U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
one)




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




For
the Quarterly Period Ended March 31, 2010


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.  xYes   ̈    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).





xYes   ̈    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 May
10, 2010 there were 30,558,562 shares of common stock, $.001 par value, issued
and outstanding.







Innovative
Card Technologies, Inc.




Table of
Contents


PagePART
      I -
                  
                  FINANCIAL
      INFORMATIONItem
      1.
                  
                  Financial
      Statements
                  3Condensed
      Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December
      31, 2009
                  3Condensed
      Consolidated Statements of Operations (Unaudited)Three
      months ended March 31, 2010 and 2009
                  4Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      months ended March 31, 2010 and 2009
                  5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                  6Item
      2.
                  
                  Management's
      Discussion and Analysis of Financial Condition and Results
      of Operations
                  13Item
      3.
                  
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  21Item
      4.
                  
                  Controls
      and Procedures
                  21PART
      II -
                  
                  OTHER
      INFORMATIONItem
      1.
                  
                  Legal
      Proceedings
                  22Item
      1A.
                  
                  Risk
      Factors
                  22Item
      2.
                  
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  26Item
      3.
                  
                  Defaults
      Upon Senior Securities
                  27Item
      4.
                  
                  (Removed
      and Reserved)
                  27Item
      5.
                  
                  Other
      Information
                  27Item
      6.
                  
                  Exhibits
                  27




2





PART
I


FINANCIAL
INFORMATION





ITEM 1.
            FINANCIAL
      STATEMENTS




INNOVATIVE
CARD TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      186,306
                      
                      
                      $
                      245,765Accounts
      receivable, net of allowance for doubtful accounts of $61,398 and $61,398,
      respectively
                      
                      
                      399,582
                      
                      
                      
                      699,854Prepaids
      and other current assets
                      
                      
                      56,983
                      
                      
                      
                      76,130Deposits
      on raw materials held for production
                      
                      
                      70,448
                      
                      
                      
                      165,138Raw
      materials held for production
                      
                      
                      114,416
                      
                      
                      
                      134,754Work
      in progress inventory, net
                      
                      
                      138,729
                      
                      
                      
                      107,212Finished
      goods inventory
                      
                      
                      38,053
                      
                      
                      
                      34,421Total
      current assets
                      
                      
                      1,004,517
                      
                      
                      
                      1,463,274Property
      and equipment, net
                      
                      
                      80,393
                      
                      
                      
                      93,763Deposits
                      
                      
                      3,720
                      
                      
                      
                      3,720Total
      assets
                      
                      $
                      1,088,630
                      
                      
                      $
                      1,560,757Liabilities
      and stockholders' deficitCurrent
      liabilities:Accounts
      payable and accrued expenses
                      
                      $
                      805,781
                      
                      
                      $
                      912,271Accrued
      interest
                      
                      
                      29,837
                      
                      
                      
                      27,737Warranty
      reserve
                      
                      
                      299,821
                      
                      
                      
                      289,135Deferred
      revenue
                      
                      
                      496,472
                      
                      
                      
                      450,1898%
      convertible debentures, net of discount of $718,896 at March 31,
      2010
                      
                      
                      4,702,188
                      
                      
                      
                      -Total
      current liabilities
                      
                      
                      6,334,099
                      
                      
                      
                      1,679,3328%
      convertible debentures, net of discount of $1,074,752 at December 31,
      2009
                      
                      
                      -
                      
                      
                      
                      4,687,576Warrant
      liability
                      
                      
                      497,351
                      
                      
                      
                      470,592Derivative
      liability
                      
                      
                      1,560,693
                      
                      
                      
                      2,151,632Total
      liabilities
                      
                      
                      8,392,143
                      
                      
                      
                      8,989,132Stockholders'
      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, 30,558,562 and
      28,840,920 shares issued and outstanding at March 31, 2010 and December
      31, 2009, respectively
                      
                      
                      30,558
                      
                      
                      
                      28,841Additional
      paid-in capital
                      
                      
                      31,438,592
                      
                      
                      
                      30,902,885Accumulated
      deficit
                      
                      
                      (38,772,663
                      )
                      
                      
                      (38,360,101
                      )Total
      deficiency in stockholders' equity
                      
                      
                      (7,303,513
                      )
                      
                      
                      (7,428,375
                      )Total
      liabilities and deficiency in stockholders' equity
                      
                      $
                      1,088,630
                      
                      
                      $
                      1,560,757





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





3




INNOVATIVE
CARD TECHNOLOGIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (Unaudited)
 
 2010
                    
                    
                    2009Revenues
                    
                    $
                    741,079
                    
                    
                    $
                    534,223Cost
      of goods sold
                    
                    
                    669,614
                    
                    
                    
                    586,960Gross
      profit/(loss)
                    
                    
                    71,465
                    
                    
                    
                    (52,737
                    )Operating
      expensesAdministrative
                    
                    
                    471,873
                    
                    
                    
                    549,914Consulting
      fees
                    
                    
                    -
                    
                    
                    
                    15,593Professional
      fees
                    
                    
                    80,998
                    
                    
                    
                    72,199Research
      and development
                    
                    
                    75,149
                    
                    
                    
                    43,209Total
      operating expense
                    
                    
                    628,020
                    
                    
                    
                    680,915Loss
      from operations
                    
                    
                    (556,555
                    )
                    
                    
                    (733,652
                    )Other
      income (expense)Change
      in fair value of warrant and conversion liability
                    
                    
                    351,764
                    
                    
                    
                    (103,267
                    )Gain
      on extinguishment of debt
                    
                    
                    136,321
                    
                    
                    
                    -Interest
      income
                    
                    
                    18
                    
                    
                    
                    29Interest
      expense
                    
                    
                    (344,110
                    )
                    
                    
                    (10,069,379
                    )Total
      other income (expense)
                    
                    
                    143,993
                    
                    
                    
                    (10,172,617
                    )Loss
      before provision for income taxes
                    
                    
                    (412,562
                    )
                    
                    
                    (10,906,269
                    )Provision
      for income taxes
                    
                    
                    -
                    
                    
                    
                    -Net
      loss
                    
                    
                    (412,562
                    )
                    
                    
                    (10,906,269
                    )Basic
      and diluted loss per share
                    
                    $
                    (0.01
                    )
                    
                    $
                    (0.38
                    )Weighted
      average shares outstanding, basic and diluted
                    
                    
                    29,761,986
                    
                    
                    
                    28,495,256
  The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


4




INNOVATIVE
CARD TECHNOLOGIES, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE
THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 (Unaudited)
 
 2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (412,562
                  )
                  
                  $
                  (10,906,269
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  13,370
                  
                  
                  
                  17,076Change
      in fair value of warrant liability
                  
                  
                  26,759
                  
                  
                  
                  57,220Change
      in fair value of conversion liability
                  
                  
                  (378,523
                  )
                  
                  
                  46,047Amortization
      of debt discount
                  
                  
                  342,010
                  
                  
                  
                  6,671,835Amortization
      of deferred debt issuance costs
                  
                  
                  -
                  
                  
                  
                  449,052Debt
      default penalty
                  
                  
                  -
                  
                  
                  
                  2,642,749Stock
      based compensation expense
                  
                  
                  104,545
                  
                  
                  
                  144,083Noncash
      gain on extinguishment of debt
                  
                  
                  (136,321
                  )
                  
                  
                  -Change
      in provision for obsolete inventory
                  
                  
                  40,771
                  
                  
                  
                  106,585(Increase)
      decrease in accounts receivable
                  
                  
                  300,272
                  
                  
                  
                  (11,363
                  )(Increase)
      decrease in prepaids and other current assets
                  
                  
                  19,147
                  
                  
                  
                  43,879(Increase)
      decrease in deposits on raw materials held for production
                  
                  
                  94,690
                  
                  
                  
                  (3,751
                  )(Increase)
      decrease in raw materials held for production
                  
                  
                  15,909
                  
                  
                  
                  (213,604
                  )(Increase)
      decrease in work in progress inventory
                  
                  
                  (67,859
                  )
                  
                  
                  255,412(Increase)
      decrease in finished goods inventory
                  
                  
                  (3,632
                  )
                  
                  
                  -(Increase)
      decrease in deposits
                  
                  
                  -
                  
                  
                  
                  5,052Increase
      (decrease) in accounts payable and accrued expenses
                  
                  
                  (82,354
                  )
                  
                  
                  (81,456
                  )Increase
      (decrease) in accrued interest
                  
                  
                  2,100
                  
                  
                  
