UNITED
STATES


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, 2009


Or




 ̈
            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
              
              90-0249676State
      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).


 ̈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 12, 2009 there were 28,495,256 shares of common stock, $.0001 par value,
issued and outstanding.







Innovative
Card Technologies, Inc.
   Table of
Contents
  PagePART
      I -
              
              FINANCIAL
      INFORMATION
              2Item
      1.
              
              Financial
      Statements
              2Condensed
      Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and
      December 31, 2008
              2Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended June 30, 2009 and 2008  and Six
      months ended June 30, 2009 and 2008
              3Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      months ended June 30, 2009 and 2008
              4Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              5Item
      2.
              
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              15Item
      3.
              
              Quantitative
      and Qualitative Disclosures about Market Risk
              28Item
      4.
              
              Controls
      and Procedures
              28PART
      II -
              
              OTHER
      INFORMATION
              30Item
      1.
              
              Legal
      Proceedings
              30Item
      1A.
              
              Risk
      Factors
              30Item
      2.
              
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              36Item
      3.
              
              Defaults
      Upon Senior Securities
              37Item
      4.
              
              Submission
      of Matters to a Vote of Security Holders.
              37Item
      5.
              
              Other
      Information
              37Item
      6.
              
              Exhibits
              38











Subsequent
Events





On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”).  Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables.  The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing supply agreement between EMC and us.  Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the supply
agreement.





The
foregoing summary of the Agreement is qualified in its entirety by reference to
the full text of such document, a copy of which is attached as Exhibits
10.1 to our Current Report on Form 8-K which was filed with the SEC on July
17, 2009.  There can be no assurance that all conditions contained in
the Agreement will be met by the parties.




1




PART
I


FINANCIAL
INFORMATION





ITEM
1.                FINANCIAL
STATEMENTS




INNOVATIVE
CARD TECHNOLOGIES, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  14,106
                  
                  
                  $
                  76,645Accounts
      receivable, net of allowance for doubtful accounts of $60,000 and $60,000
      at June 30, 2009 and December 31, 2008, respectively
                  
                  
                  360,666
                  
                  
                  
                  190,767Prepaids
      and other current assets
                  
                  
                  44,884
                  
                  
                  
                  174,178Deposits
      on raw materials held for production
                  
                  
                  268,829
                  
                  
                  
                  268,318Raw
      materials held for production
                  
                  
                  389,048
                  
                  
                  
                  347,529Work
      in progress inventory, net of allowance of $0 and $115,059 at June 30,
      2009 and December 31, 2008, respectively
                  
                  
                  722,275
                  
                  
                  
                  1,454,940Total
      current assets
                  
                  
                  1,799,808
                  
                  
                  
                  2,512,377Property
      and equipment
                  
                  
                  139,144
                  
                  
                  
                  171,722Deferred
      debt issuance cost
                  
                  
                  -
                  
                  
                  
                  449,052Deposits
                  
                  
                  57,919
                  
                  
                  
                  62,971Total
      assets
                  
                  $
                  1,996,871
                  
                  
                  $
                  3,196,122Liabilities
      and stockholders' deficitCurrent
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  1,211,753
                  
                  
                  $
                  1,281,602Accounts
      payable - related parties
                  
                  
                  600,010
                  
                  
                  
                  600,010Accrued
      interest
                  
                  
                  869,478
                  
                  
                  
                  31,689Warranty
      reserve
                  
                  
                  288,666
                  
                  
                  
                  198,854Deferred
      rent
                  
                  
                  20,575
                  
                  
                  
                  56,929Deferred
      revenue
                  
                  
                  1,593,487
                  
                  
                  
                  1,169,9578%
      convertible debentures
                  
                  
                  11,451,914
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  16,035,883
                  
                  
                  
                  3,339,0418%
      convertible debentures, net of discount of  $0 and $5,384,054 at June
      30, 2009 and December 31, 2008, respectively
                  
                  
                  -
                  
                  
                  
                  3,425,111Warrant
      liability
                  
                  
                  110,395
                  
                  
                  
                  19,055Derivative
      liability
                  
                  
                  75,389
                  
                  
                  
                  -Total
      liabilities
                  
                  
                  16,221,667
                  
                  
                  
                  6,783,207Stockholders'
      deficitPreferred
      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, 28,495,256 shares
      issued and outstanding, respectively
                  
                  
                  28,495
                  
                  
                  
                  28,495Additional
      paid-in capital
                  
                  
                  30,439,144
                  
                  
                  
                  33,381,140Accumulated
      deficit
                  
                  
                  (44,692,435
                  )
                  
                  
                  (36,996,720
                  )Total
      deficiency in stockholders' equity
                  
                  
                  (14,224,796
                  )
                  
                  
                  (3,587,085
                  )Total
      liabilities and deficiency in stockholders' equity
                  
                  $
                  1,996,871
                  
                  
                  $
                  3,196,122
 
 The
accompanying notes are an integral part of these  unaudited condensed
consolidated financial statements.
  2
  INNOVATIVE
CARD TECHNOLOGIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three
      Months Ended June 30,
                  
                  
                  Six
      Months Ended June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenues
                  
                  $
                  1,296,645
                  
                  
                  $
                  800,209
                  
                  
                  $
                  1,830,868
                  
                  
                  $
                  1,017,425Cost
      of goods sold
                  
                  
                  1,176,918
                  
                  
                  
                  859,875
                  
                  
                  
                  1,763,878
                  
                  
                  
                  1,070,209Gross
      profit/(loss)
                  
                  
                  119,727
                  
                  
                  
                  (59,666
                  )
                  
                  
                  66,990
                  
                  
                  
                  (52,784
                  )Operating
      expensesAdministrative
                  
                  
                  595,980
                  
                  
                  
                  1,656,715
                  
                  
                  
                  1,144,054
                  
                  
                  
                  3,046,646Consulting
      fees
                  
                  
                  28,183
                  
                  
                  
                  134,427
                  
                  
                  
                  45,616
                  
                  
                  
                  254,525Professional
      fees
                  
                  
                  149,771
                  
                  
                  
                  201,192
                  
                  
                  
                  221,970
                  
                  
                  
                  449,223Research
      and development
                  
                  
                  70,639
                  
                  
                  
                  118,539
                  
                  
                  
                  113,848
                  
                  
                  
                  298,355Total
      operating expense
                  
                  
                  844,573
                  
                  
                  
                  2,110,873
                  
                  
                  
                  1,525,488
                  
                  
                  
                  4,048,749Loss
      from operations
                  
                  
                  (724,846
                  )
                  
                  
                  (2,170,539
                  )
                  
                  
                  (1,458,498
                  )
                  
                  
                  (4,101,533
                  )Other
      income (expense)Change
      in fair value of warrant and conversion liability
                  
                  
                  (57,401
                  )
                  
                  
                  1,898,893
                  
                  
                  
                  (160,668
                  )
                  
                  
                  2,024,554Other
      expense
                  
                  
                  -
                  
                  
                  
                  (120,794
                  )
                  
                  
                  -
                  
                  
                  
                  (120,794
                  )Interest
      income
                  
                  
                  22
                  
                  
                  
                  11,703
                  
                  
                  
                  51
                  
                  
                  
                  20,776Interest
      expense
                  
                  
                  (526,895
                  )
                  
                  
                  (419,978
                  )
                  
                  
                  (10,596,274
                  )
                  
                  
                  (585,359
                  )Total
      other income (expense)
                  
                  
                  (584,274
                  )
                  
                  
                  1,369,824
                  
                  
                  
                  (10,756,891
                  )
                  
                  
                  1,339,177Loss
      before provision for income taxes
                  
                  
                  (1,309,120
                  )
                  
                  
                  (800,715
                  )
                  
                  
                  (12,215,389
                  )
                  
                  
                  (2,762,356
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (800
                  )Net
      loss
                  
                  
                  (1,309,120
                  )
                  
                  
                  (800,715
                  )
                  
                  
                  (12,215,389
                  )
                  
                  
                  (2,763,156
                  )Basic
      and diluted loss per share
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.43
                  )
                  
                  $
                  (0.10
                  )Weighted
      average shares outstanding, basic and diluted
                  
                  
                  28,495,256
                  
                  
                  
                  28,486,411
                  
                  
                  
                  28,495,256
                  
                  
                  
                  28,459,763
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  3




INNOVATIVE
CARD TECHNOLOGIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2009 AND 2008
 (Unaudited)
 
 2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (12,215,389
                    )
                    
                    $
                    (2,763,156
                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    32,578
                    
                    
                    
                    355,129Change
      in fair value of warrant liability
                    
                    
                    91,340
                    
                    
                    
                    (2,024,554
                    )Change
      in fair value of conversion liability
                    
                    
                    69,328
                    
                    
                    
                    -Amortization
      of debt discount
                    
                    
                    6,671,835
                    
                    
                    
                    314,828Amortization
      of deferred debt issuance costs
                    
                    
                    449,052
                    
                    
                    
