U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x	Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2010

¨	Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 001-33353

INNOVATIVE CARD TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		90-0249676
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

633 West Fifth Street, Suite 2600 Los Angeles, CA		90071
(Address of principal executive offices)		(Zip Code)

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

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a small reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ¨ Yes x No

As of August 11, 2010 there were 31,575,937 shares of common stock, $.001 par value, issued and outstanding.

Innovative Card Technologies, Inc.

Table of Contents

		Page
PART I -	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009	1

	Condensed Consolidated Statements of Operations (Unaudited)
	Three and Six months ended June 30, 2010 and 2009	2

	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Six months ended June 30, 2010 and 2009	3

	Notes to Condensed Consolidated Financial Statements (Unaudited)	4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

Item 4.	Controls and Procedures	21

PART II -	OTHER INFORMATION	22

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	28

Item 4.	(Removed and Reserved)	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

PART I

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

INNOVATIVE CARD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2010			2009
	(Unaudited)

Assets

Current assets:
Cash and cash equivalents	$	226,676		$	245,765
Accounts receivable, net of allowance for doubtful accounts of $60,000 and $61,398, respectively		33,568			699,854
Prepaids and other current assets		39,100			76,130
Deposits on raw materials held for production		38,892			165,138
Raw materials held for production		68,239			134,754
Work in progress inventory, net		232,671			107,212
Finished goods inventory		38,053			34,421
Total current assets		677,199			1,463,274

Property and equipment, net		71,449			93,763
Deposits		3,720			3,720

Total assets	$	752,368		$	1,560,757

Liabilities and deficiency in stockholders' equity

Current liabilities:
Accounts payable and accrued expenses	$	942,146		$	912,271
Accrued interest		75,956			27,737
Warranty reserve		312,646			289,135
Deferred revenue		230,846			450,189
8% convertible debentures, net of discount of $486,241 at June 30, 2010		4,934,843			-
Total current liabilities		6,496,437			1,679,332


8% convertible debentures, net of discount of $1,074,752 at December 31, 2009		-			4,687,576
Warrant liability		313,540			470,592
Derivative liability		394,150			2,151,632

Total liabilities		7,204,127			8,989,132

Deficiency in stockholders' equity

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.001 par value, 75,000,000 shares authorized, 31,142,250 and 28,840,920 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		31,142			28,841
Additional paid-in capital		31,598,764			30,902,885
Accumulated deficit		(38,081,665	)		(38,360,101	)
Total deficiency in stockholders' equity		(6,451,759	)		(7,428,375	)

Total liabilities and deficiency in stockholders' equity	$	752,368		$	1,560,757

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

INNOVATIVE CARD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009

Revenues	$	881,204		$	1,296,645		$	1,622,283		$	1,830,868
Cost of goods sold		701,699			1,176,918			1,371,313			1,763,878

Gross profit		179,505			119,727			250,970			66,990

Operating expenses
Administrative		393,442			598,390			866,468			1,148,304
Consulting fees		-			25,773			-			41,366
Professional fees		56,923			149,771			136,768			221,970
Research and development		45,324			70,639			120,473			113,848

Total operating expense		495,689			844,573			1,123,709			1,525,488

Loss from operations		(316,184	)		(724,846	)		(872,739	)		(1,458,498	)

Other income (expense)
Change in fair value of warrant and conversion liability		1,350,354			(57,401	)		1,702,118			(160,668	)
Gain on extinguishment of debt		-			-			136,321			-
Interest income		5			22			23			51
Interest expense		(343,177	)		(526,895	)		(687,287	)		(10,596,274	)

Total other income (expense)		1,007,182			(584,274	)		1,151,175			(10,756,891	)

Income (loss) before provision for income taxes		690,998			(1,309,120	)		278,436			(12,215,389	)

Provision for income taxes		-			-			-			-

Net income (loss)		690,998			(1,309,120	)		278,436			(12,215,389	)

Income (loss) per share:
Basic	$	0.02		$	(0.05	)	$	0.01		$	(0.43	)
Diluted	$	0.02		$	(0.05	)	$	0.01		$	(0.43	)

Weighted average shares outstanding:
Basic		30,742,924			28,495,256			30,255,165			28,495,256
Diluted		31,581,958			28,495,256			31,244,995			28,495,256

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

INNOVATIVE CARD TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(Unaudited)

	2010			2009

Cash flows from operating activities:
Net income (loss)	$	278,436		$	(12,215,389	)
Adjustments to reconcile net lincome (loss) to net cash used in operating activities:
Depreciation and amortization		22,314			32,578
Change in fair value of warrant liability		(157,052	)		91,340
Change in fair value of conversion liability		(1,545,066	)		69,328
Amortization of debt discount		574,665			6,671,835
Amortization of deferred debt issuance costs		-			449,052
Debt default penalty		-			2,642,749
Stock based compensation expense		185,898			295,958
Noncash gain on extinguishment of debt		(136,321	)		-
Change in provision for obsolete inventory		46,368			173,630
(Increase) decrease in accounts receivable		666,286			(169,899	)
(Increase) decrease in prepaids and other current assets		37,030			129,294
(Increase) decrease in deposits on raw materials held for production		126,246			(511	)
(Increase) decrease in raw materials held for production		49,104			(147,343	)
(Increase) decrease in work in progress inventory		(154,416	)		664,859
(Increase) decrease in finished goods inventory		(3,632	)		-
(Increase) decrease in deposits		-			5,052
Increase (decrease) in accounts payable and accrued expenses		69,011			(69,849	)
Increase (decrease) in accrued interest		112,622			837,789
Increase (decrease) in warranty reserve		23,511			89,812
Increase (decrease) in deferred rent		-			(36,354	)
Increase (decrease) in deferred revenue		(219,343	)		423,530


Net cash used in operating activities		(24,339	)		(62,539	)

Cash flows from financing activities:
Proceeds from exercise of options/warrants		5,250			-

Net cash provided by financing activities		5,250			-

Net decrease in cash and cash equivalents		(19,089	)		(62,539	)
Cash and cash equivalents, beginning of period		245,765			76,645
Cash and cash equivalents, end of period	$	226,676		$	14,106

Supplemental Schedule of Cash Flow Information:
Cash paid for interest	$	-		$	2,666

Non-Cash Financial Activity:
Debt converted to common stock	$	341,244		$	-
Conversion liability extinguished upon conversion of debt		212,416			-
Options exercised by application of accrued compensation to exercise price		39,137			-
Common stock issued as payment of accrued interest		64,403			-

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

INNOVATIVE CARD TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

COMPANY OVERVIEW

The Company develops and markets secure powered cards for payment, identification, physical and logical access applications. Our main focus is on developing One-Time-Password (“OTP”) solutions. An OTP is a password that is only valid for a single login session or transaction. OTPs avoid a number of shortcomings that are associated with traditional (static) passwords. The most important shortcoming that is addressed by OTPs is that, in contrast to static passwords, they are not vulnerable to replay attacks. This means that, if a potential intruder manages to record an OTP that was already used to log into a service or to conduct a transaction, he will not be able to abuse it since it will be no longer valid.

Currently, our main OTP product is the ICT DisplayCard. The ICT DisplayCard integrates the security of an OTP 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 OTP (also referred to as a one-time passcode). At the push of a button, the ICT DisplayCard displays a one-time passcode. 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 authentication works like tokens issued by VASCO, RSA, and ActivIdentity, but in a more convenient, wallet-sized card. In December of 2009, we introduced the ICard, our new low cost OTP product intended to serve the masses.

