contractors became less valuable and this non-cash expense was reduced. Consulting fee expense consists of payments made to independent contractors that provided services to us.

Impairment

Impairment expense totaled $1,450,888 in 2008, as compared to $1,000,010 in 2007. Impairment expense consists of certain impaired acquired intangible assets. Refer to Note 6 to the financial statements.

Unrecoverable Payments to Suppliers

Unrecoverable payments to suppliers expense totaled $1,546,428 in 2007. Unrecoverable payments to suppliers consist of payments made to third party suppliers for deposits that we no longer expect to utilize, purchase orders that we do not expect to fulfill and accrued expenses to satisfy irrevocable purchase orders. There was no equivalent expense in 2008.

Professional Fees

Professional fees expense totaled $734,680 in 2008, as compared to $1,157,781 in 2007. The decrease of $423,101, or 37%, from 2007 to 2008 was primarily attributable to a reduction in legal fees. Professional fees expense primarily consists of amounts related to services provided by our outside counsel, auditors and other similar providers

Research and Development Expense

Research and development expense totaled $467,887 in 2008, as compared to $1,352,413 in 2007. The decrease of $884,526, or 65%, from 2007 to 2008 was primarily attributable to staff reductions and cutbacks in the second half of 2008. Research and development expense consists of costs relating to further development of the InCard DisplayCard.

Other Income (Expense)

Other income totaled $1,321,308 in 2008, compared with $162,318 in 2007.

                                                                            Change in 2008
                                                                              Versus 2007
                                          2008            2007             $               %
Other income (expense):
Change in fair value of warrant
liability and other expense           $  3,068,251     $        -     $  3,068,251            100 %
Interest income                             26,857        183,793         (156,936 )          -85 %
Interest expense                        (1,644,005 )      (21,475 )     (1,622,530 )         7555 %
Other expense                             (129,795 )            -         (129,795 )           NA
Total other income (expense)          $  1,321,308     $  162,318     $  1,158,990            714 %

Change in fair value of warrant liability and other expense

During 2008, due to the decline in our stock price, the value of our warrant liability has decreased since our initial valuation. We had no warrant liability at December 31, 2007. Refer to Note 12 to the financial statements for further discussion on our warrant liability and the related 8% senior secured convertible debentures.

Interest Income

Interest income totaled $26,857 in 2008 compared to $183,793 in 2007. The decrease in 2008 as compared to 2007 of $156,936 was attributed to lower cash balances maintained in 2008 along with lower interest rates on the cash we had on deposit.

Interest Expense

Interest expense totaled $1,644,005 in 2008 and $21,475 in 2007. The increase in 2008 as compared to 2007 was attributable to the amortization of the debt discounts related to our 8% senior secured convertible debenture transactions during 2008. Refer to Note 12 to the financial statements.

Other Expense

Other expense in 2008 represents a loss on a lease that did not occur in 2007.

Liquidity and Capital Resources

Our principal sources of operating capital since our inception through December 31, 2008 have been equity and debt financings totaling $30,303,691, and to a lesser degree our revenues. Since our inception, we have incurred significant losses, and as of December 31, 2008 we had an accumulated deficit of $36,996,720. Our cash and cash equivalents balance at December 31, 2008 was $76,645, a decrease from $339,600 at December 31, 2007.

                                                                                 Change in 2008
                                                            2007                  Versus 2007
                                          2008          (as restated)           $              %
At December 31:
Cash & Cash Equivalents               $     76,645     $       339,600     $  (262,955 )          -77 %

Year ended December 31:
Net cash used in operating
activities                            $ (8,216,304 )   $    (7,949,145 )   $  (267,159 )            3 %
Net cash used in investing
activities                            $    (69,151 )   $       (21,351 )   $   (47,800 )          224 %
Net cash provided by financing
activities                            $  8,022,500     $        40,000     $ 7,982,500          19956 %

The decrease in our cash and cash equivalents balance was attributed to (1) losses from operations and the reduction of accounts payable that exceeded (2) our ability to raise adequate debt and equity capital to support these activities.

Net Cash Used in Operating Activities

In our operating activities we used $8,216,304 in cash in 2008 and $7,949,145 in cash in 2007. The increase of $267,159 in cash used in operating activities in 2008 as compared to 2007 was primarily attributable to an increased use of working capital primarily to reduce accounts payable to a more current level.

Net Cash Used in Investing Activities

In our investment activities we used $69,151 in cash in 2008 and $21,351 in cash in 2007. The increase of $47,800 in cash used in investing activities in 2008 as compared to 2007 was due to increased purchases of production and testing equipment

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $8,022,500 in 2008 as compared to $40,000 in 2007. The increase from 2007 to 2008 was attributed to our January and April 8% Senior Convertible Debenture financings.

Listed below are key financing transactions entered into by us in the last three years:

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

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

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

· On April 15, 2008, sold an additional $5 million of our 8% Senior Secured Convertible Debenture to EMC Corporation. As a result of market conditions, the conversion price of the debenture is $2.48 per share. This resulted in a re-pricing of our January 8, 2008 debentures. In connection with the sale of the additional debentures, we issued EMC a five-year common stock purchase warrant to purchase 1,008,064 shares of our common stock at an exercise price of $2.728 per share. Similar to the conversion of the debentures, this resulted in a re-pricing of the January 8, 2008 warrant exercise price to $2.7828 per share. We used the net proceeds of the financing for our working capital requirements and to pay down certain obligations.

Default of 8% Senior Secured Debentures

In September 2008, we agreed with certain Debenture holders to defer a portion of the interest payments due October 1, 2008 and January 1, 2009. Such deferral resulted in those payments, plus a ten percent (10%) deferral charge being added to the principal balance of those debentures. On February 20, 2009, as a result of our common shares being delisted from the NASDAQ Capital Market, we defaulted on our debt agreements entered into in January 2008 and April 2008 in connection with the sale of our 8% Senior Secured Debentures. Accordingly investors can call the debentures and demand immediate repayment. Our inability to repay the outstanding balance can result in our debenture holders exercising their remedies under the accompanying security agreements and foreclosing on substantially all of our assets. In such instance, we could be forced to seek bankruptcy protection or the debenture holders could take our assets as satisfaction of their indebtedness. In either instance, this will result in a total loss of our common shareholders' investment. At present, we are attempting to modify the terms of our 8% Senior Secured Debentures in order to prevent the holders' foreclosure on our assets. There can be no assurance that we will be able to modify the terms of such debentures or that if we do, that such modification will allow us to continue operating.

Future Needs

. . .