                    27,080Debt
      default penalty
                    
                    
                    2,642,749
                    
                    
                    
                    -Stock
      based compensation expense
                    
                    
                    295,958
                    
                    
                    
                    1,049,433Change
      in provision for obsolete inventory
                    
                    
                    173,630
                    
                    
                    
                    -(Increase)
      decrease in accounts receivable
                    
                    
                    (169,899
                    )
                    
                    
                    (811,051
                    )(Increase)
      decrease in prepaids and other current assets
                    
                    
                    129,294
                    
                    
                    
                    (8,311
                    )(Increase)
      decrease in deposits on raw materials held for production
                    
                    
                    (511
                    )
                    
                    
                    (263,390
                    )(Increase)
      decrease in raw materials held for production
                    
                    
                    (147,343
                    )
                    
                    
                    (49,294
                    )(Increase)
      decrease in work in progress inventory
                    
                    
                    664,859
                    
                    
                    
                    (868,923
                    )(Increase)
      decrease in deposits
                    
                    
                    5,052
                    
                    
                    
                    80,885Increase
      (decrease) in accounts payable and accrued expenses
                    
                    
                    (69,849
                    )
                    
                    
                    (1,776,816
                    )Increase
      (decrease) in accounts payable - related parties
                    
                    
                    -
                    
                    
                    
                    (61,889
                    )Increase
      (decrease) in accrued interest
                    
                    
                    837,789
                    
                    
                    
                    -Increase
      (decrease) in warranty reserve
                    
                    
                    89,812
                    
                    
                    
                    80,990Increase
      (decrease) in deferred rent
                    
                    
                    (36,354
                    )
                    
                    
                    -Increase
      (decrease) in deferred revenue
                    
                    
                    423,530
                    
                    
                    
                    50,484Net
      cash provided by (used in) operating activities
                    
                    
                    (62,539
                    )
                    
                    
                    (6,668,555
                    )Cash
      flows from investing activities:Purchase
      of property and equipment
                    
                    
                    -
                    
                    
                    
                    (13,485
                    )Net
      cash used in investing activities
                    
                    
                    -
                    
                    
                    
                    (13,485
                    )Cash
      flows from financing activities:Proceeds
      from issuance of 8% convertible debentures
                    
                    
                    -
                    
                    
                    
                    8,500,000Payments
      on debt issuance cost
                    
                    
                    -
                    
                    
                    
                    (527,500
                    )Proceeds
      from exercise of options/warrants
                    
                    
                    -
                    
                    
                    
                    50,000Net
      cash provided by financing activities
                    
                    
                    -
                    
                    
                    
                    8,022,500Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    (62,539
                    )
                    
                    
                    1,340,460Cash
      and cash equivalents, beginning of period
                    
                    
                    76,645
                    
                    
                    
                    339,600Cash
      and cash equivalents, end of period
                    
                    $
                    14,106
                    
                    
                    $
                    1,680,060Supplemental
      Schedule of Cash Flow Information:Cash
      paid for interest
                    
                    $
                    2,666
                    
                    
                    $
                    65,667Non-Cash
      Financial Activity:Debt
      discount attributable to beneficial conversion feature
                    
                    $
                    -
                    
                    
                    $
                    3,237,953Debt
      discount attributable to warrants
                    
                    
                    -
                    
                    
                    
                    3,087,307Value
      of warrants issued as non-employee compensation includedin
      prepaid expenses and other current assets
                    
                    
                    -
                    
                    
                    
                    278,876
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
  4




INNOVATIVE
CARD TECHNOLOGIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 (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 product, the ICT DisplayCard,
integrates the security of a one-time password token directly into a card the
size of a standard credit or debit card. A token is a portable physical device,
typically in a key-fob form factor, that generates the one-time password (also
referred to as a one-time passcode). At the push of a button on the back of the
ICT DisplayCard, a one-time passcode (OTP) is shown on the card’s integrated
display. During a transaction, this number is entered into a user interface with
other information (such as the user’s static PIN and login name). This
information is relayed to a backend system for multi-factor authentication.
InCard does not provide the backend authentication server, but rather will
integrate the ICT DisplayCard into authentication systems provided by other
companies including distributors and other resellers of the ICT DisplayCard. The
ICT DisplayCard’s OTP authentication works like tokens issued by VASCO, RSA, and
ActivIdentity, but in a more convenient, wallet-sized card form
factor.
 
 BASIS
OF PRESENTATION AND GOING CONCERN
 
 The
accompanying 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.
  The
Company has a history of recurring losses from operations and has an accumulated
deficit of $44,692,435 as of June 30, 2009. We incurred net losses of
$8,929,537 for the twelve months ending December 31, 2008. During the six
months ending June 30, 2009, we incurred additional net losses of
$12,215,389.  Sales of the InCard DisplayCard, the Company’s main product,
are not expected to generate positive cash flow until the fourth quarter of
2009. As a result, there is substantial doubt about the Company’s ability to
continue as a going concern at June 30, 2009 and December 31, 2008.
 
 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 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
August 10, 2009 the Company has approximately $36,000 in cash. Combined
with anticipated revenue collections and planned expense reductions, the Company
believes this amount will last through the third quarter of
2009.
  5
  The
accompanying unaudited condensed consolidated financial statements as of June
30, 2009 and for the three and six months ended June 30, 2009 and 2008 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, 2008 as disclosed in the company's 10-K
for that year as filed with the SEC.
  The
results for the six months ended June 30, 2009 are not necessarily indicative of
the results to be expected for the pending full year ending December 31,
2009.
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 PRINCIPLES
OF CONSOLIDATION
 
 The
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.
 
 REVENUE
RECOGNITION
 
 The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 104, or SAB 104. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured.
Revenue is not recognized on product sales transacted on a test or pilot basis.
Instead, receipts from these types of transactions offset marketing expenses.
Revenue from royalties is recognized with the passage of time in accordance with
the underlying agreement.
 
 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.
 
 The Company assembles its ICT
DisplayCard using a single source, NagraID, pursuant to a written agreement. The
Company believes that alternative sources for this component in the event of a
disruption or discontinuation in supply would not be available on a timely
basis, which could disrupt Company operations relating to the ICT DisplayCard,
delay production of the ICT DisplayCard for up to twelve months and impair the
Company’s ability to manufacture and sell the ICT
DisplayCard.
  6
 
 MAJOR
CUSTOMERS
 
 Two
customers accounted for 99% and 96% of the Company’s revenues for the three and
six months ended June 30, 2009, respectively, and three customers accounted
for 91% of the Company’s revenue for the three and six months ended June 30,
2008.
  FAIR
VALUE OF FINANCIAL INSTRUMENTS
 
 Fair value of financial
instruments
  In April
2009, we adopted FASB Staff Position (“FSP”) No. FAS 107-1 and APB
28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”) for its interim period ended June 30, 2009. FSP FAS 107-1 and
APB 28-1 requires disclosures about fair value of financial instruments as
defined by SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments” (“SFAS 107”), for interim reporting periods
of publicly traded companies as well as in annual financial
statements.
 
 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.
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ,
which defines fair value, establishes a framework for consistently measuring
fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does not require any new
fair value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information.  In February 2008, the FASB deferred the effective date
of SFAS 157 by one year for certain nonfinancial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  On November 1, 2008, the
Company adopted the provisions of SFAS 157, except as it applies to those
nonfinancial assets and liabilities for which the effective date has been
delayed by one year.
  The fair
value hierarchy described by the standard is based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value and include the following:
  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.
  7
  
 In
accordance with SFAS 157, 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, 2009:
  Level
      1
                            
                            Level
      2
                            
                            Level
      3
                            
                            TotalCash
      and cash equivalents
                            
                            
                            14,106
                            
                            
                            
                            
                            
                            14,106Derivative
      liabilities
                            
                            
                            
                            
                            
                            
                            (185,784
                            )
                            (185,784
                            )
 
 LOSS PER SHARE
 
 The
Company utilizes SFAS No. 128, “Earnings per Share.” Basic loss per share
is computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.
  Common
equivalent shares are excluded from the computation of diluted loss per share
since their effect would have been anti-dilutive. There were 15,454,880 common
share equivalents at June 30, 2009 and 14,104,756 at June 30, 2008 that were
excluded from the calculation of diluted loss per share as their inclusion would
reduce diluted loss per share for the three and six months ended June 30, 2009
and 2008.
 