Our primary focus is and will continue to be the further development, sales and marketing of OTP solutions. We anticipate we will expand our current ICT DisplayCard product offering with other innovative OTP products. Since 2002, we have continued to develop our power inlay technology that is the basis of our ICT DisplayCard.

BASIS OF PRESENTATION AND GOING CONCERN

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

For the six months ended June 30, 2010 we have incurred a loss from operations of $872,739. As of June 30, 2010, we have negative working capital of $5,819,238, an accumulated deficit of $38,081,665 and a stockholders’ deficiency of $6,451,759. Sales of the ICT DisplayCard and newly introduced OTP products, the Company’s main products, are not expected to generate positive cash flow until 2011. As a result, there is substantial doubt about the Company’s ability to continue as a going concern at June 30, 2010.

Management’s plan regarding these matters is to increase sales, resulting in reduced losses and raise additional debt and/or equity financing to cover operating costs as well as its obligations as they become due.

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.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

As of July 31, 2010 the Company has approximately $87,000 in cash. Combined with anticipated revenue collections and planned expense reductions, the Company believes this amount will be enough to fund our operations until October, 2010. In the event we do not receive additional financing or orders for our products, we anticipate ceasing operations during October of 2010.

The accompanying unaudited condensed consolidated financial statements as of June 30, 2010 and for the three and six months ended June 30, 2010 and 2009 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The Company believes that the disclosures provided are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and explanatory notes for the year ended December 31, 2009 as disclosed in the company's 10-K for that year as filed with the SEC, as it may be amended.

The results for the six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the pending full year ending December 31, 2010.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

USE OF 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.

REVENUE RECOGNITION

The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”. 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.

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 twelve months 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. On November 10, 2007, the Company was required to make a deposit on a purchase order to maintain its exclusivity. The Company was unable to make the deposit and therefore does not have exclusivity 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 twelve months and impair the Company’s ability to manufacture and sell the ICT DisplayCard.

MAJOR CUSTOMERS

Two customers accounted for all of our revenue for the three months ended June 30, 2010 and three customers accounted for all of our revenue for the six months ended June 30, 2010. Two customers accounted for 99% and 96% of the Company’s revenues for the three and six months ended June 30, 2009, respectively.

One customer accounted for all of our accounts receivable at June 30, 2010.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value of financial instruments

Our short-term financial instruments, including cash, accounts receivable, prepaid expenses and other assets, accounts payable and accrued expenses, warranty reserve and other liabilities, consist primarily of instruments without extended maturities, the fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of our convertible notes is based on management estimates and reasonably approximates their book value based on their current maturity. The fair value of the Company’s derivative instruments is determined using option pricing models.

Fair value measurements

We have adopted accounting guidance pursuant to ASC 820 “Fair Value Measurements and Disclosure”, which established a framework for measuring fair value and expands disclosure about fair value measurements.

ASC 820 defines fair value as the amount that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes the following three levels of inputs that may be used:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets and (liabilities) measured at fair value on a recurring basis as of June 30, 2010:

	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	226,676	$	-	$	-	$	226,676
Total Assets	$	226,676	$	-	$	-	$	226,676
Liabilities
Convertible debentures	$	-	$	-	$	4,934,843	$	4,934,843
Warrant Liability		-		-		313,540		313,540
Derivative liabilities		-		-		394,150		394,150
Total liabilities	$	-	$	-	$	5,642,533	$	5,642,533

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (warrant derivative liability and conversion derivative liability) for the six months ended June 30, 2010 and 2009.

	2010			2009
Balance at beginning of year	$	2,622,224		$	19,055
Additions to derivative instruments		-			6,061
Change in fair value of derivative liabilities		(1,702,118	)		160,668
Reclassification to equity upon conversion of debentures		(212,416	)		-

Balance at end of period	$	707,690		$	185,784

LOSS PER SHARE

The Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and diluted loss 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.

Common equivalent shares are excluded from the computation of diluted loss per share if their effect would be anti-dilutive. There were 30,751,250 common share equivalents at June 30, 2010 and 15,454,880 at June 30, 2009. Common equivalent shares were excluded from the calculation of diluted loss per share for the three and six month periods ended June 30, 2009 as their inclusion would reduce diluted loss per share for those periods. Common equivalent shares that were included in the calculation of diluted earnings per share for the three and six month periods ended June 30, 2010, as their inclusion would reduce earnings per share for those periods, were 839,034 and 989,830, respectively.

WARRANTY RESERVE

The Company generally warrants its products against defects over a period of one to three years. An accrual for estimated future costs relating to products returned under warrants is recorded as a charge to cost of sales when products are shipped. The accrual is based on a percentage of sales. This percentage was 10% through December 31, 2008, 3% for the period January 1 to September 30, 2009 and 2% effective October 1, 2009 (the changes in estimate based on historical trends). Activity in the accrued warranty reserve liability for the three and six months ended June 30, 2010 and 2009 is as follows:

	Three months ended June 30,					Six months ended June 30,
	2010		2009			2010		2009
Balance at beginning of period	$	299,821	$	239,641		$	289,135	$	198,854
Charged to cost of sales		12,825		50,499			23,511		93,161
Deductions		-		(1,474	)		-		(3,349	)

Balance at end of period	$	312,646	$	288,666		$	312,646	$	288,666

STOCK BASED COMPENSATION

The Company accounts for its stock based compensation under ASC 718 “Compensation – Stock Compensation” which was 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. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued new accounting guidance which will require more information about the transfer of financial assets where companies have continuing exposure to the risks related to transferred financial assets. This guidance is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued new accounting guidance which will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. Under this guidance, determining whether a company is required to consolidate an entity will be based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. This guidance is effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future consolidated financial statements.

NOTE 3 - 8% SENIOR SECURED CONVERTIBLE DEBENTURES

During the first quarter of 2010, certain debenture holders converted an aggregate of $341,244 of debentures into 1,364,975 shares of common stock. We recorded a charge of $46,424 related to the change in fair value of the conversion feature of the converted debentures through the dates of conversion. At the dates of conversion, we extinguished a conversion feature liability in the amount of $212,416. Since the conversion feature was accounted for as a liability, we have recorded a gain upon conversion of debt in the amount of $136,321.

NOTE 4 – DERIVATIVE LIABILITIES

During the first quarter of 2010, certain debenture holders converted an aggregate of $341,244 of debentures into 1,364,975 shares of common stock. We recorded a charge of $46,424 related to the change in fair value of the conversion feature of the converted debentures through the dates of conversion. At the dates of conversion, we extinguished a conversion feature liability in the amount of $212,416. The fair value of the conversion feature was determined using the Black-Scholes method based on the following weighted average assumptions: (1) risk free interest rate of 0.32%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 138%; and (4) an expected life of the conversion feature of 0.88 years.

At June 30, 2010 we recalculated the fair value of the conversion feature of the remaining debentures subject to derivative accounting and have determined that the fair value at June 30, 2010 is $394,150. The fair value of the conversion feature was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.215%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 105%; and (4) an expected life of the conversion feature of 0.5 years. We recorded credits of $1,166,543 and $1,591,490 during the three and six months ended June 30, 2010, respectively, related to the change in fair value of the conversion feature of the debentures during those periods.