                  302,134Increase
      (decrease) in warranty reserve
                  
                  
                  10,686
                  
                  
                  
                  40,787Increase
      (decrease) in deferred rent
                  
                  
                  -
                  
                  
                  
                  (17,216
                  )Increase
      (decrease) in deferred revenue
                  
                  
                  46,283
                  
                  
                  
                  641,601Net
      cash used in operating activities
                  
                  
                  (64,709
                  )
                  
                  
                  189,853Cash
      flows from financing activities:Proceeds
      from exercise of options/warrants
                  
                  
                  5,250
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  5,250
                  
                  
                  
                  -Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (59,459
                  )
                  
                  
                  189,853Cash
      and cash equivalents, beginning of period
                  
                  
                  245,765
                  
                  
                  
                  76,645Cash
      and cash equivalents, end of period
                  
                  $
                  186,306
                  
                  
                  $
                  266,498Supplemental
      Schedule of Cash Flow Information:Cash
      paid for interest
                  
                  $
                  -
                  
                  
                  $
                  1,885Non-Cash
      Financial Activity:Debt
      converted to common stock
                  
                  $
                  341,244
                  
                  
                  $
                  -Conversion
      liability extinguished upon conversion of debt
                  
                  
                  212,416
                  
                  
                  
                  -Options
      exercised by application of accrued compensation to exercise
      price
                  
                  
                  24,137
                  
                  
                  
                  -
 
 The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.


5


INNOVATIVE
CARD TECHNOLOGIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2010
 (Unaudited)
 
 NOTE
1 - ORGANIZATION AND LINE OF BUSINESS
 
 COMPANY
OVERVIEW
  The
Company develops and markets secure powered cards for payment, identification,
physical and logical access applications. Our main focus is on developing
One-Time-Password (“OTP”) solutions.  An OTP is a password that is
only valid for a single login session or transaction. OTPs avoid a number of
shortcomings that are associated with traditional (static) passwords. The most
important shortcoming that is addressed by OTPs is that, in contrast to static
passwords, they are not vulnerable to replay attacks. This means that, if a
potential intruder manages to record an OTP that was already used to log into a
service or to conduct a transaction, he will not be able to abuse it since it
will be no longer valid.
  Currently,
our main OTP product is the ICT DisplayCard.  The ICT DisplayCard
integrates the security of an OTP token directly into a card the size of a
standard credit or debit card. A token is a portable physical device, typically
in a key-fob form factor, that generates the OTP (also referred to as a one-time
passcode).  At the push of a button, the ICT DisplayCard displays a
one-time passcode. During a transaction, this number is entered into a user
interface with other information (such as the user’s static PIN and login name).
This information is relayed to a backend system for multi-factor authentication.
InCard does not provide the backend authentication server, but rather will
integrate the ICT DisplayCard into authentication systems provided by other
companies including distributors and other resellers of the ICT DisplayCard. The
ICT DisplayCard’s authentication works like tokens issued by VASCO, RSA, and
ActivIdentity, but in a more convenient, wallet-sized card. In December of 2009,
we introduced the ICard, our new low cost OTP product intended to serve the
masses.
 
 Our
primary focus is and will continue to be the further development, sales and
marketing of OTP solutions.  We anticipate we will expand our
current ICT DisplayCard product offering with other innovative OTP
products.  Since 2002, we have continued to develop our power inlay
technology that is the basis of our ICT DisplayCard.
 
 BASIS
OF PRESENTATION AND GOING CONCERN
 
 The
accompanying unaudited condensed consolidated financial statements of Innovative
Card Technologies, Inc. (“ICTI”) include the amounts of its wholly-owned
subsidiary, PSA Co. (“PSAC”) which was incorporated in the State of Delaware on
August 27, 2003.
  For the
three months ended March 31, 2010, the Company has incurred a net loss of
$412,562. As of March 31, 2010, we have negative working capital of $5,329,582,
an accumulated deficit of $38,772,663 and a stockholders’ deficiency of
$7,303,513. Sales of the ICT DisplayCard and newly introduced OTP products, the
Company’s main products, are not expected to generate positive cash flow until
the fourth quarter of 2010. As a result, there is substantial doubt about the
Company’s ability to continue as a going concern at March 31, 2010.
 
 Management’s
plan regarding these matters is to increase sales, resulting in reduced losses
and raise additional debt and/or equity financing to cover operating costs as
well as its obligations as they become due.
 
 There can
be no assurances that funds will be available to the Company when needed or, if
available, that such funds would be available under favorable terms. In the
event that the Company is unable to generate adequate revenues to cover expenses
and cannot obtain additional funds in the near future, the Company may seek
protection under bankruptcy laws.
  6
  The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company’s assets and the
satisfaction of liabilities in the normal course of business and does not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
  As of May
10, 2010 the Company has approximately $74,000 in cash. Combined with
anticipated revenue collections and planned expense reductions, the Company
believes this amount will be enough to fund our operations until July,
2010.
 
 The
accompanying unaudited condensed consolidated financial statements as of March
31, 2010 and for the three months ended March 31, 2010 and 2009 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, including Form 10-Q and Regulation S-X. The information
furnished herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) which are, in the opinion of management, necessary to
fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. The Company believes that the disclosures provided are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the audited financial statements and explanatory
notes for the year ended December 31, 2009 as disclosed in the company's 10-K
for that year as filed with the SEC, as it may be amended.
  The
results for the three months ended March 31, 2010 are not necessarily indicative
of the results to be expected for the pending full year ending December 31,
2010.
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 PRINCIPLES
OF CONSOLIDATION
 
 The
unaudited condensed consolidated financial statements include the accounts of
Innovative Card Technologies and its wholly owned subsidiary, PSA Co. All
significant inter-company accounts and transactions are eliminated in
consolidation.
 
 USE
OF ESTIMATES
 
 The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
 
 REVENUE
RECOGNITION
 
 The
Company recognizes revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue
Recognition”. Revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectibility is reasonably assured. Revenue is not
recognized on product sales transacted on a test or pilot basis. Instead,
receipts from these types of transactions offset marketing expenses. Revenue
from royalties is recognized with the passage of time in accordance with the
underlying agreement.
  7
 
 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.
 
 MAJOR
CUSTOMERS
 
 Two
customers accounted for 99% of the Company’s revenues for the three months ended
March 31, 2010 and three customers accounted for 99% of the Company’s revenue
for the three months ended March 31, 2009.
 
 Two
customers accounted for all of our accounts receivable at March 31, 2010.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS
 
 Fair
value of financial instruments
  Our
short-term financial instruments, including cash, accounts receivable, prepaid
expenses and other assets, accounts payable and accrued expenses, warranty
reserve and other liabilities, consist primarily of instruments without extended
maturities, the fair value of which, based on management’s estimates, reasonably
approximate their book value. The fair value of our convertible notes is based
on management estimates and reasonably approximates their book value based on
their current maturity. The fair value of the Company’s derivative instruments
is determined using option pricing models.
 
 Fair
value measurements
 
 We have
adopted accounting guidance pursuant to ASC 820 “Fair Value Measurements and
Disclosure”, which established a framework for measuring fair value and expands
disclosure about fair value measurements.
  ASC 820
defines fair value as the amount that would be received for an asset or paid to
transfer a liability (i.e., an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value
hierarchy that requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. ASC 820
describes the following three levels of inputs that may be
used:
  8
 
 Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
  Level 2 –
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
  Level 3 –
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
  In
accordance with ASC 820, the following table represents the Company’s fair value
hierarchy for its financial assets and (liabilities) measured at fair value on a
recurring basis as of March 31, 2010:
  Level 1
                            
                            
                            Level 2
                            
                            
                            Level 3
                            
                            
                            TotalAssetsCash
      and cash equivalents
                            
                            
                            186,306
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            186,306Total
      Assets
                            
                            
                            186,306
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            186,306LiabilitiesConvertible
      debentures
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,702,188
                            
                            
                            
                            4,702,188Warrant
      Liability
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            497,351
                            
                            
                            
                            497,351Derivative
      liabilities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,560,693
                            
                            
                            
                            1,560,693Total
      liabilities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            6,760,232
                            
                            
                            
                            6,760,232
 
 The table
below sets forth a summary of changes in the fair value of the Company’s Level 3
financial liabilities (warrant derivative liability and conversion derivative
liability) for the three months ended March 31, 2010 and 2009.
 