 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.
  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 March 31, 2009 and 5% effective April 1, 2009 (the change in estimate
based on historical trends). Activity in the accrued warranty reserve liability
for the three and six month periods ended June 30, 2009 and 2008 is as
follows:
 
 Three
      months ended June 30,
                    
                    
                    Six
      months ended June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    239,641
                    
                    
                    $
                    41,484
                    
                    
                    $
                    198,854
                    
                    
                    $
                    27,816Charged
      to cost of sales
                    
                    
                    50,499
                    
                    
                    
                    70,922
                    
                    
                    
                    93,161
                    
                    
                    
                    84,590Deductions
                    
                    
                    (1,474
                    )
                    
                    
                    (3,600
                    )
                    
                    
                    (3,349
                    )
                    
                    
                    (3,600
                    )Balance
      at end of period
                    
                    $
                    288,666
                    
                    
                    $
                    108,806
                    
                    
                    $
                    288,666
                    
                    
                    $
                    108,806
  STOCK
BASED COMPENSATION
 
 The
Company accounts for its stock based compensation under SFAS No. 123R,
“Share-Based Payments”, which it adopted in 2006, using the fair value based
method. Under this method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period.  This Statement 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
 
 The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable
income.
  8
  The
Company adopted the provisions of the Financial Accounting Standards Board
(“FASB”) Interpretation No.48, “Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007.
As a result of the implementation of FIN 48, the Company made a comprehensive
review of its portfolio of uncertain tax positions in accordance with
recognition standards established by FIN 48. As a result of this review, the
Company concluded that at this time there are no uncertain tax positions that
would result in tax liability to the Company. As a result of applying the
provisions of FIN 48, there was no cumulative effect on retained
earnings.
 
 CHANGE
IN ACCOUNTING PRINCIPLE
 
 In June
2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5),
Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.
EITF 07-5 requires entities to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock by assessing the
instrument’s contingent exercise provisions and settlement provisions.
Instruments not indexed to their own stock fail to meet the scope exception of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities , paragraph 11(a), and should be
classified as a liability and marked-to-market. The statement is effective for
fiscal years beginning after December 15, 2008 and is to be applied to
outstanding instruments upon adoption with the cumulative effect of the change
in accounting principle recognized as an adjustment to the opening balance of
retained earnings. The Company has assessed its outstanding equity-linked
financial instruments and has concluded that, effective January 1, 2009,
the conversion feature of our convertible debentures will need to be recorded as
a derivative liability due to the fact that the conversion price is subject to
adjustment based on subsequent sales of securities. The cumulative effect of the
change in accounting principle on January 1, 2009 is an increase in our
derivative liability related to the fair value of the conversion feature of
$6,061, an increase in the unamortized discount related to our convertible
debentures of $1,287,781, a decrease in additional paid-in capital of $3,237,954
related to the decrease in beneficial conversion feature attributable to the
debentures, and a $4,519,674 net decrease in accumulated deficit, comprised of a
credit to reflect the change in fair value of the derivative liability from date
of issue to January 1, 2009 of $5,235,242 partially offset by a charge of
$715,568 for additional expense for amortization of debt discount.
 
 RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.
SFAS No. 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability and
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, with
early adoption permitted. In February 2008, FASB Staff Position (FSP)
FAS 157-2, “Effective Date of FASB Statement No.
157”, which delays the effective date of SFAS 157 to fiscal years
and interim periods within those fiscal years beginning after November 15,
2008 for non-financial assets and non-financial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We elected to defer the adoption of the
Standard for these non-financial assets and liabilities, and are currently
evaluating the impact, if any, that the deferred provisions of the Standard will
have on our consolidated financial statements. The adoption of SFAS 157 for our
financial assets and liabilities did not have an impact on our financial
position or operating results.
 
 In
December 2007 the FASB issued SFAS 160 “Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. This
Statement amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement changes the way the
consolidated income statement is presented. It requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. This
Statement establishes disclosure requirements in the consolidated financial
statements, which will enable users to clearly distinguish between the interests
of the parent’s owners and the interests of the non-controlling owners of a
subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008; earlier adoption is
prohibited. The adoption of this standard had no impact to the Company’s
financial position, results of operations, or cash flows.
  9
 
 In
December 2007, the FASB issued No. 141 (revised 2007), “Business Combinations”, which
replaces SFAS No. 141. SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired and the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. This Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. This Statement is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of this standard had no impact to the Company’s financial position,
results of operations, or cash flows.
  In March
2008 the FASB issued SFAS 161 “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”. This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008; earlier adoption is encouraged. The adoption of this standard had no
impact to the Company’s financial position, results of operations, or cash
flows.
 
 In April
2008, the FASB issued FSP FAS 142-3,  “Determination of the Useful Life of
Intangible Assets”.  FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets . This change is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The adoption of this
standard had no impact to the Company’s financial position, results of
operations, or cash flows.
  In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities.”  FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The FSP
requires that all unvested share-based payment awards that contain
nonforfeitable rights to dividends should be included in the basic Earnings Per
Share (EPS) calculation.  The adoption of this standard had no impact
on the Company’s consolidated financial position, results of operations, or cash
flows.
  In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS No. 115-2”). FSP FAS No.
115-2 provides guidance in determining whether impairments in debt securities
are other than temporary, and modifies the presentation and disclosures
surrounding such instruments. This FSP is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009. The adoption of this standard during the second quarter of
2009 had no impact on the Company’s consolidated financial position, results of
operations, or cash flows.
  In April
2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
No. 157-4”). FSP FAS No. 157-4 provides additional guidance in determining
whether the market for a financial asset is not active and a transaction is not
distressed for fair value measurement purposes as defined in SFAS No. 157, “Fair
Value Measurements.” FSP FAS No. 157-4 is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009. The adoption of this standard during the second quarter of
2009 had no impact on the Company’s consolidated financial position, results of
operations, or cash flows.
  10
  In April
2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP FAS No. 107-1 and APB 28-1”). This FSP
amends FASB Statement No. 107, “Disclosures about Fair Values of Financial
Instruments,” to require disclosures about fair value of financial instruments
in interim financial statements as well as in annual financial statements. APB
28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in all interim financial statements. This standard is
effective for interim periods ending after June 15, 2009, but early adoption is
permitted for interim periods ending after March 15, 2009. The adoption of this
standard during the second quarter of 2009 had no impact on the Company’s
consolidated financial position, results of operations, or cash
flows.
 
 In May 2009, the FASB issued
SFAS No. 165,“Subsequent
Events”(“SFAS No. 165”). SFAS No. 165 establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS No. 165 will be effective for interim and annual financial
periods ending after June 15, 2009. The Company adopted
SFAS No. 165 during the three months ended June 30, 2009 and
evaluated subsequent events through the issuance date of the financial
statements. SFAS No. 165 had no impact on the Company’s consolidated
financial position, results of operations, or cash flows.
 
 In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers and
Servicing of Financial Assets – an amendment of SFAS Statement No. 140”
(“SFAS No. 166”). SFAS No. 166 will require more information about transferred
of financial assets and where companies have continuing exposure to the risks
related to transferred financial assets. SFAS 166 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.
 
 In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS No. 167”). SFAS No. 167 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 SFAS
No. 167, 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. SFAS 167 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.
 In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principals – a replacement of
FAS No.162” (“SFAS No. 168”). This
statement establishes the Codification as the source of authoritative U.S.
accounting and reporting standards recognized by the FASB for use in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification was the result of a project of FASB
to organize and simplify all authoritative GAAP literature into one source. This
statement is effective for interim reporting and annual periods ending after
September 15, 2009. Accordingly, the Company will adopt SFAS No. 168
during the quarter ended September 30, 2009. The Company does not
anticipate this statement to have a material impact on its consolidated
financial position, results of operations or cash
flows.
 
 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.
  11
 
 NOTE
3 - INCOME TAXES
 
 Our
effective tax rate was estimated at 0% for the three and six months ended June
30, 2009 and 2008.
 
 NOTE
4 - 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.
  In April
2009 the Company’s board of directors approved stock option awards to two
employees aggregating 150,000 shares of common stock, 100,000 options with an
exercise price of $0.072 per share and vest over one year and 50,000 options
with an exercise price of $0.062 per share and vest over three years. Both
options expire after five years.
 
 The
Company recorded $295,958 and $914,957 of compensation expense for employee and
consultant stock options during the six months ending June 30, 2009 and 2008,
respectively, and recorded $151,875 and $241,636 of compensation expense for
employee and consultant stock options during the three months ending June 30,
2009 and 2008, respectively, which is included in the administrative expense
category.
 
 NOTE
5 - 8% SENIOR SECURED CONVERTIBLE DEBENTURES
 
 On
February 20, 2009, the Company’s stock was delisted from the NASDAQ National
Market System due to a failure to maintain adequate share pricing. As a result,
the Company defaulted on its 8% Senior Secured Convertible
Debentures.  Such default results in acceleration of the debentures, a
thirty percent (30%) increase in the principal amount of the debentures, and an
increase in the interest rate on the debentures from eight percent (8%) to
eighteen percent (18%). We have accounted for the default in the financial
statements.
 
 On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”).  Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables.  The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing Supply Agreement between EMC and us.  Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the Supply
Agreement. As of the date of this filing the aforementioned deliverables and the
certification of the content of such deliverables have not been provided and as
such no debt has been forgiven. We expect that future revenue streams will not
be affected.
 