At June 30, 2010, we recalculated the fair value of our warrants subject to derivative accounting and have determined that the fair value at June 30, 2010 is $313,540. The fair value of the warrant liability was determined using the Black-Scholes method based on the following weighted average assumptions: (1) risk free interest rate of 0.475%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 144%; and (4) an expected life of the warrants of 1.5 years. We recorded credits of $183,811 and $157,052 during the three and six months ended June 30, 2010, respectively, related to the change in fair value of the warrant liability.

NOTE 5 - STOCKHOLDER’S 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 first quarter of 2010 the Company issued 1,364,975 shares of common stock upon conversion debentures in the amount of $341,244.

During the six months ended June 30, 2010 the Company issued 502,667 shares of common stock upon the exercise of 502,667 employee stock options. We received $5,250 in cash proceeds from the exercise of the options; the balance of the exercise price was paid through the reduction of accrued compensation in the amount of $39,137.

During June 2010 we issued 433,688 shares of common stock as partial payment of accrued interest in the amount of $64,403.

NOTE 6- STOCK OPTIONS AND WARRANTS

On February 22, 2010, our Board and Compensation Committee approved the 2010 Equity Compensation Plan (“2010 Plan”). The 2010 Plan permits the granting of up to 6,000,000 shares of common stock through the issuance of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Restricted Stock Units, Performance Units, Performance Shares and Other Stock Based Awards to our employees, directors and consultants. We anticipate submitting the plan for shareholder approval during the following 12 months. In the event the Plan is not approved by our shareholders during this time, the 2010 Plan will be considered a non-qualified plan.

In January 2010 the Company’s board of directors approved a stock option award to a director in the amount of 100,000 shares of common stock with an exercise price of $0.35 per share. The option vests over one year. The option expires after ten years. The option had a grant date fair value of $9,702. The fair value of the option was determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.25%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 161%; and (4) an expected life of the option of 0.625 years.

The Company recorded a credit of $7,668 to compensation expense for consultant stock options for the three months ended June 30, 2010, of which $436 is included in professional fees and $7,232 is included in the administrative expense category. The Company recorded a net credit of $307 to compensation expense for consultant stock options for the six months ended June 30, 2010, of which $1,155 has been charged to professional fees and $1,462 credited to the administrative expense category. During the three and six months ended June 30, 2009, the Company recorded $2,411 and $4,251, respectively, of compensation expense for consultant stock options which is included in the administrative expense category.

The Company recorded $89,021 and $149,465 of compensation expense for employee stock options during the three months ended June 30, 2010 and 2009, respectively, and $186,205 and $291,708 of compensation expense for employee stock options during the six months ended June 30, 2010 and 2009, respectively, which is included in the administrative expense category.

NOTE 7 - PROVISION FOR INCOME TAXES

Our effective tax rate was estimated at 0% for the three and six months ended June 30, 2010 and 2009.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

LEASE

The Company leases office space on a month-to-month basis.

Rent expense was $9,498 and $13,447 for the three months ended June 30, 2010 and 2009, respectively, and $22,495 and $25,894 for the six months ended June 30, 2010 and 2009, respectively.

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.

NOTE 9 – SUBSEQUENT EVENTS

During July 2010 we issued 296,426 shares of common stock as payment of $44,019 interest accrued at June 30, 2010.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ADVISEMENT

We urge you to read this entire Quarterly Report on Form 10-Q, including the” Risk Factors” section, the financial statements, and related notes included herein. As used in this Quarterly Report, unless the context otherwise requires, the words “we,” “us,”“our,” “the Company,” “InCard” “Innovative Card” and “Registrant” refer to Innovative Card Technologies, Inc. and our subsidiaries. Also, any reference to “common shares,” “Common Stock,” “common stock” or “Common Shares” refers to our $.001 par value common stock. The information contained herein is current as of the date of this Quarterly Report June 30, 2010), unless another date is specified.

We prepare our interim financial statements in accordance with United States generally accepted accounting principles (“GAAP”). Our financials and results of operation for the six month period ended June 30, 2010 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2010. The interim financial statements presented in this Quarterly Report as well as other information relating to our company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with the United States Securities and Exchange Commission (“SEC”).

FORWARD LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in this Quarterly Report, including those related to our cash, liquidity, resources and our anticipated cash expenditures, as well as any statements other than statements of historical fact, regarding our strategy, future operations, financial position, projected costs, prospects, plans and objectives are forward-looking statements. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe are appropriate in the circumstances. You can generally identify forward looking statements through words and phrases such as “believe”, “expect”, “seek”, “estimate”, “anticipate”, “intend”, “plan”, “budget”, “project”, “may likely result”, “may be”, “may continue” and other similar expressions, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in Part II, Item 1A, “Risk Factors ” and elsewhere in this Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, new products or strategic investments. In addition, any forward-looking statement represents our expectation only as of the day this Report was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

When reading any forward-looking statement, you should remain mindful that actual results or developments may vary substantially from those expressed in or implied by such statement for a number of reasons or factors. Each forward-looking statement should be read in context with and in understanding of the various other disclosures concerning our company and our business made elsewhere in this Quarterly Report as well as our public filings with the SEC. You should not place undue reliance on any forward-looking statement. We are not obligated to update or revise any forward-looking statements contained in this Quarterly Report or any other filing to reflect new events or circumstances unless and to the extent required by applicable law.

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. Our 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 the three and six months ended June 30, 2010 to 2009.

Liquidity and Capital Resources — An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including recent developments 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 II, Item 1A of this Report). Our actual results may differ materially.

Overview

We develop and market secure products for payment, identification, physical and logical access applications. Our main focus is on developing One-Time-Password (“OTP”) solutions. An OTP is a password that is only valid for a single login session or transaction. OTPs avoid a number of shortcomings that are associated with traditional (static) passwords. The most important shortcoming that is addressed by OTPs is that, in contrast to static passwords, they are not vulnerable to replay attacks. This means that, if a potential intruder manages to record an OTP that was already used to log into a service or to conduct a transaction, he will not be able to abuse it since it will be no longer valid.

Our primary focus is and will continue to be the further development, sales and marketing of OTP solutions. We anticipate we will expand our current ICT DisplayCard product offering with other innovative OTP products. Since 2002, we have devoted a majority of our efforts to developing our ICard and our ICT DisplayCard and accompanying technology, initiating marketing and raising capital to fund our business. We have generated limited revenues.

Since inception, we have been unprofitable. We incurred net losses of $5,883,055 and $8,929,537 for 2009 and 2008, respectively. Additionally, we had operating losses of $316,184 and $724,846 and $872,739 and $1,458,498 for the three and six month periods ended June 30, 2010 and 2009, respectively. Sales of the ICT DisplayCard and newly introduced OTP products, the Company’s main products, are not expected to generate positive cash flow until 2011. As a result, there is substantial doubt about the Company’s ability to continue as a going concern at June 30, 2010.

Our continued existence is dependent upon our ability to generate sales from our OTP products or, if we are unable to do so in sufficient quantity to cover our expenses, to obtain additional financing. Notwithstanding the sales of our devices, 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 research and development of new OTP products, the acquisition of inventory, retention and hiring of key personnel, and implementation of a sales force for our products. These expenditures are anticipated to be significant. 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 until October 2010. If we are unable to raise additional capital or make significant sales 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 ICT DisplayCard and newly introduced OTP products in quantities that will sustain a positive cash flow until 2011.