 2010
                  
                  
                  2009Balance
      at beginning of year
                  
                  $
                  2,622,224
                  
                  
                  $
                  19,055Additions
      to derivative instruments
                  
                  
                  -
                  
                  
                  
                  6,061Change
      in fair value of derivative liabilities
                  
                  
                  (351,764
                  )
                  
                  
                  103,267Reclassification
      to equity upon conversion of debentures
                  
                  
                  (212,416
                  )
                  
                  
                  -Balance
      at end of period
                  
                  $
                  2,058,044
                  
                  
                  $
                  128,383
 
 LOSS
PER SHARE
 
 The
Company utilizes ASC 260, “Earnings Per Share” for calculating the basic and
diluted loss per share. Basic loss per share is computed by dividing loss
available to common shareholders by the weighted-average number of common shares
outstanding. Diluted loss per share is computed similar to basic loss per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive.
  Common
equivalent shares are excluded from the computation of diluted loss per share if
their effect would be anti-dilutive. There were 31,572,500 common share
equivalents at March 31, 2010 and 15,097,653 at March 31, 2009. Common
equivalent shares were excluded from the calculation of diluted loss per share
for the three months ended March 31, 2010 and 2009 as their inclusion would
reduce diluted loss per share for those periods.
  9
  WARRANTY
RESERVE
 
 The
Company generally warrants its products against defects over a period of one to
three years. An accrual for estimated future costs relating to products returned
under warrants is recorded as a charge to cost of sales when products are
shipped. The accrual is based on a percentage of sales. This percentage was 10%
through December 31, 2008, 3% for the period January 1 to September 30, 2009 and
2% effective October 1, 2009 (the changes in estimate based on historical
trends). Activity in the accrued warranty reserve liability for the three months
ended March 31, 2010 and 2009 is as follows:
 
 2010
                      
                      
                      2009Balance
      at beginning of year
                      
                      $
                      289,135
                      
                      
                      $
                      198,854Charged
      to cost of sales
                      
                      
                      10,686
                      
                      
                      
                      42,662Deductions
                      
                      
                      -
                      
                      
                      
                      (1,875
                      )Balance
      at end of period
                      
                      $
                      299,821
                      
                      
                      $
                      239,641
  STOCK
BASED COMPENSATION
 
 The
Company accounts for its stock based compensation under ASC 718 “Compensation –
Stock Compensation” which was adopted in 2006, using the fair value based
method. Under this method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period.  This guidance establishes standards for
the accounting for transactions in which an entity exchanges it equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity’s equity instruments or that may be settled by the
issuance of those equity instruments.
 
 RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
 
 In June
2009, the FASB issued new accounting guidance which will require more
information about the transfer of financial assets where companies have
continuing exposure to the risks related to transferred financial assets. This
guidance is effective at the start of a company’s first fiscal year beginning
after November 15, 2009, or January 1, 2010 for companies reporting earnings on
a calendar-year basis. The adoption of this guidance did not have a material
impact on the Company’s financial position or results of
operations.
 
 In June
2009, the FASB issued new accounting guidance which will change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. Under this
guidance, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. This guidance is effective at the
start of a company’s first fiscal year beginning after November 15, 2009, or
January 1, 2010 for companies reporting earnings on a calendar-year basis. The
adoption of this guidance did not have a material impact on the Company’s
financial position or results of operations.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
  10
 
 NOTE
3 - 8% SENIOR SECURED CONVERTIBLE DEBENTURES
 
 During
the first quarter of 2010, certain debenture holders converted an aggregate of
$341,244 of debentures into 1,364,975 shares of common stock. We recorded a
charge of $46,424 related to the change in fair value of the conversion feature
of the converted debentures through the dates of conversion. At the dates of
conversion, we extinguished a conversion feature liability in the amount of
$212,416.  Since the conversion feature was accounted for as a
liability, we have recorded a gain upon conversion of debt in the amount of
$136,321.
 
 NOTE
4 – DERIVATIVE LIABILITIES
 
 During
the first quarter of 2010, certain debenture holders converted an aggregate of
$341,244 of debentures into 1,364,975 shares of common stock. We recorded a
charge of $46,424 related to the change in fair value of the conversion feature
of the converted debentures through the dates of conversion. At the dates of
conversion, we extinguished a conversion feature liability in the amount of
$212,416. The fair value of the conversion feature was determined using the
Black-Scholes method based on the following weighted average
assumptions: (1) risk free interest rate of 0.32%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 138%; and (4) an expected life of the
conversion feature of 0.88 years.
 
 At March
31, 2010 we recalculated the fair value of the conversion feature of the
remaining debentures subject to derivative accounting and have determined that
the fair value at March 31, 2010 is $2,060,199. The fair value of the conversion
feature was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.363%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 115%; and (4) an expected life of the
conversion feature of 0.75 years. We recorded a credit of $424,947 during
2010 related to the change in fair value of the conversion feature of the
debentures.
 
 At March
31, 2010, we recalculated the fair value of our warrants subject to derivative
accounting and have determined that the fair value at March 31, 2010 is
$497,351. The fair value of the warrant liability was determined using the
Black-Scholes method based on the following weighted average
assumptions:  (1) risk free interest rate of 0.60%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 142%; and (4) an expected life of the
warrants of 1.1 years. We recorded a charge of $26,759 during 2010 related
to the change in fair value of the warrant liability.
 
 NOTE
5 - STOCKHOLDER’S EQUITY
 
 PREFERRED
STOCK
 
 The
Company has 5,000,000 authorized shares of $0.001 par value preferred stock. The
preferred stock may be issued in series, from time to time, with such
designations, rights, preferences, and limitations as the Board of Directors may
determine by resolution.
 
 COMMON
STOCK
 
 The
Company has 75,000,000 authorized shares of $0.001 par value common
stock.
  During
the first quarter of 2010 the Company issued 1,364,975 shares of common stock
upon conversion debentures in the amount of $341,244.
 
 During
the first quarter of 2010 the Company issued 352,667 shares of common stock upon
the exercise of 352,667 employee stock options. We received $5,250 in cash
proceeds from the exercise of the options; the balance of the exercise price was
paid through the reduction of accrued compensation in the amount of
$24,137.
  11
 
 NOTE 6- STOCK OPTIONS AND
WARRANTS
 
 On
February 22, 2010, our Board and Compensation Committee approved the 2010
Equity Compensation Plan (“2010 Plan”).  The 2010 Plan permits the
granting of up to 6,000,000 shares of common stock through the issuance of
Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock
Appreciation Rights, Restricted Stock Units, Performance Units, Performance
Shares and Other Stock Based Awards to our employees, directors and
consultants.  We anticipate submitting the plan for shareholder
approval during the following 12 months.  In the event the Plan is not
approved by our shareholders during this time, the 2010 Plan will be considered
a non-qualified plan.
 
 In
January 2010 the Company’s board of directors approved a stock option award to a
director in the amount of 100,000 shares of common stock with an exercise price
of $0.35 per share. The option vests over one year. The option expires after ten
years. The option had a grant date fair value of $9,702. The fair value of the
option was determined using the Black-Scholes method based on the following
assumptions: (1) risk free interest rate of 0.25%;
(2) dividend yield of 0%; (3) volatility factor of the expected market
price of our common stock of 161%; and (4) an expected life of the
option of 0.625 years.
 
 The
Company recorded $7,361 of compensation expense for consultant stock options
during the three months ended March 31, 2010, of which $1,591 is included in
professional fees and $5,770 is included  in the administrative
expense category. During the three months ended March 31, 2009, the Company
recorded $1,840 of compensation expense for consultant stock options which is
included in the administrative expense category.
 
 The
Company recorded $97,184 and $142,243 of compensation expense for employee stock
options during the three months ended March 31, 2010 and 2009, respectively,
which is included in the administrative expense category.
 
 NOTE
7 - PROVISION FOR INCOME TAXES
 
 Our
effective tax rate was estimated at 0% for the three months ended March 31,
2010 and 2009.
 
 NOTE
8 - COMMITMENTS AND CONTINGENCIES
 
 LEASE
 
 The
Company leases office space on a month-to-month basis.
 
 Rent
expense was $12,997 and $12,447 for the three months ended March 31, 2010
and 2009, respectively.
 