 As of the
date of this filing, we are negotiating a waiver of this default with the other
debenture holders. We have not yet received any waivers.
  12
  In June
2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5),
Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock.
EITF 07-5 requires entities to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock by assessing the
instrument’s contingent exercise provisions and settlement provisions.
Instruments not indexed to their own stock fail to meet the scope exception of
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities , paragraph 11(a), and should be
classified as a liability and marked-to-market. The statement is effective for
fiscal years beginning after December 15, 2008 and is to be applied to
outstanding instruments upon adoption with the cumulative effect of the change
in accounting principle recognized as an adjustment to the opening balance of
retained earnings. The Company has assessed its outstanding equity-linked
financial instruments and has concluded that, effective January 1, 2009,
the conversion feature of our convertible debentures will need to be recorded as
a derivative liability due to the fact that the conversion price is subject to
adjustment based on subsequent sales of securities. The cumulative effect of the
change in accounting principle on January 1, 2009 includes an increase in
our derivative liability related to the fair value of the conversion feature of
$6,061. Fair value at January 1, 2009 was determined using the Black-Scholes
method based on the following assumptions:  (1) risk free
interest rate of 0.875%; (2) dividend yield of 0%; (3) volatility
factor of the expected market price of our common stock of 101%; and
(4) an expected life of the conversion feature of 2 years. At January
1, 2009 the Company has also recorded an additional discount related to the
debentures of $1,287,781 as a result of the implementation of EITF
07-05.
 
 As a
result of the default described above, the principal amount of the debentures
was increased by 30%, or $2,642,750. We have recorded a charge to interest
expense related to this increase during the quarter ended March 31,
2009.
 
 Also as a
result of the default, the maturity date of the debentures has been accelerated.
The Company has classified the carrying value of the debentures as a current
liability in the financial statements as of June 30, 2009. The Company has fully
amortized the remaining discount and deferred debt issue costs during the period
ended March 31, 2009. The charge to interest expense for the amortization of
debt discount is $6,671,835 and for amortization of debt issue costs is $449,052
during the quarter ended March 31, 2009.
 
 At June
30, 2009 we recalculated the fair value of the conversion feature subject to
derivative accounting and have determined that the fair value at June 30, 2009
is $75,389. 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 1.0%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 118%; and (4) an expected life of the
conversion feature of 1.7 years.
 
 We
recorded charges of $23,281 and $69,328 during the three and six months ended
June 30, 2009, respectively, related to the change in fair value of the
conversion feature during those periods.
  The
Company is accounting for the warrants, issued in connection with the debentures
as derivative liabilities in accordance with SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19. At June 30, 2009,
the warrant liability was valued at $110,395. The Company recorded charges of
$34,120 and $91,340 during the three and six months ended June 30, 2009,
respectively, related to the change in fair value of the warrant liability
during those periods. The fair value of the warrant liability was determined
using the Black-Scholes method based on the following
assumptions:  (1) risk free interest rate of 1.5%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 118%; and (4) an expected life of the
warrants of 3.7 years. The Company recorded gains of $1,898,893 and
$2,024,554 during the three and six months ended June 30, 2008, respectively,
related to the change in fair value of the warrant liability during those
periods.
 
 NOTE
6 - COMMITMENTS AND CONTINGENCIES
 
 LITIGATION
 
 To date,
the Company has never been a party to and has never been involved with any
litigation. However, in the future, the Company, like any other business or
individual, may become subject to litigation some of which the Company can
control and other litigation that the Company cannot control. If the Company
were to become involved in any litigation, management would have to assess
whether or not such litigation would likely have a material adverse effect on
the Company’s consolidated financial condition or results of
operations.
  13
 
 EMPLOYMENT
AGREEMENT
 
 On
February 20, 2009, we entered in into a written employment agreement with
Richard Nathan.  The agreement provides for a bonus equal to: (i) 3%
of increase in market capitalization occurring during first year of employment;
and (ii) 2% of increase in market capitalization year after year for all periods
thereafter.  Mr. Nathan’s employment under the agreement is
“At-Will.”
 
 NOTE
7 - SUBSEQUENT EVENTS
 
 On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”).  Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables.  The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing Supply Agreement between EMC and us.  Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the Supply
Agreement. As of the date of this filing the aforementioned deliverables and the
certification of the content of such deliverables have not been provided and no
such debt has been forgiven. We expect that future revenue streams will not be
affected
    14




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 consolidated 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, 2009), 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 three and six month periods ended June 30, 2009 are not
necessarily indicative of our prospective financial condition and results of
operations for the pending full fiscal year ending December 31, 2009. 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.


15





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.





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





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: (i) 3
      months ended June 30, 2009 and 2008; and (ii) 6 months ended June 30, 2009
      and 2008.·
            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





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




Since
inception, we have been unprofitable. We incurred net losses of $8,929,537 and
$14,333,622 for the twelve months ending December 31, 2008 and 2007,
respectively. During the six months ended June 30, 2009, we incurred additional
net losses of $12,215,389. As of June 30, 2009, we had an accumulated deficit of
$44,692,435. Sales of the InCard DisplayCard, the Company’s main product, are
not expected to generate positive cash flow until the fourth quarter of 2009. As
a result, there is substantial doubt about the Company’s ability to continue as
a going concern at June 30, 2009 and December 31, 2008.


16





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





We
believe that our current cash, combined with anticipated revenue collections,
will be adequate to fund our operations through the third quarter of 2009. If we
are unable to raise additional 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 InCard DisplayCard
in quantities that will sustain a positive cash flow until the fourth quarter of
2009.




Our
backlog, which consists of orders received but not yet shipped, totaled $3.7
million at June 30, 2009, most of which we expect to deliver in
2009.





On
January 13, 2009 we disclosed that we received a purchase order (“PO”) in the
amount of $3,737,988. We have recently been informed that the purchaser
intends to delay the delivery of approximately 60% of the PO.  As of
the date of this report, we have fulfilled approximately $660,000 worth of
product deliveries under the PO.





Critical
Accounting Policies





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





Revenue
recognition.





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





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




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





The
revenue generated from the LensCard and LightCard is negligible, and we expect
that the sales of these products will have an immaterial impact on our results
of operations.


17





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, 2009, based on our review of customer activity, we
recorded an allowance for doubtful accounts of $60,000.





Warranty
reserves.





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 March 31, 2009 and 5% effective April 1, 2009 (the change 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.





Valuation
of Long-Lived Assets.





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





Stock
Based Compensation.





On
January 1, 2006, we adopted SFAS No. 123 (R), “Share Based
Payment,” which establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or services,
primarily focusing on accounting for transactions where an entity obtains
employee services in share-based payment transactions. SFAS
No.123(R) requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, including stock
options, based on the grant-date fair value of the award and to recognize it as
compensation expense over the period the employee is required to provide service
in exchange for the award, usually the vesting period.





Income
Taxes





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





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


18





Change
in Accounting Principle





In June
2008, the FASB issued Emerging Issues Task Force No. 07-5 (EITF 07-5),Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own
Stock.  EITF 07-5 requires entities to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock by assessing the instrument’s contingent exercise provisions and
settlement provisions. Instruments not indexed to their own stock fail to meet
the scope exception of Statement of Financial Accounting Standards
No. 133,Accounting for
Derivative Instruments and Hedging Activities , paragraph 11(a), and
should be classified as a liability and marked-to-market. The statement is
effective for fiscal years beginning after December 15, 2008 and is to be
applied to outstanding instruments upon adoption with the cumulative effect of
the change in accounting principle recognized as an adjustment to the opening
balance of retained earnings. The Company has assessed its outstanding
equity-linked financial instruments and has concluded that, effective
January 1, 2009, the conversion feature of our convertible debentures will
need to be recorded as a derivative liability due to the fact that the
conversion price is subject to adjustment based on subsequent sales of
securities. The cumulative effect of the change in accounting principle on
January 1, 2009 is an increase in our derivative liability related to the
fair value of the conversion feature of $6,061, an increase in the unamortized
discount related to our convertible debentures of $1,287,781, a decrease in
additional paid-in capital of $3,237,954 related to the decrease in beneficial
conversion feature attributable to the debentures, and a $4,519,674 net decrease
in accumulated deficit, comprised of a credit to reflect the change in fair
value of the derivative liability from date of issue to January 1, 2009 of
$5,235,242 partially offset by a charge of $715,568 for additional expense for
amortization of debt discount.





Recently
Issued Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”.
SFAS No. 157 clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability and
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, with
early adoption permitted. In February 2008, FASB Staff Position (FSP)
FAS 157-2, “Effective Date of FASB Statement No.
157”, which delays the effective date of SFAS 157 to fiscal years
and interim periods within those fiscal years beginning after November 15,
2008 for non-financial assets and non-financial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We elected to defer the adoption of the
Standard for these non-financial assets and liabilities, and are currently
evaluating the impact, if any, that the deferred provisions of the Standard will
have on our consolidated financial statements. The adoption of SFAS 157 for our
financial assets and liabilities did not have an impact on our financial
position or operating results.