Our backlog, which consists of orders received but not yet shipped, totaled approximately $418,000 at June 30, 2010.

Critical Accounting Policies

Our MD&A is based on our consolidated financial statements, which have been prepared in accordance GAAP. 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.

Accounting Standards Codification and GAAP Hierarchy — Effective for interim and annual periods ending after September 15, 2009, the Accounting Standards Codification and related disclosure requirements issued by the FASB became the single official source of authoritative, nongovernmental GAAP. The ASC simplifies GAAP, without change, by consolidating the numerous, predecessor accounting standards and requirements into logically organized topics. All other literature not included in the ASC is non-authoritative. We adopted the ASC as of July 1, 2009, which did not have any impact on our results of operations, financial condition or cash flows as it does not represent new accounting literature or requirements. All references to pre-codified U.S. GAAP have been removed from this Report.

Revenue recognition.

We recognize revenues in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue Recognition”. 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 ASC 605.

We anticipate that the majority of our revenues in the future will come from the InCard DisplayCard and new OTP products. We intend to sell these items 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.

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 June 30, 2010, 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. We generally warrant our products against defects over a period of one to three years. The initial estimate and changes to the estimate are charged to cost of goods sold at the time of sale of the product. The accrual is based on a percentage of sales. This percentage was 10% through December 31, 2008, 3% for the period January 1 to September 30, 2009 and 2% effective October 1, 2009 (the changes in estimate based on historical trends).

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.

Stock Based Compensation.

We account for our stock based compensation under ASC 718 “Compensation – Stock Compensation” which was 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. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

Income Taxes

We utilize ASC Topic 740 “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.

Recently Issued Accounting Pronouncements

Result of Operations — Three Months Ended June 30, 2010 Compared to Same Period of 2009

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future.

Revenue

Revenues totaled $881,204 and $1,296,645 for the three months ended June 30, 2010 and 2009, respectively.

					Change in
					2010
	Three Months Ended June 30,				Versus 2009
	2010		2009		$				%
Revenue	$	881,204	$	1,296,645		$	(415,441	)		(32	)%

The decrease of $415,441 or 32% for the three months ended June 30, 2010 compared to the same period in 2009 was attributable to the cancellation of a purchase order during October of 2009 (notwithstanding the fact that the order is non-cancellable). During the second quarter of 2009, we fulfilled approximately $660,000 worth of product deliveries under the order. Sales in 2010 pursuant to other orders increased by approximately $245,000 as compared to 2009.

Cost of Goods Sold

Cost of Goods Sold totaled $701,699 and $1,176,918 for the three months ended June 30, 2010 and 2009, respectively.

					Change in
					2010
	Three Months Ended June 30,				Versus 2009
	2010		2009		$			%
Cost of Goods Sold	$	701,699	$	1,176,918	$	(475,219	)		(40	) %

Cost of goods consists of costs to manufacture, inventory write-offs and reserve adjustment and warranty expense. The decrease of $475,219 or 40% for the three months ended June 30, 2010 compared to the same period in 2009 was attributable to decreases of $375,969 for costs to manufacture, $37,675 for warranty expense and $61,575 for inventory write-offs and reserve adjustment. The decrease in cost to manufacture results primarily from the decrease in revenue during the 2010 period.

Operating Expenses

Operating expenses totaled $495,689 and $844,573 for the three months ended June 30, 2010 and 2009, respectively.

					Change in
					2010
	Three Months Ended June 30,				Versus 2009
	2010		2009		$			%
Operating Expenses
Administrative	$	393,442	$	598,390	$	(204,948	)		(34	)%
Consulting Fees		-		25,773		(25,773	)		(100	)%
Professional Fees		56,923		149,771		(92,848	)		(62	)%
Research and development		45,324		70,639		(25,315	)		(36	)%
Total expense	$	495,689	$	844,573	$	(348,884	)		(41	)%

Administrative Expenses

Administrative expenses totaled $393,442 and $598,390 for the three months ended June 30, 2010 and 2009, respectively. The decrease of $204,948 or 34% for the three months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to a decrease in share based compensation of $70,087 (resulting from a decrease in issued and outstanding equity awards) and reductions in insurance of $34,191, delivery costs of $102,702 and overall decreases in other administrative expenses, partially offset by an increase in cash based compensation expense and related costs of $41,473. Administrative expenses consist of travel, marketing, compensation, administrative fees and costs, and depreciation expense.

Consulting Fees

Consulting fees totaled $0 and $25,773 for the three months ended June 30, 2010 and 2009, respectively. The decrease of $25,773 or 100% for the three months ended June 30, 2010 compared to the same period in 2009 was attributable to the consultant becoming an employee in late 2009. Consulting fees consists of payments made to independent contractors for services.

Professional Fees

Professional Fees totaled $56,923 and $149,771 for the three months ended June 30, 2010 and 2009, respectively. The decrease of $92,848 or 62% for the three months ended June 30, 2010 compared to the same period in 2009 was attributable to an overall higher cost of professional fees in the current period due to an increase in professional services. A decrease of $99,705 in accounting and audit fees was partially offset by an increase of $6,857 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

Research and development expenses totaled $45,324 and $70,639 for the three months ended June 30, 2010 and 2009, respectively. The decrease of $25,315 or 36% for the three months ended June 30, 2010 compared to the same period in 2009 was attributable to reductions in spending during the 2010 period. Research and development expense consists of costs relating to further development of our OTP products and solutions.

Other Income (Expense)

Other income (expense) totaled $1,007,182 of income for the three months ended June 30, 2010. We reported other expense of $584,274 for the three months ended June 30, 2009

							Change in
							2010
	Three Months Ended June 30,						Versus 2009
	2010			2009			$			%
Other income (expense):
Change in fair value of warrant and conversion liabilities	$	1,350,354		$	(57,401	)	$	1,407,755			2,452	%
Interest income		5			22			(17	)		(77	)%
Interest expense		(343,177	)		(526,895	)		183,718			35	%
Total other income (expense)	$	1,007,182		$	(584,274	)	$	1,591,456			272	%

Change in fair value of warrants

The change in the fair value of our warrant and conversion liabilities resulted primarily from the changes in our stock price, the conversion and exercise prices of the instruments and the volatility of our common stock during the reported periods. Refer to Note 4 to the financial statements for further discussion on our warrant liabilities and the related 8% senior secured convertible debentures.

The securities were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The securities do not qualify for hedge accounting, and as such, all future changes in the fair value of these securities will be recognized currently in earnings until such time as the securities are exercised or expire.

Interest Income

Interest income totaled $5 and $22 for the three months ended June 30, 2010 and 2009, respectively. Interest income consists of earning on balances in interest bearing accounts.

Interest expense

Interest expense totaled $343,177 and $526,895 for the three months ended June 30, 2010 and 2009, respectively. Interest expense for 2010 consists of interest accrued on our convertible debentures of $108,422, other interest of $2,100 and amortization of debt discount of $232,655. Interest expense for 2009 consists of interest accrued on our convertible debentures of $513,924 and other interest paid of $12,971.

As a result of the default on our debentures, the interest rate was increased from 8% to 18% effective February 20, 2009 and the maturity date of the debentures was accelerated. We fully amortized the remaining discount and deferred debt issue costs during the quarter ended March 31, 2009.