 LITIGATION
 
 To date,
the Company has never been a party to and has never been involved with any
litigation. However, in the future, the Company, like any other business or
individual, may become subject to litigation some of which the Company can
control and other litigation that the Company cannot control. If the Company
were to become involved in any litigation, management would have to assess
whether or not such litigation would likely have a material adverse effect on
the Company’s consolidated financial condition or results of
operations.
  12




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





ADVISEMENT





We
urge you to read this entire Quarterly Report on Form 10-Q, including the” Risk
Factors” section, the financial statements, and related notes included
herein.  As used in this Quarterly Report, unless the context
otherwise requires, the words “we,” “us,”“our,” “the Company,” “InCard”
“Innovative Card” and “Registrant” refer to Innovative Card Technologies, Inc.
and our subsidiaries.  Also, any reference to “common shares,” “Common
Stock,” “common stock” or “Common Shares” refers to our $.001 par value common
stock.   The information contained herein is current as of the
date of this Quarterly Report (March 31, 2010), unless another date is
specified.





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





FORWARD
LOOKING STATEMENTS





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





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





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


13





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 3 months ended March 31, 2010 to
      2009.





·
            Liquidity and
      Capital Resources —An analysis of changes in
      our balance sheets and cash flows, and discussion of our financial
      condition including recent developments and potential sources of
      liquidity.





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





Overview





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





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





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





Since
inception, we have been unprofitable. We incurred net losses of $5,883,055 and
$8,929,537 for 2009 and 2008, respectively. Additionally, we had net losses of
$412,562 and $10,906,269 for the three month periods ended March 31, 2010 and
2009, respectively. Sales of the ICT DisplayCard and newly introduced OTP
products, the Company’s main products, are not expected to generate positive
cash flow until the fourth quarter of 2010.  As a result, there is
substantial doubt about the Company’s ability to continue as a going concern at
March 31, 2010.





Our
continued existence is dependent upon our ability to generate sales from our OTP
products or, if we are unable to do so in sufficient quantity to cover our
expenses, to obtain additional financing. In 2008, we made our first significant
sale of ICT 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 research and development of new OTP products, the acquisition of inventory,
retention and hiring of key personnel, and implementation of a sales force for
our products. These expenditures are anticipated to be significant. To date, our
operations have been funded primarily through equity and debt
financings.


14





We
believe that our current cash, combined with anticipated revenue collections,
will be adequate to fund our operations until July, 2010. If we are unable
to raise additional capital or make significant sales by that date, we may be
forced to curtail our operations or seek bankruptcy protection. We anticipate
that we will not be able to generate sales of the ICT DisplayCard and newly
introduced OTP products in quantities that will sustain a positive cash flow
until the fourth quarter of 2010.





Our
backlog, which consists of orders received but not yet shipped, totaled
approximately $1,163,000 at March 31, 2010.





Critical
Accounting Policies





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





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





Revenue
recognition.





We
recognize revenues in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 605 “Revenue
Recognition”. Revenues are recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable and collectability is reasonably assured. Revenue is not
recognized on product sales transacted on a test or pilot basis. Instead,
receipts from these types of transactions offset marketing expenses. Revenue
from royalties is recognized with the passage of time in accordance with the
underlying agreement. We recognize certain long-term contracts using the
completed-contract method in accordance with ASC 605.





We 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.





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





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.





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 March 31, 2010, based on our review of customer activity, we
recorded an allowance for doubtful accounts of $61,398.





Warranty
expense.





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


15


Inventory.





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





Research
and Development.





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





Stock Based
Compensation.





We
account for our stock based compensation under ASC 718 “Compensation – Stock
Compensation” which was adopted in 2006, using the fair value based method.
Under this method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period.  This guidance establishes standards for the
accounting for transactions in which an entity exchanges it equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity’s equity instruments or that may be settled by the issuance of
those equity instruments.





Income
Taxes





We
utilize ASC Topic 740 “Income Taxes” which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.





Recently
Issued Accounting Pronouncements





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





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





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


16


Result of Operations– First Quarter of
2010 Compared to First Quarter of 2009
  Our
results of operations have varied significantly from year to year and quarter to
quarter and may vary significantly in the future.
 
 Revenue
 
 Revenues
totaled $741,079 and $534,223 for the three months ended March 31, 2010 and
2009, respectively.
  Change in2010Three Months Ended March 31,
                      
                      
                      Versus 20092010
                      
                      
                      2009
                      
                      
                      $
                      
                      
                      %Revenue
                      
                      $
                      741,079
                      
                      
                      $
                      534,223
                      
                      
                      $
                      206,856
                      
                      
                      
                      39
                      %
 
 The
increase of $206,856 or 39% for the three months ended March 31, 2010 compared
to the same period in 2009 was attributable to an increase in customer
orders.
  Cost
of Goods Sold
  Cost of
Goods Sold totaled $669,614 and $586,960 or the three months ended March 31,
2010 and 2009, respectively.
 
 Change in2010Three Months Ended March 31,
                      
                      
                      Versus 20092010
                      
                      
                      2009
                      
                      
                      $
                      
                      
                      %Cost
      of Goods Sold
                      
                      $
                      669,614
                      
                      
                      $
                      586,960
                      
                      
                      $
                      82,654
                      
                      
                      
                      14
                      %
  Cost of
goods consists of costs to manufacture, inventory write-offs and reserve
adjustment and warranty expense.  The increase of $82,654 or 14% for
the three months ended March 31, 2010 compared to the same period in 2009 was
attributable to an increase of $179,237 for costs to manufacture, offset by
decreases of $64,607 for inventory write-offs and reserve adjustments and
$31,976 for warranty expense. The increase in cost to manufacture results
primarily from the increase in revenue during the 2010 period.
 
 Operating
Expenses
 
 Operating
expenses totaled $628,020 and $680,915 for the three months ended March 31, 2010
and 2009, respectively.
  Change in2010Three Months Ended March 31,
                  
                  
                  Versus 20092010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Operating
      ExpensesAdministrative
                  
                  $
                  471,873
                  
                  
                  $
                  549,914
                  
                  
                  $
                  (78,041
                  )
                  
                  
                  (15
                  )
      %Consulting
      Fees
                  
                  
                  -
                  
                  
                  
                  15,593
                  
                  
                  
                  (15,593
                  )
                  
                  
                  (100
                  )
      %Professional
      Fees
                  
                  
                  80,998
                  
                  
                  
                  72,199
                  
                  
                  
                  8,799
                  
                  
                  
                  13
                  %Research
      and development
                  
                  
                  75,149
                  
                  
                  
                  43,209
                  
                  
                  
                  31,940
                  
                  
                  
                  74
                  %Total
      expense
                  
                  $
                  628,020
                  
                  
                  $
                  680,915
                  
                  
                  $
                  (52,895
                  )
                  
                  
                  (8
                  )
      %
  Administrative
Expenses
 
 Administrative Expenses
totaled $471,873 and $549,914 for the three months ended March 31, 2010 and
2009, respectively. The decrease of $78,041 or 15% for the three months ended
March 31, 2010 compared to the same period in 2009 was primarily attributable to
a decrease in share based compensation of $41,129 (resulting from a decrease in
issued and outstanding equity awards) and reductions in insurance of $33,000,
license and fees of $27,248 and overall decreases in other administrative
expenses, partially offset by an increase in cash based compensation expense and
related costs of $53,137. Administrative expenses consist of travel, marketing,
compensation, administrative fees and costs, and depreciation
expense.
  17
 
 Consulting
Fees
 
 Consulting
fees totaled $0 and $15,593 for the three months ended March 31, 2010 and 2009,
respectively. The decrease of $15,593 or 100% for the three months ended
March 31, 2010 compared to the same period in 2009 was attributable to the
consultant becoming an employee in late 2009. Consulting fees consists of
payments made to independent contractors for services.
  Professional
Fees
  Professional
Fees totaled $80,998 and $72,199 for the three months ended March 31, 2010 and
2009, respectively. The increase of $8,799 or 13% for the three months
ended March 31, 2010 compared to the same period in 2009 was attributable to an
overall higher cost of professional fees in the current period due to an
increase in professional services. An increase of $18,104 in accounting and
audit fees was partially offset by a decrease of $9,305 in legal fees.
Professional fees expense primarily consists of amounts related to services
provided by our outside counsel, auditors and other similar
providers.
 
 Research
and Development
 
 Research
and development expenses totaled $75,149 and $43,209 for the three months ended
March 31, 2010 and 2009, respectively. The increase of $31,940 or 74% for
the three months ended March 31, 2010 compared to the same period in 2009 was
attributable to an accrual reversal of approximately $30,000 in 2009 with no
comparable item in 2010. Research and development expense consists of costs
relating to further development of our OTP products and solutions.
 
 Other
Income (Expense)
  Other
income (expense) totaled $143,993 of income for the three months ended March 31,
2010 and $10,172,617 of expense for the three months ended March 31,
2009.
 