In
December 2007 the FASB issued SFAS 160 “Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. This
Statement amends ARB 51 to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement changes the way the
consolidated income statement is presented. It requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the non-controlling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the non-controlling interest. This
Statement establishes disclosure requirements in the consolidated financial
statements, which will enable users to clearly distinguish between the interests
of the parent’s owners and the interests of the non-controlling owners of a
subsidiary. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008; earlier adoption is
prohibited. The adoption of this standard had no impact to the Company’s
financial position, results of operations, or cash flows.





In
December 2007, the FASB issued No. 141 (revised 2007), “Business Combinations”, which
replaces SFAS No. 141. SFAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired and the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. This Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. This Statement is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of this standard had no impact to the Company’s financial position,
results of operations, or cash flows.


19




In March
2008 the FASB issued SFAS 161 “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”. This Statement changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008; earlier adoption is encouraged. The adoption of this standard had no
impact to the Company’s financial position, results of operations, or cash
flows.





In April
2008, the FASB issued FSP FAS 142-3,  “Determination of the Useful Life of
Intangible Assets”.  FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets . This change is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
No. 141R and other GAAP. FSP 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The adoption of this
standard had no impact to the Company’s financial position, results of
operations, or cash flows.




In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating
Securities.”  FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The FSP
requires that all unvested share-based payment awards that contain
nonforfeitable rights to dividends should be included in the basic Earnings Per
Share (EPS) calculation.  The adoption of this standard had no impact
on the Company’s consolidated financial position, results of operations, or cash
flows.




In April
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS No. 115-2”). FSP FAS No.
115-2 provides guidance in determining whether impairments in debt securities
are other than temporary, and modifies the presentation and disclosures
surrounding such instruments. This FSP is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009. The adoption of this standard during the second quarter of
2009 had no impact on the Company’s consolidated financial position, results of
operations, or cash flows.




In April
2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS
No. 157-4”). FSP FAS No. 157-4 provides additional guidance in determining
whether the market for a financial asset is not active and a transaction is not
distressed for fair value measurement purposes as defined in SFAS No. 157, “Fair
Value Measurements.” FSP FAS No. 157-4 is effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods ending
after March 15, 2009. The adoption of this standard during the second quarter of
2009 had no impact on the Company’s consolidated financial position, results of
operations, or cash flows.




In April
2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP FAS No. 107-1 and APB 28-1”). This FSP
amends FASB Statement No. 107, “Disclosures about Fair Values of Financial
Instruments,” to require disclosures about fair value of financial instruments
in interim financial statements as well as in annual financial statements. APB
28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in all interim financial statements. This standard is
effective for interim periods ending after June 15, 2009, but early adoption is
permitted for interim periods ending after March 15, 2009. The adoption of this
standard during the second quarter of 2009 had no impact on the Company’s
consolidated financial position, results of operations, or cash
flows.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”
(“SFAS No. 165”). SFAS No. 165 establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
SFAS No. 165 will be effective for interim and annual financial
periods ending after June 15, 2009. The Company adopted
SFAS No. 165 during the three months ended June 30, 2009 and
evaluated subsequent events through the issuance date of the financial
statements. SFAS No. 165 had no impact on the Company’s consolidated
financial position, results of operations, or cash flows.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers and
Servicing of Financial Assets – an amendment of SFAS Statement No. 140”
(“SFAS No. 166”). SFAS No. 166 will require more information about transferred
of financial assets and where companies have continuing exposure to the risks
related to transferred financial assets. SFAS 166 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.


20





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS No. 167”). SFAS No. 167 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 SFAS
No. 167, 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. SFAS 167 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.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principals – a
replacement of FAS No.162” (“SFAS No. 168”). This
statement establishes the Codification as the source of authoritative U.S.
accounting and reporting standards recognized by the FASB for use in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification was the result of a project of FASB
to organize and simplify all authoritative GAAP literature into one source. This
statement is effective for interim reporting and annual periods ending after
September 15, 2009. Accordingly, the Company will adopt SFAS No. 168
during the quarter ended September 30, 2009. The Company does not
anticipate this statement to have a material impact on its consolidated
financial position, results of operations or cash flows.





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.





Results
of Operations





Results
for the 3 months ended June 30, 2009 compared to 2008





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





Revenue




Revenue
for the three months ended June 30, 2009 and 2008 was $1,296,645 and $800,209,
respectively.




Three Months Ended June 30,2009
                
                
                2008Revenue
                
                $
                1,296,645
                
                
                $
                800,209





The
increase of $496,436, or 62%, for the three months ended June 30, 2009 as
compared to the same period of 2008 was attributed to increased sales of the
InCard DisplayCard, primarily from the partial fulfillment of our 2009 $3.7
million purchase order.





Cost
of Goods Sold





Cost of
goods sold for the three months ended June 30, 2009 and 2008, was $1,176,918 and
$859,875, respectively.





Three Months Ended June 30,2009
                
                
                2008Cost
      of Goods Sold
                
                $
                1,176,918
                
                
                $
                859,875





Cost of
goods sold consists of costs to manufacture, inventory write-offs and reserve
adjustments and warranty expense. The increase of $317,043, or 37%, for the
three months ended June 30, 2009 as compared to the same period of 2008 was
attributed to an increase of $349,411 for costs to manufacture, offset by
decreases of $11,870 for inventory write-offs and reserve adjustments and
$20,498 for warranty expense. The increase results primarily from the increase
in revenue during the 2009 period.


21





Operating
Expenses




Operating
expenses for the three months ended June 30, 2009 and 2008, consist of the
following:




Three Months Ended June 30,2009
                
                
                2008Operating
      expensesAdministrative
                
                $
                595,980
                
                
                $
                1,656,715Consulting
      Fees
                
                
                28,183
                
                
                
                134,427Professional
      Fees
                
                
                149,771
                
                
                
                201,192Research
      and Development
                
                
                70,639
                
                
                
                118,539Total
      expense
                
                $
                844,573
                
                
                $
                2,110,873




Administrative
Expenses





Administrative
expenses totaled $595,980 for the three months ended June 30, 2009 compared to
$1,656,715 for the same period of 2008.  The decrease of $1,060,735 or
64% for the three months ended June 30, 2009 compared to the comparable period
in 2008 was primarily attributable to a decrease in share based compensation of
$224,237 (resulting from a decrease in issued and outstanding equity awards) and
reductions in salaries of $418,992, marketing and investor relations of
$181,772, travel of $16,269 and other expenses, resulting from managements cost
cutting measures, plus a decrease in depreciation and amortization expense of
$159,988. Administrative expenses consist of travel, marketing, compensation,
administrative fees, and depreciation and amortization expense.




Consulting
Fees





Consulting
fees totaled $28,183 for the three months ended June 30, 2009 compared to
$134,427 for the same period of 2008.  The decrease of $106,244 or 79%
for the three months ended June 30, 2009 compared to the comparable period in
2008 was primarily attributable to the use of fewer consultants in the current
period. Consulting fee expense consists of payments made to independent
contractors that provided services to us.





Professional
Fees




Professional
Fees totaled $149,771 for the three months ended June 30, 2009 compared to
$201,192 for the same period of 2008.  The decrease of $51,421or 26%
for the three months ended June 30, 2009 compared to the comparable period in
2008 was primarily attributable to decreased activity and lower cost of
professional fees. A decrease of $144,703 in legal fees was partially offset by
an increase of $93,282 in accounting 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 $70,639 for the three months ended June 30,
2009 compared to $118,539 for the same period of 2008.  The decrease
of $47,900 or 40% for the three months ended June 30, 2009 compared to the
comparable period in 2008 was primarily attributable to reduced consulting
costs. Research and development expense consists of costs relating to further
development of the InCard DisplayCard.





Other
Income (Expense)




Other
expense totaled $584,274 for the three months ended June 30, 2009. We reported
net other income of $1,369,824 for the three months ended June 30,
2008.


22





Three Months Ended June 30,2009
                
                
                2008Other
      income (expense):Change
      in fair value of warrant and conversion liability
                
                $
                (57,401
                )
                
                $
                1,898,893Other
      expense
                
                
                -
                
                
                
                (120,794
                )Interest
      income
                
                
                22
                
                
                
                11,703Interest
      expense
                
                
                (526,895
                )
                
                
                (419,978
                )Total
      Nonoperating income
                
                $
                (584,274
                )
                
                $
                1,369,824





Change
in fair value of warrants and conversion liability





The
change in the fair value of our warrant and conversion liabilities resulted
primarily from the changes in our stock price and the volatility of our common
stock during the reported periods. We had no warrant liability at January 1,
2008  Refer to Note 5 to the financial statements for further
discussion on our warrant liability  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.