Results of Operations — Six Months Ended June 30, 2010 Compared to Same Period of 2009

Our results of operations have varied significantly from year to year and quarter to quarter and may vary significantly in the future.

Revenue

Revenues totaled $1,622,283 and $1,830,868 for the six months ended June 30, 2010 and 2009, respectively.

							Change in
							2010
	Six Months Ended June 30,						Versus 2009
	2010			2009			$				%
Revenue		$	1,622,283		$	1,830,868		$	(208,585	)		(11	)%

The decrease of $208,585 or 11% for the six months ended June 30, 2010 compared to the same period in 2009 was attributable to the cancellation of a purchase order during October of 2009 (notwithstanding the fact that the order is non-cancellable). During the six months ended June 30, 2009, we fulfilled approximately $660,000 worth of product deliveries under the order. Sales in 2010 pursuant to other orders increased by approximately $451,000 as compared to 2009.

Cost of Goods Sold

Cost of Goods Sold totaled $1,371,313 and $1,763,878 for the six months ended June 30, 2010 and 2009, respectively.

					Change in
					2010
	Six Months Ended June 30,				Versus 2009
	2010		2009		$			%
Cost of Goods Sold	$	1,371,313	$	1,763,878	$	(392,565	)		(22	)%

Cost of goods consists of costs to manufacture, inventory write-offs and reserve adjustment and warranty expense. The decrease of $392,565 or 22% for the six months ended June 30, 2010 compared to the same period in 2009 was attributable to decreases of $196,732 for costs to manufacture, $69,651 for warranty expense and $126,182 for inventory write-offs and reserve adjustments. The decrease in cost to manufacture results primarily from the decrease in revenue during the 2010 period.

Operating Expenses

Operating expenses totaled $1,123,709 and $1,525,488 for the six months ended June 30, 2010 and 2009, respectively.

					Change in
					2010
	Six Months Ended June 30,				Versus 2009
	2010		2009		$			%
Operating Expenses
Administrative	$	866,468	$	1,148,304	$	(281,836	)		(25	)%
Consulting Fees		-		41,366		(41,366	)		(100	)%
Professional Fees		136,768		221,970		(85,202	)		(38	)%
Research and development		120,473		113,848		6,625			6	%
Total expense	$	1,123,709	$	1,525,488	$	(401,779	)		(26	)%

Administrative Expenses

Administrative Expenses totaled $866,468 and $1,148,304 for the six months ended June 30, 2010 and 2009, respectively. The decrease of $281,836 or 25% for the six months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to a decrease in share based compensation of $110,914 (resulting from a decrease in issued and outstanding equity awards) and reductions in insurance of $67,191, license and fees of $34,295 and overall decreases in other administrative expenses, partially offset by an increase in cash based compensation expense and related costs of $99,707. Administrative expenses consist of travel, marketing, compensation, administrative fees and costs, and depreciation expense.

Consulting Fees

Consulting fees totaled $0 and $41,366 for the six months ended June 30, 2010 and 2009, respectively. The decrease of $41,366 or 100% for the six months ended June 30, 2010 compared to the same period in 2009 was attributable to the consultant becoming an employee in late 2009. Consulting fees consists of payments made to independent contractors for services.

Professional Fees

Professional Fees totaled $136,768 and $221,970 for the six months ended June 30, 2010 and 2009, respectively. The decrease of $85,202 or 38% for the six months ended June 30, 2010 compared to the same period in 2009 was attributable to an overall reduction in cost of professional fees in the current period due to a decrease in professional services. We had decreases of $82,752 in accounting and audit fees and $2,450 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

Research and development expenses totaled $120,473 and $113,848 for the six months ended June 30, 2010 and 2009, respectively. The increase of $6,625 or 6% for the six months ended June 30, 2010 compared to the same period in 2009 was attributable to an accrual reversal of approximately $30,000 in 2009 with no comparable item in 2010, offset by reductions in spending during 2010. Research and development expense consists of costs relating to further development of our OTP products and solutions.

Other Income (Expense)

Other income (expense) totaled $1,151,175 of income for the six months ended June 30, 2010 and $10,756,891 of expense for the six months ended June 30, 2009.

							Change in
							2010
	Six Months Ended June 30,						Versus 2009
	2010			2009			$			%
Other income (expense):
Change in fair value of warrant and conversion liabilities	$	1,702,118		$	(160,668	)	$	1,862,786			1,159	%
Gain on extinguishment of debt		136,321			-			136,321			100	%
Interest income		23			51			(28	)		(55	)%
Interest expense		(687,287	)		(10,596,274	)		9,908,987			93	%
Total other income (expense)	$	1,151,175		$	(10,756,891	)	$	11,908,066			111	%

Change in fair value of warrants

Gain on extinguishment of debt

During the first quarter of 2010, certain debenture holders converted an aggregate of $341,244 of debentures into 1,364,975 shares of common stock. Since the conversion feature was accounted for as a liability, we have recorded a gain upon conversion of debt in the amount of $136,321. Refer to Note 3 to the financial statements for further discussion.

Interest Income

Interest income totaled $23 and $51 for the six months ended June 30, 2010 and 2009, respectively. Interest income consists of earning on balances in interest bearing accounts.

Interest expense

Interest expense totaled $687,287 and $10,596,274 for the six months ended June 30, 2010 and 2009, respectively. Interest expense for 2010 consists of interest accrued on our convertible debentures of $108,422, other interest of $4,200 and amortization of debt discount of $574,665. Interest expense for 2009 consists of interest accrued on our convertible debentures of $817,784, other interest of $14,853, amortization of debt discount of $6,671,835, amortization of debt issue costs of $449,052 and a charge of $2,642,750 for the 30% increase in the principal amount our convertible debentures as a result of the default described above.

Liquidity and Capital Resources

Our principal sources of operating capital since inception through June 30, 2010 have been equity and debt financings totaling approximately $31,431,000, and to a lesser degree our revenues. Since inception, we have incurred significant losses, and as of December 31, 2009 we had an accumulated deficit of $38,360,101. Our accumulated deficit totaled $38,081,665 at June 30, 2010. Our cash and cash equivalents balance at June 30, 2010 was $226,676, compared to $14,106 for the same period of 2009.

Sales of our products are not expected to generate positive cash flow until 2011. As a result, there is substantial doubt about our ability to continue as a going concern at June 30, 2010.

As of June 30, 2010 we had approximately $227,000 in cash and cash equivalents. We believe that our cash, combined with anticipated revenue collections and planned expense reductions, will last until October, 2010. In the event we do not receive additional financing or orders for our products, we anticipate ceasing operations during October of 2010.

							Change in
							2010
	Six Months Ended June 30,						Versus 2009
	2010			2009			$		%
At June 30:
Cash & Cash Equivalents	$	226,676		$	14,106		$	212,570		1,506	%
Six months ended June 30:
Net cash (used in) provided by operating activities	$	(24,339	)	$	(62,539	)	$	38,200		61	%
Net cash provided by financing activities		5,250			-			5,250		100	%

Net Cash (Used in) Provided by Operating Activities

We used cash of $24,339 for our operating activities during the six months ended June 30, 2010 and used cash of $62,539 for our operating activities during the six months ended June 30, 2009. The decrease in cash used of $38,200 or 61% for the six months ended June 30, 2010 compared to the same period in 2009 was primarily attributable to a decrease in loss (after adjustment for non-cash charges) of $1,058,161, a decrease in accounts receivable of $836,185 and an increase in accounts payable of $138,860, offset by increases in prepaid expenses and other current assets of $92,264 and inventory of $499,703 and decreases in deferred revenue of $642,873 and accrued interest of $725,167.