 Change in2010Three Months Ended March 31,
                  
                  
                  Versus 20092010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Other
      income (expense):Change
      in fair value of warrant and conversion liabilities
                  
                  $
                  351,764
                  
                  
                  $
                  (103,267
                  )
                  
                  $
                  455,031
                  
                  
                  
                  441
                  %Gain
      on extinguishment of debt
                  
                  
                  136,321
                  
                  
                  
                  -
                  
                  
                  
                  136,321
                  
                  
                  
                  100
                  %Interest
      income
                  
                  
                  18
                  
                  
                  
                  29
                  
                  
                  
                  (11
                  )
                  
                  
                  (38
                  )
      %Interest
      expense
                  
                  
                  (344,110
                  )
                  
                  
                  (10,069,379
                  )
                  
                  
                  9,725,269
                  
                  
                  
                  97
                  %Total
      other income (expense)
                  
                  $
                  143,993
                  
                  
                  $
                  (10,172,617
                  )
                  
                  $
                  10,316,610
                  
                  
                  
                  101
                  %
 
 Change
in fair value of warrants
 
 The
change in the fair value of our warrant and conversion liabilities resulted
primarily from the changes in our stock price, the conversion and exercise
prices of the instruments and the volatility of our common stock during the
reported periods. Refer to Note 4 to the financial statements for further
discussion on our warrant liabilities and the related 8% senior secured
convertible debentures.
 
 The
securities were not issued with the intent of effectively hedging any future
cash flow, fair value of any asset, liability or any net investment in a foreign
operation. The securities do not qualify for hedge accounting, and as such, all
future changes in the fair value of these securities will be recognized
currently in earnings until such time as the securities are exercised or
expire.
 
 Gain
on extinguishment of debt
 
 During
the first quarter of 2010, certain debenture holders converted an aggregate of
$341,244 of debentures into 1,364,975 shares of common stock. Since the
conversion feature was accounted for as a liability, we have recorded a gain
upon conversion of debt in the amount of $136,321. Refer to Note 3 to the
financial statements for further discussion.
 
 Interest
Income
 
 Interest
income totaled $18 and $29 for the three months ended March 31, 2010 and 2009,
respectively. Interest income consists of earning on balances in interest
bearing accounts.
  18
 
 Interest
expense
 
 Interest
expense totaled $344,110 and $10,069,379 for the three months ended March
31, 2010 and 2009, respectively.  Interest expense for 2009
consists of interest accrued on our convertible debentures of $303,857, other
interest paid of $1,885, amortization of debt discount of $6,671,835,
amortization of debt issue costs of $449,052 and a charge of $2,642,750 for
the 30% increase in the principal amount our convertible debentures as a result
of the default described above.
 
 As a
result of the default on our debentures, the interest rate was increased from 8%
to 18% effective February 20, 2009 and the maturity date of the debentures was
accelerated. The Company fully amortized the remaining discount and deferred
debt issue costs during the quarter ended March 31, 2009.
 
 Liquidity
and Capital Resources
 
 Our
principal sources of operating capital since inception through March 31, 2010
have been equity and debt financings totaling approximately $31,431,000, and to
a lesser degree our revenues.  Since inception, we have incurred
significant losses, and as of December 31, 2009 we had an accumulated deficit of
$38,360,101. Our accumulated deficit totaled $38,772,663 at March 31, 2010. Our
cash and cash equivalents balance at March 31, 2010 was $186,306, compared to
$266,498 for the same period of 2009.
  Sales of
our products are not expected to generate positive cash flow until the fourth
quarter of 2010. As a result, there is substantial doubt about the Company’s
ability to continue as a going concern at March 31, 2010.
 
 As of May
10, 2010 we had approximately $74,000 in cash and cash equivalents.
Combined with anticipated revenue collections and planned expense reductions,
the Company believes this amount will last until July, 2010.
 
 Change in2010Three Months Ended March 31,
                    
                    
                    Versus 20092010
                    
                    
                    2009
                    
                    
                    $
                    
                    
                    %At
      March 31:Cash
      & Cash Equivalents
                    
                    $
                    186,306
                    
                    
                    $
                    266,498
                    
                    
                    $
                    (80,192
                    )
                    
                    
                    (30
                    )%Three
      months ended March 31:Net
      cash (used in) provided by operating activities
                    
                    $
                    (64,709
                    )
                    
                    $
                    189,853
                    
                    
                    $
                    (254,562
                    )
                    
                    
                    (134
                    )%Net
      cash provided by financing activities
                    
                    
                    5,250
                    
                    
                    
                    -
                    
                    
                    
                    5,250
                    
                    
                    
                    100
                    %
 
 Net
Cash (Used in) Provided by Operating Activities
 
 We used
cash of $64,709 for our operating activities during the three months ended March
31, 2010 and generated cash of $189,853 from our operating activities during the
three months ended March 31, 2009. The increase in cash used of $254,562 or
134% for the three months ended March 31, 2010 compared to the same period in
2009 was primarily attributable to a decrease in deferred revenue of $595,318, a
decrease in prepaids and other current assets of $24,732 and a decrease in
accrued interest of $300,034, partially offset by an increase in cash provided
by accounts receivable of $311,635 and a decrease in loss (after adjustment for
non-cash charges) of $371,671.
 
 Net
Cash Provided by Financing Activities
 
 We
received cash from our financing activities of $5,250 during the three months
ended March 31, 2010, from the exercise of employee stock options, with no cash
provided by financing activities during the three months ended March 31,
2009.
 Listed
below are key financing transactions entered into by us in the last three
years:
 
 ·
              On January 8, 2008, we
      entered into a securities purchase agreement with 13 institutional and
      accredited investors. Pursuant to the terms of the agreement, we sold $3.5
      million of our 8% Senior Secured Convertible Debenture. The debentures:
      (i) bear interest at 8% per year, paid quarterly in cash or
      registered common stock, at our discretion; (ii) have a maturity of
      January 8, 2011, (iii) are convertible at the holder’s option
      into shares of our common stock at $2.50 per share, (iv) are secured
      by all of our and our subsidiary’s assets including inventory,
      receivables, unencumbered equipment and intellectual property, and
      (v) have a forced conversion feature which allows us to force the
      conversion of the debentures if our common stock trades above $5.00 for 20
      consecutive trading days and certain other conditions are met. In
      connection with the sale of the debentures, we also issued the purchasers
      five-year common stock purchase warrants to purchase an aggregate of
      700,000 shares of our common stock at an exercise price of $2.75 per
      share. We used the net proceeds of the financing for our working capital
      requirements and to pay down certain obligations. Both the conversion
      price of the debentures and the warrants’ exercise price were reset
      following the April 15, 2008 financing discussed
      below.
  19
 
 ·
              On April 15, 2008, sold an
      additional $5 million of our 8% Senior Secured Convertible Debenture to
      EMC Corporation.   As a result of market conditions, the
      conversion price of the debenture is $2.48 per share.  This
      resulted in a re-pricing of our January 8, 2008
      debentures.   In connection with the sale of the additional
      debentures, we issued EMC a five-year common stock purchase warrant to
      purchase 1,008,064 shares of our common stock at an exercise price of
      $2.728 per share. Similar to the conversion of the debentures, this
      resulted in a re-pricing of the January 8, 2008 warrant exercise price to
      $2.728 per share.  We used the net proceeds of the financing for
      our working capital requirements and to pay down certain
      obligations.
 
 ·
              On September 30, 2009 we sold an
      additional $1,173,416 face value of our Amended Debentures (convertible
      into 4,693,664 common shares) and 2,254,642 Amended
      Warrants.  We received cash proceeds of $1,127,321. The Amended
      Debentures (i) bear interest at 8% per year commencing on April 1, 2010,
      paid quarterly, commencing July 1, 2010, in cash or, subject to certain
      conditions, registered shares of our common stock; (ii) have a maturity of
      January 8, 2011, (iii) are convertible at the holders’ option into shares
      of our common stock at $0.25 per share, (iv) are secured by all of our and
      our subsidiaries’ assets, including inventory, receivables, unencumbered
      equipment and intellectual property, and (v) have a forced conversion
      feature which allows us to force the conversion of the Amended
      Debentures if our common stock trades above $1.00 for 10 consecutive
      trading days.  Such a forced conversion may be limited by
      contractual restrictions on the amount of our common stock which the
      holder may own and certain other conditions.  Each Amended
      Warrant has a term of 5 years and an exercise price of $0.25 per share.
      The Amended Warrants also provide for the issuance of a replacement
      warrant in the event they are exercised for
  cash.
 