Other
Expense





Other
expense for the three months ended June 30, 2008 consists of a loss recognized
on a sublease.





Interest
Income





The
decrease in interest income is primarily attributable to a decrease in balances
in interest bearing accounts.





Interest
expense





Interest
expense totaled $526,895 for the three months ended June 30, 2009 compared
to $419,978 for the same period of 2008.  Interest expense for
the three months ended June 30, 2009 consists of interest accrued on our
convertible debentures of $513,924 and other interest of $12,971. Interest
expense for the three months ended June 30, 2008 consists of interest accrued on
our convertible debentures of $156,333, other interest of $9,541, amortization
of debt discount of $234,766 and amortization of debt issue costs of
$19,338.





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 has
been accelerated. The Company has classified the carrying value of the
debentures as a current liability in the financial statements as of June 30,
2009. The Company fully amortized the remaining discount and deferred debt issue
costs during the quarter ended March 31, 2009.





Results
for the 6 months ended June 30, 2009 compared to 2008





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





Revenue




Revenue
for the six months ended June 30, 2009 and 2008 was $1,830,868 and $1,017,425,
respectively.





Six Months Ended June 30,2009
                
                
                2008Revenue
                
                $
                1,830,868
                
                
                $
                1,017,425





The
increase of $813,443, or 80%, for the six months ended June 30, 2009 as compared
to the same period of 2008 was attributed to increased sales of the InCard
DisplayCard, primarily from the partial fulfillment of our 2009 $3.7 million
purchase order.


23





Cost
of Goods Sold





Cost of
goods sold for the six months ended June 30, 2009 and 2008, was $1,763,878 and
$1,070,209, respectively.





Six Months Ended June 30,2009
                
                
                2008Cost
      of Goods Sold
                
                $
                1,763,878
                
                
                $
                1,070,209





Cost of
goods sold consists of costs to manufacture, inventory write-offs and reserve
adjustments and warranty expense. The increase of $693,669, or 65%, for the six
months ended June 30, 2009 as compared to the same period of 2008 was attributed
to increases of $650,451 for costs to manufacture, $34,721 for inventory
write-offs and reserve adjustments and $8,497 for warranty expense. The
increases result primarily from the increase in revenue during the 2009
period.





Operating
Expenses




Operating
expenses for the six months ended June 30, 2009 and 2008, consist of the
following:




Six Months Ended June 30,2009
                
                
                2008Operating
      expensesAdministrative
                
                $
                1,144,054
                
                
                $
                3,046,646Consulting
      Fees
                
                
                45,616
                
                
                
                254,525Professional
      Fees
                
                
                221,970
                
                
                
                449,223Research
      and Development
                
                
                113,848
                
                
                
                298,355Total
      expense
                
                $
                1,525,488
                
                
                $
                4,048,749




Administrative
Expenses





Administrative
expenses totaled $1,144,054 for the six months ended June 30, 2009 compared to
$3,046,646 for the same period of 2008.  The decrease of $1,902,592 or
62% for the six months ended June 30, 2009 compared to the comparable period in
2008 was primarily attributable to a decrease in share based compensation of
$753,475 (resulting from a decrease in issued and outstanding equity awards) and
reductions in salaries of $310,216, marketing and investor relations of
$244,092, travel of $45,537 and other expenses, resulting from managements cost
cutting measures, plus a decrease in depreciation and amortization expense of
$322,551. Administrative expenses consist of travel, marketing, compensation,
administrative fees, and depreciation and amortization expense.




Consulting
Fees





Consulting
fees totaled $45,616 for the six months ended June 30, 2009 compared to $254,525
for the same period of 2008.  The decrease of $208,909 or 82% for the
six months ended June 30, 2009 compared to the comparable period in 2008 was
primarily attributable to the use of fewer consultants in the current period.
Consulting fee expense consists of payments made to independent contractors that
provided services to us.





Professional
Fees




Professional
Fees totaled $221,970 for the six months ended June 30, 2009 compared to
$449,223 for the same period of 2008.  The decrease of $227,253 or 51%
for the six months ended June 30, 2009 compared to the comparable period in 2008
was primarily attributable to decreased activity and lower cost of professional
fees. A decrease of $285,423 in legal fees was partially offset by an increase
of $58,170 in accounting fees. Professional fees expense primarily consists of
amounts related to services provided by our outside counsel, auditors and other
similar providers.


24





Research and
Development





Research
and development expenses totaled $113,848 for the six months ended June 30, 2009
compared to $298,355 for the same period of 2008.  The decrease of
$184,507 or 62% for the six months ended June 30, 2009 compared to the
comparable period in 2008 was primarily attributable to reduced consulting
costs. Research and development expense consists of costs relating to further
development of the InCard DisplayCard.





Other
Income (Expense)




Other
expense totaled $10,756,891 for the six months ended June 30, 2009. We reported
net other income of $1,339,177 for the six months ended June 30,
2008.





Six
      Months Ended June 30,2009
                        
                        
                        2008Other
      income (expense):Change
      in fair value of warrant and conversion liability
                        
                        $
                        (160,668
                        )
                        
                        $
                        2,024,554Other
      expense
                        
                        
                        -
                        
                        
                        
                        (120,794
                        )Interest
      income
                        
                        
                        51
                        
                        
                        
                        20,776Interest
      expense
                        
                        
                        (10,596,274
                        )
                        
                        
                        (585,359
                        )Total
      Nonoperating income
                        
                        $
                        (10,756,891
                        )
                        
                        $
                        1,339,177





Change
in fair value of warrants and conversion liability





The
change in the fair value of our warrant and conversion liabilities resulted
primarily from the changes in our stock price and the volatility of our common
stock during the reported periods. We had no warrant liability at January 1,
2008  Refer to Note 5 to the financial statements for further
discussion on our warrant liability  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.





Other
Expense





Other
expense for the six months ended June 30, 2008 consists of a loss recognized on
a sublease.





Interest
Income





The
decrease in interest income is primarily attributable to a decrease in balances
in interest bearing accounts.





Interest
expense





Interest
expense totaled $10,596,274 for the six months ended June 30, 2009 compared
to $585,359 for the same period of 2008.  Interest expense for
the six months ended June 30, 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
of our convertible debentures as a result of the default described in Note
5 to the financial statements. Interest expense for the six months
ended June 30, 2008 consists of interest accrued on our convertible debentures
of $233,910, other interest of $9,541, amortization of debt discount of $314,828
and amortization of debt issue costs of $27,080.





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 has
been accelerated. The Company has classified the carrying value of the
debentures as a current liability in the financial statements as of June 30,
2009. The Company fully amortized the remaining discount and deferred debt issue
costs during the quarter ended March 31, 2009.


25





Liquidity
and Capital Resources




Our
principal sources of operating capital since our inception through June 30, 2009
have been equity and debt financings totaling $30,303,691 and, to a lesser
degree, our revenues.  Since our inception, we have incurred
significant losses, and as of June 30, 2009 we had an accumulated deficit of
$44,692,435. Our cash and cash equivalents balance at June 30, 2009 was $14,106,
compared to $1,680,060 for the same period in 2008.





Sales of
the InCard DisplayCard, the Company’s main product, are not expected to generate
positive cash flow until the fourth quarter of 2009. As a result, there is
substantial doubt about the Company’s ability to continue as a going concern at
June 30, 2009.




As of
August 10 2009 the Company had approximately $36,000 in cash. Combined with
anticipated revenue collections and planned expense reductions, the Company
believes this amount will last through the third quarter of 2009.





Six Months Ended June 30,2009
                  
                  
                  2008Cash
      & Cash Equivalents
                  
                  $
                  14,106
                  
                  
                  $
                  1,680,060Net
      cash provided by (used in) operating activities
                  
                  $
                  (62,539
                  )
                  
                  $
                  (6,668,555
                  )Net
      cash used by investing activities
                  
                  $
                  -
                  
                  
                  $
                  (13,485
                  )Net
      cash provided by financing activities
                  
                  $
                  -
                  
                  
                  $
                  8,022,500




Net
Cash Provided by (Used in) Operating Activities




For the
six months ended June 30, 2009 we used $62,539 in cash for our operating
activities as compared to cash used of $6,668,555 for the same period of 2008.
The decrease in cash used of $6,606,016 was primarily attributable to a decrease
in payments for accounts payable and accrued expenses of $1,768,856, an increase
in collections on accounts receivable of $641,152, a decrease in cash applied to
inventory of $1,698,612, an increase in deferred revenue of  $373,046,
an increase in accrued interest of $837,789 and  a decrease in loss
(after adjustment for non-cash charges) of $1,078,691.





Net
Cash Provided by Financing Activities





There was
no net cash provided by financing activities for the six months ended June 30,
2009.  During the six months ended June 30, 2008 we raised net cash of
$7,972,500 through the sale of convertible debentures.





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





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




26





·
            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.