Net Cash Provided by Financing Activities

We received cash from our financing activities of $5,250 during the six months ended June 30, 2010, from the exercise of employee stock options, with no cash provided by financing activities during the six months ended June 30, 2009.

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

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 $2.728 per share. We used the net proceeds of the financing for our working capital requirements and to pay down certain obligations.

On September 30, 2009 we sold an additional $1,173,416 face value of our Amended Debentures (convertible into 4,693,664 common shares) and 2,254,642 Amended Warrants. We received cash proceeds of $1,127,321. The Amended Debentures (i) bear interest at 8% per year commencing on April 1, 2010, paid quarterly, commencing July 1, 2010, in cash or, subject to certain conditions, registered shares of our common stock; (ii) have a maturity of January 8, 2011, (iii) are convertible at the holders’ option into shares of our common stock at $0.25 per share, (iv) are secured by all of our and our subsidiaries’ 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 Amended Debentures if our common stock trades above $1.00 for 10 consecutive trading days. Such a forced conversion may be limited by contractual restrictions on the amount of our common stock which the holder may own and certain other conditions. Each Amended Warrant has a term of 5 years and an exercise price of $0.25 per share. The Amended Warrants also provide for the issuance of a replacement warrant in the event they are exercised for cash.

Both the conversion price of the Amended Debentures and the exercise price of the Amended 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.

Restructuring and Sales of Our 8% Senior Secured Debentures

On September 30, 2009, we completed the restructuring of our 8% Senior Secured Convertible Debentures as well as certain warrants held by the debenture holders. In connection with the restructuring, we sold an additional $1,173,416 (face value) of our Amended Debentures (convertible into 4,693,664 common shares) and 2,254,642 Amended Warrants. The effect of these transactions is a follows:

Cancellation of 8% Senior Secured Convertible Debentures in the amount of $7,581,981 and warrants to purchase 1,008,064 shares;

Issuance of Amended 8% Senior Secured Convertible Debentures in the amount $1,339,041 ($1.00 conversion price) and Amended Warrants to purchase 246,460 ($0.25 exercise price) common shares. These debentures and warrants do not contain any anti-dilution or repricing provisions;

Issuance of Amended 8% Senior Secured Convertible Debentures in the amount $4,509,703 ($0.25 conversion price) and Amended Warrants 2,843,715 ($0.25 exercise price); These debentures and warrants have anti-dilution and repricing provisions;

Gross cash proceeds to the Company in the amount of $1,127,321; and

Conversion of past due obligations to creditors and short term financing in the amount of $672,243.

The foregoing summary of the transaction is qualified in its entirety by reference to the full text of the transaction documents filed as exhibits to our Current Report on Form 8-K which was filed with the SEC on October 5, 2009. The information contained in such Current Report regarding the transaction is incorporated herein by reference. Refer to Note 5 to the financial statements for further discussion on the cancellation and restructuring.

Future Needs

Through the date of this report, our operations have been funded primarily through equity and debt financings totaling approximately $31,431,000 since inception.

We believe that our current cash of approximately $227,000 as of June 30, 2010, combined with anticipated revenue collections, will provide us with sufficient resources to fund our operations until October, 2010.

If we are able to successfully sell our products in substantial quantities during the third and fourth quarters of 2010 we may be able to continue operations until or through the first quarter of 2011. 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, 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.

Going Concern

Our independent registered public accountants have included a going concern explanatory paragraph in their unqualified opinions on our 2009 and 2008 financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are not required to provide the information required by this items as we are considered a smaller reporting company, as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (June 30, 2010). Based on such evaluation our CEO and CFO has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Notwithstanding the conclusion that our disclosure and control procedures were not effective, we believe that our financial condition, results of operations and cash flows presented in this Report 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.

Limitations on Effectiveness of Controls and Procedures

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

ITEM 1A. RISK FACTORS

We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Report, may adversely affect our business, operating results and financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this Report should be considered carefully in evaluating our company and our business and the value of our securities. The following important factors, among others, could cause our actual business, financial condition and future results to differ materially from those contained in forward-looking statements made in this Annual Report or presented elsewhere by management from time to time.

Risk Related to Our Business and Operations

There is serious doubt regarding our ability to continue as a going concern.

As of July 31, 2010, the Company had approximately $87,000 in cash. Combined with anticipated revenue collections and planned expenses, the Company believes this amount will be enough to fund our operations until October of 2010. In the event we do not secure additional financing or orders for our products, we anticipate ceasing operations during October of 2010.

We have a history of recurring losses from operations and have an accumulated deficit of $38,081,665 as of June 30, 2010. Sales of our products are not expected to generate positive cash flow until 2011. As a result, there is substantial doubt about our ability to continue as a going concern. Our plan regarding these matters is to raise additional debt and/or equity financing to allow us the ability to cover our current cash flow requirements and meet our obligations as they become due. There can be no assurances that financing will be available or if available, that such financing will be available under favorable terms. In the event that we are unable to generate adequate revenues to cover expenses and cannot obtain additional financing in the near future, we may seek protection under bankruptcy laws.

Our auditors have added an explanatory paragraph to their opinion on our financial statements for the year ended December 31, 2009 because of concerns about our ability to continue as a going concern. These concerns arise from the fact that we have not yet established an ongoing source of revenues sufficient to cover our operating costs. As a result, we must raise additional capital in order to continue to operate our business. If we fail to generate positive cash flows or obtain additional financing when required, we will have to modify, delay or abandon some or all of our business and expansion plans.

We will need to raise additional capital to continue operation.

We do not generate enough cash to fund our ongoing operations. We have relied heavily on external financing to fund operations. Such financing has come primarily from the sale of our securities. As of July 31, 2010, we had cash on hand of approximately $87,000 which we anticipate will fund our operations through October of 2010. In the event we do not secure additional financing or orders for our products, we anticipate ceasing operations during October of 2010.

All of our assets are pledged as collateral to our secured debenture holders.

Any event of default in our obligations to the holders of the secured convertible debentures, including the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against us, could require the early repayment of the secured convertible debentures. We presently do not have sufficient capital to repay the secured debentures when required. In the event we are unable to repay the secured debentures, the debenture holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such actions would require us to severely limit operations or to file for protection under United States Bankruptcy laws.

We are an early stage company with an unproven business strategy.

Our business prospects are difficult to predict because of our limited operating history, early stage of development and unproven business strategy. We are primarily focused on developing OTP solutions and products. We made our first significant commercial sale of our ICT DisplayCard in 2008. Although we believe that our current product and those under development have significant profit potential, we may not attain profitable operations and may not succeed in realizing our business objectives.

We will require additional capital which we may be unable to obtain.

We believe that our current cash, combined with anticipated revenue collections, will be enough to fund our operations until October, 2010. We currently do not have any sources of additional financing and cannot assure you that such funding will be available. If we are unable to raise additional capital we may be forced to file for bankruptcy.

We depend on a limited number of suppliers for our current product.