 Both the
conversion price of the Amended Debentures and the exercise price of the Amended
Warrants are subject to “full-ratchet” price protection in the event of stock
issuances below their respective conversion or exercise prices, except for
specified exempted issuances including grants of stock options and stock
issuances to officers, directors, employees and consultants.
 
 Restructuring
and Sales of Our 8% Senior Secured Debentures
 
 On
September 30, 2009, we completed the restructuring of our 8% Senior Secured
Convertible Debentures as well as certain warrants held by the debenture
holders.  In connection with the restructuring, we sold an additional
$1,173,416 face value of our Amended Debentures (convertible into 4,693,664
common shares) and 2,254,642 Amended Warrants.  The effect of these
transactions is a follows:
 
 ·
              Cancellation of 8% Senior Secured
      Convertible Debentures in the amount of $7,581,981 and warrants to
      purchase
1,008,064  shares;
 
 ·
              Issuance of Amended 8% Senior
      Secured Convertible Debentures in the amount $1,339,041 ($1.00 conversion
      price) and Amended Warrants to purchase 246,460 ($0.25 exercise price)
      common shares.  These debentures and warrants do not contain any
      anti-dilution or repricing
provisions;
 
 ·
              Issuance of Amended 8% Senior
      Secured Convertible Debentures in the amount $4,509,703 ($0.25 conversion
      price) and Amended Warrants 2,843,715 ($0.25 exercise price); These
      debentures and warrants have anti-dilution and repricing
      provisions;
 
 ·
              Gross cash proceeds to the
      Company in the amount of $1,127,321;
and
 
 ·
              Conversion of past due
      obligations to creditors and short term financing in the amount of
      $672,243.
 
 The
foregoing summary of the transaction is qualified in its entirety by reference
to the full text of the transaction documents filed as exhibits to our Current
Report on Form 8-K which was filed with the SEC on October 5,
2009.  The information contained in such Current Report regarding the
transaction is incorporated herein by reference. Refer to Note 5 to the
financial statements for further discussion on the cancellation and
restructuring.
 
 Future
Needs
 
 Through
the date of this report, our operations have been funded primarily through
equity and debt financings totaling approximately $31,431,000 since
inception.
  20
 
 We
believe that our current cash of approximately $74,000 as of May 10, 2010,
combined with anticipated revenue collections, will provide us with sufficient
resources to fund our operations until July, 2010.
 
 If we are
able to successfully sell our products in substantial quantities during the
second and third quarters of 2010 we may be able to continue operations until or
through the third quarter of 2010.  If we need additional capital, we
do not have any binding commitments for, or readily available sources of,
additional financing. Additional financing, whether through public or private
equity or debt financing, arrangements with stockholders or other sources, may
not be available, or if available, may be on terms unacceptable to us. If we
issue additional equity securities to raise funds, the ownership percentage of
our existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of our common
stock. Debt incurred by us would be senior to equity in the ability of debt
holders to make claims on our assets. The terms of any debt issued could impose
restrictions on our operations. If adequate funds are not available to satisfy
our capital requirements, our operations and liquidity could be materially
adversely affected.
 
 Going
Concern
 
 Our
independent registered public accountants have included a going concern
explanatory paragraph in their unqualified opinions on our 2009 and 2008
financial statements.
 
 ITEM
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 We are
not required to provide the information required by this items as we are
considered a smaller reporting company, as defined by Rule
229.10(f)(1).
  ITEM
4. CONTROLS AND
PROCEDURES.
 
 Evaluation
of Disclosure Controls and Procedures
 
 Our
management, with the participation of our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report (March
31, 2010). Based on such evaluation which disclosed numerous material weaknesses
as noted below, our CEO and CFO has concluded that, as of the end of such
period, the Company’s disclosure controls and procedures were not effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act and are not effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the Company’s
management, including the Company’s CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
 
 Notwithstanding
the conclusion that our disclosure and control procedures were not effective, we
believe that our financial condition, results of operations and cash flows
presented in this Report are fairly presented in all material respects. We base
our conclusion on our ability to substantiate, with a high degree of confidence,
the small number of significant general ledger accounts that comprise our
financial statements.
 
 Limitations
on Effectiveness of Controls and Procedures
 
 Our
management does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include, but are not limited to, the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
 
 Changes
in Internal Control Over Financial Reporting
 
 There
were no changes to our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
  21
 
 PART
II
 OTHER
INFORMATION
 
 ITEM
1. 
LEGAL PROCEEDINGS
 
 As of the
date of this Quarterly Report, there are no material pending legal or
governmental proceedings relating to our company or properties to which we are a
party, and to our knowledge there are no material proceedings to which any of
our directors, executive officers or affiliates are a party adverse to us or
which have a material interest adverse to us.
 
 ITEM
1A.RISK
FACTORS
  We
have described below a number of uncertainties and risks which, in addition to
uncertainties and risks presented elsewhere in this Report, may adversely affect
our business, operating results and financial condition.  The uncertainties
and risks enumerated below as well as those presented elsewhere in this Report
should be considered carefully in evaluating our company and our business and
the value of our securities. The following important factors, among others,
could cause our actual business, financial condition and future results to
differ materially from those contained in forward-looking statements made in
this Annual Report or presented elsewhere by management from time to
time.
 
 Risk
Related to Our Business and Operations
 
 There
is serious doubt regarding our ability to continue as a going
concern.
 
 We have a
history of recurring losses from operations and have an accumulated deficit of
$38,772,663 as of March 31, 2010. Sales of our products are not expected to
generate positive cash flow until the fourth quarter of 2010.  As a
result, there is substantial doubt about our ability to continue as a going
concern.  Our plan regarding these matters is to raise additional debt
and/or equity financing to allow us the ability to cover our current cash flow
requirements and meet our obligations as they become due.  There can
be no assurances that financing will be available or if available, that such
financing will be available under favorable terms. In the event that we are
unable to generate adequate revenues to cover expenses and cannot obtain
additional financing in the near future, we may seek protection under bankruptcy
laws.
 
 Our
auditors have added an explanatory paragraph to their opinion on our financial
statements for the year ended December 31, 2009 because of concerns about our
ability to continue as a going concern. These concerns arise from the fact that
we have not yet established an ongoing source of revenues sufficient to cover
our operating costs.  As a result, we must raise additional capital in
order to continue to operate our business. If we fail to generate positive cash
flows or obtain additional financing when required, we will have to modify,
delay or abandon some or all of our business and expansion plans.
 
 We
are an early stage company with an unproven business strategy.
 
 Our
business prospects are difficult to predict because of our limited operating
history, early stage of development and unproven business strategy. We are
primarily focused on developing OTP solutions and products.  We made
our first significant commercial sale of our ICT DisplayCard in 2008. Although
we believe that our current product and those under development have significant
profit potential, we may not attain profitable operations and may not succeed in
realizing our business objectives.
 
 We
will require additional capital which we may be unable to obtain.
 
 We
believe that our current cash, combined with anticipated revenue collections,
will be enough to fund our operations until July, 2010.  We
currently do not have any sources of additional financing and cannot assure you
that such funding will be available.  If we are unable to raise
additional capital we may be forced to file for bankruptcy.
 
 We
depend on a limited number of suppliers for our current product.
 
 We obtain
the battery for our current product from Solicore, Inc., our single source
supplier, on a purchase order basis.  In the event of a disruption or
discontinuation in supply, we may not be able to obtain batteries on a timely
basis, which would disrupt our operations, delay production and impair our
ability to manufacture and sell our products.
 
 We obtain
the display for our current product from SmartDisplayer, our single source
supplier, under a written agreement. In the event of a disruption or
discontinuation in supply, we may not be able to obtain displays on a timely
basis, which would disrupt our operations, delay production and impair our
ability to manufacture and sell our ICT DisplayCard.
  22
 
 Our
dependence upon outside suppliers exposes us to substantial risks, including but
not limited to:
 
 ·
              the possibility that our
      suppliers will experience major disruptions in production, which is
      exacerbated by the fact that we are a major customer of our
      suppliers;
 
 ·
              the solvency of our suppliers and
      the potential that our suppliers will be solely dependent upon
      us;
 
 ·
              the potential inability of our
      suppliers to obtain required components or
  products;
 
 ·
              reduced control over pricing,
      quality and timely delivery, due to the difficulties in switching to
      alternative suppliers;
 
 ·
              potential delays and expense of
      seeking alternative sources of suppliers;
  and
 
 ·
              increases in prices of key
      components.
 
 We
may not be able to develop our products due to inadequate
resources.
 