Default
of 8% Senior Secured Debentures





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





On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”).  Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables.  The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing Supply Agreement between EMC and us.  Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the Supply
Agreement. As of the date of this filing the aforementioned deliverables and the
certification of the content of such deliverables have not been
provided





As of the
date of this filing, we are negotiating a waiver of this default with the other
debenture holders. We have not yet received any waivers.


27





Future
Needs





Through
the date of this report, our operations have been funded primarily through
equity and debt financings totaling $30,303,691 since inception.





We
believe that our current cash of $50,000 as of July 31, 2009, combined with
anticipated revenue collections, will provide us with sufficient resources to
fund our operations through the third quarter of 2009, provided holders of our
8% Senior Secured Debenture do not exercise their respective rights and require
the repayment of the outstanding debenture balances.





If we are
able to successfully sell the InCard DisplayCard in substantial quantities
during the third quarter of 2009 we may be able to continue operations through
the third quarter of 2009.  If we need additional capital, we do not
have any binding commitments for, or readily available sources of, additional
financing. Additional financing, whether through public or private equity or
debt financing, arrangements with stockholders or other sources, 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 opinion of our 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”), 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, 2009). Based on such evaluation which
disclosed numerous material weaknesses as noted below, our CEO 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, as appropriate to allow timely decisions regarding required
disclosure.




Management
Report on Internal Control Over Financial Reporting




Management
of Innovative Card Technologies, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Internal control over financial reporting is a process designed by, or under the
supervision of, the Company’s principal executive and principal financial
officers to provide reasonable assurance to the Company’s management and board
of directors regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that:





·
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




28





·
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and




·
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. A control system, no matter how well
designed and operated, can provide only reasonable, but not absolute, assurance
that the control system’s objectives will be met. 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.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of June 30, 2009. In making this assessment, management used the
criteria set forth inInternal
Control-Integrated Framework  issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”)   Based on our
assessment at June 30, 2009, management believes that our internal control over
financial reporting was not effective based on criteria set forth by the COSO.
The following material weaknesses were identified in our internal control over
financial reporting at June 30, 2009:




·
            We
      performed a financial close on a quarterly basis through March of 2008
      (effective April 2008 we began a monthly close process). The analysis of
      actual to budgeted results was either done marginally or not at all and
      there was no mechanism in place to evaluate variances, investigate unusual
      activity or communicate findings to senior management or the board of
      directors.




·
            During
      the quarterly financial close we did not utilize a financial closing
      checklist or prepare other documentation to ensure that all items had been
      considered for inclusion in this
report




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




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




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




·
            Through
      April 2008, we did not consistently utilize purchase orders when
      purchasing inventory, which could lead to uncertainty regarding our
      quarter end commitments. Effective May 2008 we began this
      process.




·
            Formal
      job descriptions do not exist and annual reviews are not
      performed.




·
            During
      the fourth quarter of 2008 our CEO and CFO resigned. This caused us to
      have limited oversight of operations and less review of
      activity.




·
            Due
      to the deficiencies discussed above, we were not able to complete our
      December 31, 2008 annual close in a timely manner which lead to filing our
      Form 10-K late.




We intend
to remediate these material weaknesses during 2009. As concerns the material
weakness relating to segregation of duties, we are re-examining our procedures
to include compensating controls and minimize the risk associated with having
limited resources in the accounting department.


29





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





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





Investing
in our common stock involves a high degree of risk. We have described below a
number of uncertainties and risks which, in addition to uncertainties and risks
presented elsewhere in this Quarterly 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 Quarterly Report,
should be considered carefully in evaluating our company and our business and
the value of our securities.





The
occurrence of any event contained in the following risk factors could have a
materially negative impact on the value of our common stock and other
securities.





We
are in default of our 8% Senior Secured Debentures.





We are in
default of our debenture agreements entered into in January 2008 and
April 2008 in connection with the sale of our 8% Senior Secured
Debentures.  In September 2008, we agreed to defer a portion of the
interest payments due October 1, 2008 and January 1, 2009. Such deferral
resulted in those payments, plus a ten percent (10%) deferral charge being added
to the principal balance of those debentures.  On February 20, 2009,
our common shares were delisted from the NASDAQ Capital Market.  As a
result of our common shares being delisted, and our inability to make our
quarterly interest payments under the debentures, we are in
default.  As a result, investors can call the debentures and demand
immediate repayment.  Our inability to repay the outstanding balance
may result in the debenture holders exercising their remedies and foreclosing on
substantially all of our assets.  In such instance, we could be forced
to seek bankruptcy protection or the debenture holders could take our assets as
satisfaction of their indebtedness.  In either instance, this will
result in a total loss of our common shareholders’
investment.





On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”).  Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables.  The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing Supply Agreement between EMC and us.  Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the Supply
Agreement. As of the date of this filing the aforementioned deliverables and the
certification of the content of such deliverables have not been
provided





As of the
date of this filing, we are negotiating a waiver of this default with the other
debenture holders. We have not yet received any waivers.


30





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





Our
auditors have added an explanatory paragraph to their opinion on our financial
statements for the year ended December 31, 2008 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.




The
Company has a history of recurring losses from operations and has an accumulated
deficit of $44,692,435 as of June 30, 2009. Sales of the InCard DisplayCard, the
Company’s main product, are not expected to generate positive cash flow until
the fourth quarter of 2009. As a result, there is substantial doubt about the
Company’s 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
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 of the delisting, 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.  Addition, shares listed on 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 transactions in penny stocks are 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, in highlight form, 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.


31




Because
of these regulations, broker-dealers may not wish to engage in the
above-referenced necessary paperwork and disclosures and 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, investors may have the perception that penny stocks are too risky or
involve a high degree of fraud.  As a result, these factors will make
the development of an active market for our common shares more
difficult.





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





To be successful
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 through the third quarter of this
year.  We currently do not have any binding commitments for, or readily
available sources of additional financing, and we cannot assure you that
such funding will be available at all or available on terms acceptable to us. If
we are unable to raise additional capital we may be forced to file for
bankruptcy.





We depend on a
limited number of suppliers.





We obtain
the battery, a key component for our power inlay technology, from a single
source on a purchase order basis from Solicore, Inc. In the event of a
disruption or discontinuation in supply, we may not be able to  obtain
replacement 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, a key component for the InCard DisplayCard, from a single source,
SmartDisplayer, under a written agreement. In the event of a disruption or
discontinuation in supply, we  may not be able to obtain replacement
displays on a timely basis, which would disrupt our operations, delay
production  and impair our ability to manufacture and sell our InCard
DisplayCard.


32




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




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




·
            mass
      produce the InCard DisplayCard at significantly lower
  cost;





·
            continue
      to fund research and development
endeavors;




·
            complete
      development of new products; and





·
            successfully
      introduce and commercialize new
products.




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





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 and Chief Executive Officer, Craig Nelson, who supervises the
manufacturing and testing of the InCard DisplayCard, 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 power
inlay technology as a preferred method of applying card enhancements to payment
cards. 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.


33





We
have granted third parties substantial marketing rights to certain of our
products and products under development.





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





Failure to
manufacture in mass production may have a material negative effect on our
business strategy and operations.





Our power
inlay technology has only been produced in limited production quantities. We are
applying our own resources and working in cooperation with other companies that
have specialized technical expertise related to the power inlay technology for
thin, flexible non-payment cards. Failure to secure or maintain these
relationships or failure to successfully transition to full scale production may
have a material negative effect on our business.





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
process of our power inlay technology for the InCard DisplayCard. We also
currently use a limited number of sources for most of the supplies and services
that we use in the manufacturing of our power inlay technology and prototypes.
Our manufacturing strategy presents the following risks:





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





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




·
            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 we.





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.





Risks
Related to our Securities





We
do not anticipate paying any cash 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 would be derive from
an increase in the price of our stock, which may or may not
occur.


34





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





As of
June 30, 2009, we had 28,495,256 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 43,950,136 shares outstanding or
issuable.  All of these shares can be traded pursuant to a prospectus
or via a transaction pursuant to Rule 144 under 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
at which we could sell our common stock.





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 nine months, the price of our common stock has decreased from $1.27 on
June 30, 2008 to $0.15 as of March 31, 2009.  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, 2009, 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 31,049,864 additional common shares
and 5,000,000 preferred shares. The power of the board of directors to issue
these shares of common stock, preferred stock or warrants or options to purchase
shares of our stock is generally not subject to stockholder
approval.




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.


35


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.





Our management has concluded that, as of
June 30, 2009, 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,
2009. Based on such evaluation which disclosed numerous material weaknesses, our
CEO and CFO have concluded that, as of June 30, 2009, 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.




We have identified numerous material
weaknesses in our internal control over financial reporting.