We obtain the battery for our current product from Solicore, Inc., our single source supplier, on a purchase order basis. In the event of a disruption or discontinuation in supply, we may not be able to obtain batteries on a timely basis, which would disrupt our operations, delay production and impair our ability to manufacture and sell our products.

We obtain the display for our current product from SmartDisplayer, our single source supplier, under a written agreement. In the event of a disruption or discontinuation in supply, we may not be able to obtain displays on a timely basis, which would disrupt our operations, delay production and impair our ability to manufacture and sell our ICT DisplayCard.

Our dependence upon outside suppliers exposes us to substantial risks, including but not limited to:

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

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

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

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

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

increases in prices of key components.

We may not be able to develop our products due to inadequate resources.

Our business strategy is to develop and market new OTP solutions and products. We believe that our revenue growth and profitability, if any, will substantially depend upon our ability to:

mass produce the ICT DisplayCard at significantly lower cost;

continue to fund research and development endeavors; and

develop, introduce and commercialize new products.

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

We depend on key personnel.

We rely to a substantial extent on the management, marketing and product development skills of our key employees and consultants, particularly Richard Nathan, our President, Chief Executive Officer and Chief Financial Officer and Mark Poidomani, our chief technology officer, to formulate and implement our business plan. Our success depends to a significant extent upon our ability to retain and attract key personnel. Competition for employees can be intense in the payment card industry, and the process of locating key personnel with the right combination of skills is often lengthy. The loss of any key personnel may significantly delay or prevent the achievement of product development and could have a material adverse effect on us.

Our products might not achieve market acceptance.

The commercial success of our products will depend upon the adoption of our products by payment card providers. In order to be successful, our products must meet the technical and cost requirements for card enhancements within the payment card industry. Market acceptance will depend on many factors, including:

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

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

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

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

We rely substantially on third-party manufacturers.

To be successful, we must manufacture, or contract for the manufacture of, our products in compliance with industry standards and on a timely basis. As discussed in the risk factor above, we are working in cooperation with other companies that have specialized technical expertise related to the manufacturing of our ICT DisplayCard. We currently use a limited number of sources for most of the supplies and services that we use in the manufacturing processes. Our manufacturing strategy presents substantial risk, including but not limited to:

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

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

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

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

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

Some of our competitors have significantly greater resources than us.

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

Our competitors have significantly greater financial, technical, marketing, purchasing and other resources than we do, and as a result, may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of products, or to deliver competitive products at a lower end-user price. Our inability to successfully compete will materially and adversely affect our business.

Our business is dependent on the stability of the Banking Industry.

A great deal of our business requires a certain degree of stability in the banking industry in order for us to effectively provide and market our products to consumers. Unforeseen problems or turmoil in the banking industry may negatively impact our business.

Our business may be negatively impacted by a lasting recession.

If a recession continues for an extended period and consumer spending is sharply curtailed, our revenue stream may diminish to such a degree that the business is no longer feasible.

Risks Related to our Securities

Our common shares were delisted from the NASDAQ Capital Market.

On February 20, 2009, our common shares were delisted from the NASDAQ Capital Market. As a result, our shares now trade on the Over-the-Counter Bulletin Board and on the Pinksheets. Historically, the volume and liquidity of these markets has been significantly less than on the NASDAQ Capital Market. In addition, shares traded in these markets are unlikely to be followed by market analysts and there may be few market makers for our common stock. Also, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of our common stock. Any of these factors could adversely affect the liquidity and trading price of our common stock and could result in large fluctuations in market price.

Our common stock is subject to the penny stock regulations and restrictions.

Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a "penny stock," for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects any market liquidity for our common stock.

For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transaction is suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market which sets forth:

the basis on which the broker or dealer made the suitability determination, and

that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commissions’ payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Because of these regulations, broker-dealers may not wish to engage in transactions with penny stocks. Accordingly, investors may encounter difficulties in their attempt to sell shares of our common stock. These additional sales practice and disclosure requirements could impede the sale of our common stock. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our shares, in all probability, will be subject to such penny stock rules for the foreseeable future and our shareholders will, in all likelihood, find it difficult to sell their common stock.

The market for penny stocks has experienced numerous frauds and abuses.

We believe that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:

Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

“Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;

Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and

Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

As a result, many investors have the perception that penny stocks are too risky or involve a high degree of fraud. These factors will make the development of an active market for our common shares more difficult which further affects the liquidity of our common stock.

We do not pay any dividends.

We plan to use all of our earnings; to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. Therefore, any return on your investment will be derived from an increase in the price of our stock, which may or may not occur.

Sales of our common stock in the public market may depress our stock price.

As of June 30, 2010, we had 31,142,250 shares of common stock outstanding. On a fully diluted basis, including shares issuable upon exercise of warrants and stock options and convertible debentures, we have 61,893,500 shares outstanding or issuable, as of June 30, 2010. On September 30, 2009, we completed the restructuring of our 8% Senior Secured Convertible Debentures. As a result, the conversion price of the debentures as well as substantially all our outstanding warrants was adjusted to $0.25. All of these shares can be traded pursuant to prospectus or via Rule 144 of the Securities Act of 1933. If our stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall, which could result in a significant loss on any investment you make in our common stock. The sale of a large number of shares could impair our ability to raise needed capital by depressing the price of our common stock.

We are contractually obligated to issue shares in the future, diluting the interest of current stockholders.

As of June 30, 2010, there were outstanding options, warrants and other convertible securities entitling the holder to purchase 30,751,250 shares of our common stock, at a weighted average exercise price of $0.51 per share. We expect to issue additional options, warrants and other convertible securities to compensate employees, consultants and directors, and may issue additional shares to raise capital, to acquire other companies or technologies, to pay for services, or for other corporate purposes. Any such issuances will have the effect of diluting the interest of current stockholders.

We may be subject to securities litigation as the price of our common stock has drastically decreased over the past twelve months.

During the past two years, the price of our common stock has decreased drastically. Although management feels that at all times it has acted in the best interest of the company’s shareholders, such declines in stock price have historically increased the probability of becoming the subject of a securities class action law suit. If we were to become the target of such litigation, we will have to spend considerable time and resources in defending such litigation. This would result in management diverting its focus from the development and sale of our products. Additionally, such litigation is extremely costly and will deplete our assets.

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

Our certificate of incorporation currently authorizes our board of directors to issue up to 75,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of June 30, 2010, after taking into consideration our outstanding common and preferred shares and our contingently issuable shares, our board of directors will be entitled to issue up to 13,106,500 additional common shares and 5,000,000 preferred shares. The power of the board of directors to issue these shares or securities convertible into these shares is generally not subject to stockholder approval.

We will require additional working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the holders of our common stock. The issuance of additional common stock or securities convertible into common stock will also have the effect of diluting the proportionate equity interest and voting power of holders of our common stock.

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

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

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

prohibit stockholders from calling special meetings;

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

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

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

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

New rules, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract qualified officers and directors.

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

We face risks related to compliance with corporate governance laws and financial reporting standards.

The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company's legal and financial compliance costs and make some activities more time-consuming and more burdensome. As a result, management will be required to devote more time to compliance which could result in a reduced focus on the development thereby adversely affecting the Company’s development activities. Also, the increased costs will require the Company to seek financing sooner that it may otherwise have had to.