 Our
business strategy is to develop and market new OTP solutions and products. We
believe that our revenue growth and profitability, if any, will substantially
depend upon our ability to:
 
 ·
              mass produce the ICT DisplayCard
      at significantly lower cost;
 
 ·
              continue to fund research and
      development endeavors; and
 
 ·
              develop, introduce and
      commercialize new products.
 
 If we are
not able to devote adequate resources to our new product development efforts, we
may be unable to develop new products, which would adversely affect our revenue
growth and profitability.
 
 We
depend on key personnel.
 
 We rely
to a substantial extent on the management, marketing and product development
skills of our key employees and consultants, particularly Richard Nathan, our
President, Chief Executive Officer and Chief Financial Officer, 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 products
by payment card providers. In order to be successful, our products must meet the
technical and cost requirements for card enhancements within the payment card
industry. Market acceptance will depend on many factors, including:
 
 ·
              our ability to convince
      prospective strategic partners and customers to adopt our
      products;
 
 ·
              the willingness and ability of
      prospective strategic partners and customers to adopt our products;
      and
 
 ·
              our ability to sell and service
      sufficient quantities of our
products.
 
 Because
of these and other factors, our products may not achieve market acceptance. If
our products do not achieve market acceptance, demand for our products will not
develop as expected and it is highly unlikely that we will become
profitable.
 
 We
rely substantially on third-party manufacturers.
 
 To be
successful, we must manufacture, or contract for the manufacture of, our
products in compliance with industry standards and on a timely basis. As
discussed in the risk factor above, we are working in cooperation with other
companies that have specialized technical expertise related to the manufacturing
of our ICT DisplayCard. We currently use a limited number of sources for most of
the supplies and services that we use in the manufacturing processes. Our
manufacturing strategy presents substantial risk, including but not limited
to:
 
 ·
              delays in the quantities needed
      for product development could delay commercialization of our products in
      development;
  23
 
 ·
              if we need to change to other
      commercial manufacturers, any new manufacturer would have to be educated
      in, or develop substantially equivalent processes necessary for, the
      production of our products;
 
 ·
              if market demand for our products
      increases suddenly, our current manufacturers might not be able to fulfill
      our commercial needs, which would require us to seek new manufacturing
      arrangements and may result in substantial delays in meeting market
      demand; and
 
 ·
              we may not have intellectual
      property rights, or may have to share intellectual property rights, to any
      improvements in the manufacturing processes or new manufacturing processes
      for our products.
 
 Any of
these factors could delay commercialization of our products under development,
entail higher costs and result in our being unable to effectively manufacture
our products.
 
 Some
of our competitors have significantly greater resources than us.
 
 We
believe that the principal competitive factors that affect the market for tokens
include convenience, price, quality/reliability, ease of use, and distribution
cost. We cannot assure you that we will be able to maintain our competitive
position against current and potential competitors, especially those with
significant marketing, service, support, technical and other competitive
resources.
 
 Our
competitors have significantly greater financial, technical, marketing,
purchasing and other resources than we do, and as a result, may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of products, or to deliver competitive products at a lower end-user price.
Our inability to successfully compete will materially and adversely affect our
business.
 
 Risks
Related to our Securities
 
 Our
common shares were delisted from the NASDAQ Capital Market.
 
 On
February 20, 2009, our common shares were delisted from the NASDAQ Capital
Market.  As a result, our shares now trade on the Over-the-Counter
Bulletin Board and on the Pinksheets.  Historically, the volume and
liquidity of these markets has been significantly less than on the NASDAQ
Capital Market.  In addition, shares traded in these markets are
unlikely to be followed by market analysts and there may be few market makers
for our common stock.  Also, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the price of our common
stock.  Any of these factors could adversely affect the liquidity and
trading price of our common stock and could result in large fluctuations in
market price.
 
 Our
common stock is subject to the penny stock regulations and
restrictions.
 
 Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a
"penny stock," for purposes relevant to us, as any equity security that has a
minimum bid price of less than $5.00 per share, subject to a limited number of
exceptions which are not available to us. It is likely that our shares will be
considered to be penny stocks for the immediately foreseeable future. This
classification severely and adversely affects any market liquidity for our
common stock.
 
 For any
transaction involving a penny stock, unless exempt, the penny stock rules
require that a broker or dealer approve a person's account for transactions in
penny stocks and the broker or dealer receive from the investor a written
agreement to the transaction setting forth the identity and quantity of the
penny stock to be purchased.  In order to approve a person's account
for transactions in penny stocks, the broker or dealer must obtain financial
information and investment experience and objectives of the person and make a
reasonable determination that the transaction is suitable for that person and
that that person has sufficient knowledge and experience in financial matters to
be capable of evaluating the risks of transactions in penny stocks.
 
 The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prepared by the SEC relating to the penny stock market which
sets forth:
 
 ·
              the basis on which the broker or
      dealer made the suitability determination,
  and
 
 ·
              that the broker or dealer
      received a signed, written agreement from the investor prior to the
      transaction.
 
 Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and commissions’ payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
 
 Because
of these regulations, broker-dealers may not wish to engage in transactions with
penny stocks.  Accordingly, investors may encounter difficulties in
their attempt to sell shares of our common stock.  These additional
sales practice and disclosure requirements could impede the sale of our common
stock. In addition, the liquidity for our common stock may decrease, with a
corresponding decrease in the price of our common stock. Our shares, in all
probability, will be subject to such penny stock rules for the foreseeable
future and our shareholders will, in all likelihood, find it difficult to sell
their common stock.
  24
 
 The
market for penny stocks has experienced numerous frauds and abuses.
 
 We
believe that the market for penny stocks has suffered from patterns of fraud and
abuse. Such patterns include:
 
 ·
              Control of the market for the
      security by one or a few broker-dealers that are often related to the
      promoter or issuer;
 
 ·
              Manipulation of prices through
      prearranged matching of purchases and sales and false and misleading press
      releases;
 
 ·
              “Boiler room" practices involving
      high pressure sales tactics and unrealistic price projections by
      inexperienced sales persons;
 
 ·
              Excessive and undisclosed bid-ask
      differentials and markups by selling broker-dealers;
      and
 
 ·
              Wholesale dumping of the same
      securities by promoters and broker-dealers after prices have been
      manipulated to a desired level, along with the inevitable collapse of
      those prices with consequent investor
  losses.
 
 As a
result, many investors have the perception that penny stocks are too risky or
involve a high degree of fraud.  These factors will make the
development of an active market for our common shares more difficult which
further affects the liquidity of our common stock.
 
 We
do not pay any dividends.
 
 We plan
to use all of our earnings; to the extent we have earnings, to fund our
operations. We do not plan to pay any cash dividends in the foreseeable
future.  Therefore, any return on your investment will be derived from
an increase in the price of our stock, which may or may not occur.
 
 Sales
of our common stock in the public market may depress our stock
price.
 
 As of
March 31, 2010, we had 30,558,562 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 62,131,062 shares outstanding or
issuable, as of March 31, 2010.   On September 30, 2009, we
completed the restructuring of our 8% Senior Secured Convertible
Debentures.  As a result, the conversion price of the debentures as
well as substantially all our outstanding warrants was adjusted to
$0.25.  All of these shares can be traded pursuant to prospectus or
via Rule 144 of the Securities Act of 1933.  If our stockholders sell
substantial amounts of common stock in the public market, or the market
perceives that such sales may occur, the market price of our common stock could
fall, which could result in a significant loss on any investment you make in our
common stock. The sale of a large number of shares could impair our ability to
raise needed capital by depressing the price of our common stock.
 
 We
may be subject to securities litigation as the price of our common stock has
drastically decreased over the past twelve months.
 
 During
the past two years, the price of our common stock has decreased
drastically.  Although management feels that at all times it has acted
in the best interest of the company’s shareholders, such declines in stock price
have historically increased the probability of becoming the subject of a
securities class action law suit.  If we were to become the target of
such litigation, we will have to spend considerable time and resources in
defending such litigation.  This would result in management diverting
its focus from the development and sale of our
products.  Additionally, such litigation is extremely costly and will
deplete our assets.
 
 We
may raise additional capital through a securities offering that could dilute
your ownership interest and voting rights.
 
 Our
certificate of incorporation currently authorizes our board of directors to
issue up to 75,000,000 shares of common stock and 5,000,000 shares of preferred
stock. As of March 31, 2010, after taking into consideration our outstanding
common and preferred shares and our contingently issuable shares, our board of
directors will be entitled to issue up to 12,868,938 additional common shares
and 5,000,000 preferred shares. The power of the board of directors to issue
these shares or securities convertible into these shares is generally not
subject to stockholder approval.
 