As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public
companies to include a report of management on internal control over financial
reporting in their Annual Reports on Form 10-K. This report is required to
contain an assessment by management of the effectiveness of a company’s internal
control over financial reporting. Our non-affiliated market capitalization
qualified us as a “Smaller Reporting Company” effective in 2009. As a
result, we are required to include our management’s report on internal control
over financial reporting in this Annual Report but are not required to include
our auditors’ attestation report on our internal control over financial
reporting.   As discussed in our December 31, 2008 Annual Report,
we have concluded that, as of December 31, 2008, our internal control over
financial reporting were not effective and identified a number of material
weaknesses in our internal control over financial reporting. While we intend to
remedy these weaknesses during the current fiscal year, we may be unable to do
so. If we fail to implement required new or improved controls there may be an
adverse reaction in the financial markets due to a loss of confidence in the
reliability of our financial statements, which could cause the market price of
our common stock to decline.





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





We incorporate by reference the
information pertaining to unregistered sales of equity securities as disclosed
in our annual report file on Form 10-K for the period ended December 31,
2008.  The following information is given with regard to unregistered
securities sold during the period covered by this report that were not
registered under the Securities Act and were not previously included in a
Current Report on Form 8-K.





·
            In
      April 2009 the Company’s board of directors approved stock option awards
      to two employees aggregating 150,000 shares of common stock, 100,000
      options with an exercise price of $0.072 per share and vest over one year
      and 50,000 options with an exercise price of $0.062 per share and vest
      over three years. Both options expire after five
  years.


36





ITEM
3.                DEFAULT
UPON SENIOR SECURITIES





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





On July
11, 2009, we entered into an Assignment of Debenture and Common Stock Warrant
agreement with EMC Corporation and RSA Security Inc., its wholly owned
subsidiary (collectively “EMC”).  Pursuant to the terms of the
agreement, EMC has agreed to assign and transfer to us approximately $7.1
million of our 8% Senior Secured Convertible Debentures and approximately 1.01
million common stock purchase warrants upon the receipt of certain deliverables
and the certification of the content of such deliverables.  The
aforementioned deliverables are as follows: (i) pay EMC cash in the amount of
$1.00; (ii) return to EMC all intellectual property belonging to EMC that is in
our and SmartDisplayer Technology’s possession; (iii) return to EMC certain
inventory containing EMC-related materials; (iv) grant to EMC certain audit and
confirmation rights as further described in the Agreement; and (v) cancel a
pre-existing Supply Agreement between EMC and us.  Additionally, the
Agreement provides for the mutual release of all claims, whether known or
unknown, between the parties which relate to the securities and the Supply
Agreement. As of the date of this filing the aforementioned deliverables and the
certification of the content of such deliverables have not been
provided





As of the
date of this filing, we are negotiating a waiver of this default with the other
debenture holders. We have not yet received any waivers.





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





None





ITEM
5.                OTHER
INFORMATION





None





ITEM
5.                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,
      INCDated: August [__],
      2009
              
              By:
              /S/ Richard
      NathanRichard Nathan
                Chief Executive Officer and Chief
      Financial
                Officer


37





INDEX TO EXHIBITS




Incorporated by
      ReferenceExhibit
                  No.
                
                Description
                
                Filed
                  Herewith
                
                Form
                
                Exhibit
                  No.
                
                File No.
                
                Filing Date3.01(i)
                
                Amended and Restated Certificate
      of Incorporation of Innovative Card Technologies, Inc. filed on
      5/11/05
                
                
                
                10-K
                
                3.01(i)
                
                001-33353
                
                5/15/093.02(i)
                
                Certificate of Amendment to
      Certificate of Incorporation of Innovative Card Technologies, Inc. filed
      on 12/21/07
                
                
                
                8-K
                
                3.1
                
                001-33353
                
                1/2/083.03(ii)
                
                Amended and Restated Bylaws of
      Innovative Card Technologies, Inc. adopted on May 5,
      2005
                
                
                
                10-K
                
                3.03(ii)
                
                001-33353
                
                5/15/0910.01**
                
                2004 Stock Incentive Plan as
      amended
                
                
                
                S-8
                
                10.1
                
                333-137033
                
                3/25/0810.02
                
                Form of Warrant pursuant to
      private placement dated October 19, 2005
                
                
                
                8-K
                
                4.1
                
                000-51260
                
                10/25/0510.03
                
                Form of Warrant issued to TR
      Winston & Company, LLC dated May 30, 2006
                
                
                
                8-K
                
                4.1
                
                000-51260
                
                5/31/0610.04
                
                Form of Securities Purchase
      Agreement dated May 30, 2006
                
                
                
                8-K
                
                10.1
                
                000-51260
                
                5/31/0610.05
                
                Form of Registration Rights
      Agreement dated May 30, 2006
                
                
                
                8-K
                
                10.2
                
                000-51260
                
                5/31/0610.06
                
                Licensing Agreement dated
      September 26, 2006 by and between Innovative Card Technologies, Inc. and
      NCryptone, SA as license
                
                
                
                SB-2
                
                10.35
                
                333-135715
                
                7/12/0610.07
                
                Licensing Agreement dated
      September 26, 2006 by and betweenNCryptone, SA as licensor
      and  Innovative Card as license
                
                
                
                SB-2
                
                10.36
                
                333-135715
                
                7/12/0610.08
                
                Form of Indemnification Agreement
      for Executive Officers and Directors of Innovative Card Technologies,
      Inc.
                
                
                
                8-K
                
                10.1
                
                001-33353
                
                3/23/0710.09**
                
                2007 Equity Incentive
      Plan
                
                
                
                10-QSB
                
                10.44
                
                001-33353
                
                11/19/0710.10
                
                Form of Indemnification Agreement
      entered into between the Company and Messrs. Delcarson and
      Caporale
                
                
                
                8-K
                
                10.1
                
                001-33353
                
                11/29/07


38


10.11
                  
                  Form of Securities Purchase
      Agreement Dated January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.1
                  
                  001-33353
                  
                  1/9/0710.12
                  
                  Form of 8% Senior Secured
      Convertible Debenture issued January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.2
                  
                  001-33353
                  
                  1/9/0710.13
                  
                  Form of Common Stock Purchase
      Warranted issued January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.3
                  
                  001-33353
                  
                  1/9/0710.14
                  
                  Form of Registration Rights
      Agreement dated January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.4
                  
                  001-33353
                  
                  1/9/0710.15
                  
                  Form of Security Agreement dated
      January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.5
                  
                  001-33353
                  
                  1/9/0710.16
                  
                  Form of Subsidiary Guarantee dated
      January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.6
                  
                  001-33353
                  
                  1/9/0710.17**
                  
                  Form of Lock-Up Agreement dated
      January 8, 2008
                  
                  
                  
                  8-K
                  
                  10.7
                  
                  001-33353
                  
                  1/9/0710.18**
                  
                  Executive Employment Agreement of
      Steven Delcarson
                  
                  
                  
                  8-K
                  
                  10.1
                  
                  001-33353
                  
                  4/2/0810.19**
                  
                  Executive Employment Agreement of
      Charles Caporale
                  
                  
                  
                  8-K
                  
                  10.2
                  
                  001-33353
                  
                  4/2/0810.20
                  
                  Form of Securities Purchase
      Agreement Dated April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.1
                  
                  001-33353
                  
                  4/16/0810.21
                  
                  Form of 8% Senior Secured
      Convertible Debenture issued April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.2
                  
                  001-33353
                  
                  4/16/0810.22
                  
                  Form of Common Stock Purchase
      Warranted issued April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.3
                  
                  001-33353
                  
                  4/16/0810.23
                  
                  Form of Registration Rights
      Agreement dated April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.4
                  
                  001-33353
                  
                  4/16/0810.24
                  
                  Form of Security Agreement dated
      April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.5
                  
                  001-33353
                  
                  4/16/0810.25
                  
                  Form of Subsidiary Guarantee dated
      April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.6
                  
                  001-33353
                  
                  4/16/0810.26
                  
                  Form of Lock-Up Agreement dated
      April 15, 2008
                  
                  
                  
                  8-K
                  
                  10.7
                  
                  001-33353
                  
                  4/16/0810.27**
                  
                  Form of Executive Employment
      Agreement of Vincent M. Schiavo, dated as of May 22,
      2008
                  
                  
                  
                  8-K
                  
                  10.1
                  
                  001-33353
                  
                  5/27/0810.28**
                  
                  Employment Agreement of Mr.
      Richard Nathan dated February 20, 2009
                  
                  
                  
                  8-K
                  
                  10.01
                  
                  001-33353
                  
                  2/24/0910.29
                  
                  Assignment
      of Debenture and Common Stock Warrants Agreement
                  
                  
                  
                  8-K
                  
                  10.01
                  
                  001-33353
                  
                  7/17/0914.01
                  
                  Code of
    Ethics
                  
                  
                  
                  10-KSB
                  
                  14.0
                  
                  000-51260
                  
                  3/20/06




39





21.1
                  
                  List of
      Subsidiaries
                  
                  
                  
                  SB-2
                  
                  21.1
                  
                  333-119814
                  
                  10/19/0431.1
                  
                  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.


40