Starting in 2007, Section 404 of the Sarbanes-Oxley Act of 2002 requires a company’s management to assess the company’s internal control over financial reporting annually and include a report on such assessment in our annual report filed with the SEC. Some of this concern has been alleviated due to the signing of the “Dodd-Frank Wall Street Reform and Consumer Protection Act.” (Wall Street Reform Act). This was signed On July 21, 2010 by President Barack Obama. The Wall Street Reform Act permanently exempts small public companies with less than $75 million in market capitalization (nonaccelerated filers) from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX). Section 404(b) requires a registrant to provide an attestation report on management’s assessment of internal controls over financial reporting by the registrant’s external auditor. Disclosure of management attestations on internal control over financial reporting under existing Section 404(a) is still required for smaller companies. Although we are currently a smaller reporting company and will be in the foreseeable future, there is no guarantee that we will remain so if circumstances in our business change. If we lost our status as a smaller reporting company, we would then be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002. In the event we become subject to 404(b), we will be required to expand substantial capital in connection with compliance.

Our management has concluded that, as of June 30, 2010, our disclosure controls and procedures were not effective.

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2010. Based on such evaluation which disclosed numerous material weaknesses, our CEO and CFO have concluded that, as of June 30, 2010, the Company’s disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. If we fail to implement new or improved disclosure controls, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

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

The following information is given with regard to unregistered securities sold during the year beginning January 1, 2010.

On January 4, 2010, we issued John Ward, III, one of our non-executive directors, an option to purchase 100,000 common shares as compensation under our non-executive board compensation policy. The option has an exercise price of $0.35, vests quarterly over the grant year and has a term of 10 year.

On January 7, 2010, we issued 100,000 common shares in connection with the conversion of $25,000 of our convertible debentures.

During February of 2010 we issued 352,667 shares of common stock upon the exercise of 352,667 employee stock options. We received $5,250 in cash proceeds from the exercise of the options; the balance of the exercise price was paid through the reduction of accrued compensation in the amount of $24,137.

On February 17, 2010, we issued 1,264,975 common shares in connection with the conversion of $316,224 of our convertible debentures.

In June of 2010, we issued 150,000 common shares upon the exercise of 150,000 employee stock options. The exercise price was paid through a reduction of accrued compensation in the amount of $15,000.

In connection with the foregoing, the Company relied upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. The issuances were made to a limited number of persons, and transfer of the securities was restricted in accordance with the requirements of the Securities Act of 1933.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None

ITEM 4. (REMOVED AND RESERVED)

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. OTHER INFORMATION

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-Q.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.

	INNOVATIVE CARD TECHNOLOGIES, INC

Dated: August 16, 2010	By:	/S/ Richard Nathan
		Richard Nathan Chief Executive Officer Chief Financial Officer and Director (Principal Executive Officer and Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the following capacities and on the dates indicated.

INDEX TO EXHIBITS

Incorporated by Reference

Exhibit

No.

Description

Filed

Herewith

Form

Exhibit

No.

File No.

Filing Date

3.01(i)

Amended and Restated Certificate of Incorporation of Innovative Card Technologies, Inc. filed on 5/11/05

10-K

3.01(i)

001-33353

5/15/09

3.02(i)

Certificate of Amendment to Certificate of Incorporation of Innovative Card Technologies, Inc. filed on 12/21/07

8-K

3.1

001-33353

1/2/08

3.03(ii)

Amended and Restated Bylaws of Innovative Card Technologies, Inc. adopted on May 5, 2005

10-K

3.03(ii)

001-33353

5/15/09

10.01**

2004 Stock Incentive Plan as amended

S-8

10.1

333-137033

3/25/08

10.02

Form of Warrant pursuant to private placement dated October 19, 2005

8-K

4.1

000-51260

10/25/05

10.03

Form of Warrant issued to TR Winston & Company, LLC dated May 30, 2006

8-K

4.1

000-51260

5/31/06

10.04

Form of Securities Purchase Agreement dated May 30, 2006

8-K

10.1

000-51260

5/31/06

10.05

Form of Registration Rights Agreement dated May 30, 2006

8-K

10.2

000-51260

5/31/06

10.06

Licensing Agreement dated September 26, 2006 by and between Innovative Card Technologies, Inc. and NCryptone, SA as license

SB-2

10.35

333-135715

7/12/06

10.07

Licensing Agreement dated September 26, 2006 by and betweenNCryptone, SA as licensor and Innovative Card as license

SB-2

10.36

333-135715

7/12/06

10.08

Form of Indemnification Agreement for Executive Officers and Directors of Innovative Card Technologies, Inc.

8-K

10.1

001-33353

3/23/07

10.09**

2007 Equity Incentive Plan

10-QSB

10.44

001-33353

11/19/07

10.10

Form of Indemnification Agreement entered into between the Company and Messrs. Delcarson and Caporale

8-K

10.1

001-33353

11/29/07

10.11	Form of Securities Purchase Agreement Dated January 8, 2008	8-K	10.1	001-33353	1/9/07

10.12	Form of 8% Senior Secured Convertible Debenture issued January 8, 2008	8-K	10.2	001-33353	1/9/07

10.13	Form of Common Stock Purchase Warranted issued January 8, 2008	8-K	10.3	001-33353	1/9/07

10.14	Form of Registration Rights Agreement dated January 8, 2008	8-K	10.4	001-33353	1/9/07

10.15	Form of Security Agreement dated January 8, 2008	8-K	10.5	001-33353	1/9/07

10.16	Form of Subsidiary Guarantee dated January 8, 2008	8-K	10.6	001-33353	1/9/07

10.17	Form of Securities Purchase Agreement Dated April 15, 2008	8-K	10.1	001-33353	4/16/08

10.18	Form of 8% Senior Secured Convertible Debenture issued April 15, 2008	8-K	10.2	001-33353	4/16/08

10.19	Form of Common Stock Purchase Warranted issued April 15, 2008	8-K	10.3	001-33353	4/16/08

10.20	Form of Registration Rights Agreement dated April 15, 2008	8-K	10.4	001-33353	4/16/08

10.21	Form of Security Agreement dated April 15, 2008	8-K	10.5	001-33353	4/16/08

10.22	Form of Subsidiary Guarantee dated April 15, 2008	8-K	10.6	001-33353	4/16/08

10.23**	Form of Executive Employment Agreement of Vincent M. Schiavo, dated as of May 22, 2008	8-K	10.1	001-33353	5/27/08

10.24**	Employment Agreement of Mr. Richard Nathan dated February 20, 2009	8-K	10.01	001-33353	2/24/09

10.25	Assignment of Debenture and Common Stock Warrants Agreement with EMC	8-K	10.01	001-33353	7/17/09

10.26	Waiver, Amendment and Exchange Agreement	8-K	10.16	001-33353	10/05/09

10.27	Debenture & Warrant Purchase Agreement	8-K	10.17	001-33353	10/05/09

10.28	Form of Amended Debenture dated September 30, 2009	8-K	10.18	001-33353	10/05/09

10.29	Form of Amended Warrant dated September 30, 2009		8-K	10.19	001-33353	10/05/09

10.30**	2010 Equity Compensation Plan		8-K	4.01	001-33353	2/22/10

14.01	Code of Ethics		10-KSB	14.0	000-51260	3/20/06

21.1	List of Subsidiaries		SB-2	21.1	333-119814	10/19/04

31.1	Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	*

31.2	Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	*

32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. § 1350	*

32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350	*

**Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.

INNOVATIVE CARD TECHNOLOGIES INC 10-Q