 We will
require additional working capital to fund our business. If we raise additional
funds through the issuance of equity, equity-related or convertible debt
securities, these securities may have rights, preferences or privileges senior
to those of the holders of our common stock. The issuance of additional common
stock or securities convertible into common stock will also have the effect of
diluting the proportionate equity interest and voting power of holders of our
common stock.
  25
 
 Our
incorporation documents and Delaware law may inhibit a takeover that
stockholders consider favorable and could also limit the market price of your
stock, which may inhibit an attempt by our stockholders to change our direction
or management.
 
 Our
amended and restated certificate of incorporation and bylaws contain provisions
that could delay or prevent a change in control of our company. Some of these
provisions:
 
 ·
              authorize our board of directors
      to determine the rights, preferences, privileges and restrictions granted
      to, or imposed upon, the preferred stock and to fix the number of shares
      constituting any series and the designation of such series without further
      action by our stockholders;
 
 ·
              prohibit stockholders from
      calling special meetings;
 
 ·
              prohibit cumulative voting in the
      election of directors, which would otherwise allow less than a majority of
      stockholders to elect director
  candidates;
 
 ·
              establish advance notice
      requirements for submitting nominations for election to the board of
      directors and for proposing matters that can be acted upon by stockholders
      at a meeting; and
 
 ·
              prohibit stockholder action by
      written consent, requiring all stockholder actions to be taken at a
      meeting of our stockholders.
 
 In
addition, we are governed by the provisions of Section 203 of the Delaware
General Corporate Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of our outstanding voting stock, from
merging or combining with us, which may prevent or frustrate any attempt by our
stockholders to change our management or the direction in which we are heading.
These and other provisions in our amended and restated certificate of
incorporation and bylaws and under Delaware law could reduce the price that
investors might be willing to pay for shares of our common stock in the future
and result in the market price being lower than it would be without these
provisions.
 
 New
rules, including those contained in and issued under the Sarbanes-Oxley Act of
2002, may make it difficult for us to retain or attract qualified officers and
directors.
 
 We may be
unable to attract and retain qualified officers, directors and members of board
committees required to provide for our effective management as a result of the
recent and currently proposed changes in the rules and regulations that govern
publicly held companies, including, but not limited to, certifications from
executive officers and requirements for financial experts on the board of
directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a
series of new rules and regulations and the strengthening of existing rules and
regulations by the Securities and Exchange Commission (the “SEC”). Further,
certain of these recent and proposed changes heighten the requirements for board
or committee membership, particularly with respect to an individual’s
independence from the corporation and level of experience in finance and
accounting matters. We may have difficulty attracting and retaining directors
with the requisite qualifications. If we are unable to attract and retain
qualified officers and directors, the management of our business could be
adversely affected.
 
 Our
management has concluded that, as of March 31, 2010, our disclosure controls and
procedures were not effective.
 
 Our
management, with the participation of our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of March 31, 2010. Based on such evaluation which
disclosed numerous material weaknesses, our CEO and CFO have concluded that, as
of March 31, 2010, the Company’s disclosure controls and procedures were not
effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act and were not effective in ensuring
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the
Company’s management, including the Company’s CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. If we fail to implement
new or improved disclosure controls, investors could lose confidence in the
reliability of our financial statements, which could result in a decrease in the
value of our common stock.
 
 ITEM
2. UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
 
 The
following information is given with regard to unregistered securities sold
during the 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.
 
 ·
              On January 4, 2010, we issued
      John Ward, III, one of our non-executive directors, an option to purchase
      100,000 common shares as compensation under our non-executive board
      compensation policy.  The option has an exercise price of $0.35,
      vests quarterly over the grant year and has a term of 10
      year.
  26
 
 ·
              On
      January 7, 2010, we issued 100,000 common shares in connection with the
      conversion of $25,000 of our convertible
  debentures.
 
 ·
              During
      February of 2010 we issued 352,667 shares of common stock upon the
      exercise of 352,667 employee stock options. We received $5,250 in cash
      proceeds from the exercise of the options; the balance of the exercise
      price was paid through the reduction of accrued compensation in the amount
      of $24,137.
 
 ·
              On February 17, 2010, we issued
      1,264,975 common shares in connection with the conversion of $316,224 of
      our convertible debentures.
 
 In
connection with the foregoing, the Company relied upon the exemption from
securities registration afforded by Rule 506 of Regulation D as promulgated by
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the “Securities Act”) and/or Section 4(2) of the Securities
Act. No advertising or general solicitation was employed in offering the
securities. The issuances were made to a limited number of persons, and transfer
of the securities was restricted in accordance with the requirements of the
Securities Act of 1933.
 
 ITEM
3. DEFAULT UPON SENIOR
SECURITIES
 
 None
 
 ITEM
4. (REMOVED AND
RESERVED)
 
 None
 
 ITEM
5. OTHER
INFORMATION
 
 None
 
 ITEM
5. OTHER
INFORMATION
 
 None
 
 ITEM
6. OTHER
INFORMATION
 
 The
exhibits listed in the accompanying index to exhibits are filed or incorporated
by reference as part of this Form 10-Q.
 
 SIGNATURES
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed by the undersigned hereunto duly
authorized.
  INNOVATIVE
      CARD TECHNOLOGIES, INCDated: May
      17, 2010
                
                By:
                /S/
      Richard NathanRichard
      Nathan
                  Chief
      Executive Officer Chief Financial Officer
                  and
      Director (Principal Executive Officer and
                  Principal
      Accounting Officer)
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
following capacities and on the dates indicated.
  27
 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
  28
  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 Securities Purchase Agreement Dated April 15, 2008
                        
                        
                        
                        8-K
                        
                        10.1
                        
                        001-33353
                        
                        4/16/0810.18
                        
                        Form
      of 8% Senior Secured Convertible Debenture issued April 15,
      2008
                        
                        
                        
                        8-K
                        
                        10.2
                        
                        001-33353
                        
                        4/16/0810.19
                        
                        Form
      of Common Stock Purchase Warranted issued April 15, 2008
                        
                        
                        
                        8-K
                        
                        10.3
                        
                        001-33353
                        
                        4/16/0810.20
                        
                        Form
      of Registration Rights Agreement dated April 15, 2008
                        
                        
                        
                        8-K
                        
                        10.4
                        
                        001-33353
                        
                        4/16/0810.21
                        
                        Form
      of Security Agreement dated April 15, 2008
                        
                        
                        
                        8-K
                        
                        10.5
                        
                        001-33353
                        
                        4/16/0810.22
                        
                        Form
      of Subsidiary Guarantee dated April 15, 2008
                        
                        
                        
                        8-K
                        
                        10.6
                        
                        001-33353
                        
                        4/16/08
 
 10.23**
                      
                      Form
      of Executive Employment Agreement of Vincent M. Schiavo, dated as of May
      22, 2008
                      
                      
                      
                      8-K
                      
                      10.1
                      
                      001-33353
                      
                      5/27/0810.24**
                      
                      Employment
      Agreement of Mr. Richard Nathan dated February 20, 2009
                      
                      
                      
                      8-K
                      
                      10.01
                      
                      001-33353
                      
                      2/24/09
 
 10.25
                            
                            Assignment
      of Debenture and Common Stock Warrants Agreement with EMC
                            
                            
                            
                            8-K
                            
                            10.01
                            
                            001-33353
                            
                            7/17/0910.26
                            
                            Waiver,
      Amendment and Exchange Agreement
                            
                            
                            
                            8-K
                            
                            10.16
                            
                            001-33353
                            
                            10/05/0910.27
                            
                            Debenture
      & Warrant Purchase Agreement
                            
                            
                            
                            8-K
                            
                            10.17
                            
                            001-33353
                            
                            10/05/0910.28
                            
                            Form
      of Amended Debenture dated September 30, 2009
                            
                            
                            
                            8-K
                            
                            10.18
                            
                            001-33353
                            
                            10/05/09
 29
 10.29
                    
                    Form
      of Amended Warrant dated September 30, 2009
                    
                    
                    
                    8-K
                    
                    10.19
                    
                    001-33353
                    
                    10/05/09
 
 10.30**
                    
                    2010
      Equity Compensation Plan
                    
                    
                    
                    8-K
                    
                    4.01
                    
                    001-33353
                    
                    2/22/1014.01
                    
                    Code
      of Ethics
                    
                    
                    
                    10-KSB
                    
                    14.0
                    
                    000-51260
                    
                    3/20/0621.1
                    
                    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.
  30