TraceGuard 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-QSB

(Mark One)

x	Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

	For the quarterly period ended June 30, 2007

o	Transition report under Section 13 or 15(d) of the Exchange Act

	For the transition period from ___________ to ____________

	Commission File Number: 000-50329

TRACEGUARD TECHNOLOGIES, INC.

(Exact Name of Small Business Issuer as Specified in Charter)

Nevada		98-0370398
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

330 Madison Avenue, 9th Floor, New York, New York 10017

(Address of Principal Executive Offices)

(866) 401-5969

(Issuer’s Telephone Number, Including Area Code)

(Former Address, if Changed Since Last Report)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yes x No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the last practicable date: As of August 9, 2007 there were 37,703,354 shares of common stock issued and outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No x

TRACEGUARD TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

(UNAUDITED)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

	Page

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:

Balance Sheet		3

Statements of Operations		4

Statements of Cash Flows		5

Statements of Changes in Shareholders' Equity		6

Notes to Financial Statements		7-11

TRACEGUARD TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

(UNAUDITED)

CONDENSED INTERIM CONSOLIDATED BALANCE SHEET

IN US DOLLARS

	June 30,			December 31,
	2007			2006
	(Unaudited)			(Audited)

Assets

Current Assets
Cash and cash equivalents		2,501,812			1,056,939
Restricted deposits		41,067			21,264
Other receivables		131,031			72,111

Total current assets		2,673,910			1,150,314

Long Term Prepaid Expenses		22,028			22,153

Property and equipment, net		467,297			534,577

License rights		455,000			455,000

Total Assets		3,618,235			2,162,044

Liabilities and Shareholders’ Equity

Current Liabilities

Accounts payable- trade and other		349,800			180,542
Accrued Expenses and other current liabilities		359,836			501,148
Total current liabilities		709,636			681,690

Commitments and contingencies

Total liabilities		709,636			681,690

Shareholders’ Equity
Share capital - common shares par value $0.001; Authorized - June 30, 2007 and December 31, 2006 - 150,000,000 Issued and outstanding - June 30, 2007 and December 31, 2006 - 37,703,354 and 29,669,819 shares, respectively		37,704			29,670
Additional paid-in capital		9,668,099			5,672,277
Receipt on account of shares to be allotted		-			221,435
Warrants		3,369,826			1,971,826
Deficit accumulated during the development stage		(10,167,030	)		(6,414,854	)
Total shareholders equity		2,908,599			1,480,354

Total liabilities and shareholders equity		3,618,235			2,162,044

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

TRACEGUARD TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

(UNAUDITED)

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

IN US DOLLARS

	Three Months Ended June 30						Six Months Ended June 30						*Cumulative from March 20, 2002() to June 30,**
	2007			2006			2007			2006			2007
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Research and development expenses		683,575			574,809			1,543,783			737,437			3,968,068
Marketing & business development Expenses		378,625			148,725			575,017			240,615			1,075,018
General and administrative expenses		806,935			293,149			1,659,393			745,195			5,151,125

Operating loss		(1,869,135	)		(1,016,683	)		(3,778,193	)		(1,723,247	)		(10,194,211	)

Financing income net		10,193			7,527			26,017			9,394			27,181
Net loss for the period		(1,858,942	)		(1,009,156	)		(3,752,176	)		(1,713,853	)		(10,167,030	)

Loss per share ("EPS") - basic and diluted		(0.06	)		(0.04	)		(0.12	)		(0.08	)		(0.53	)

Weighted average number of shares used in computation of EPS basic and diluted		32,106,818			22,773,213			31,328,106			22,675,578			19,257,093

(*) Date of inception.

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

TRACEGUARD TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

(UNAUDITED)

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS

IN US DOLLARS

	Six Months Ended June 31,			Six Months Ended June 30,			Cumulative from March 20, 2002(*) to June 30,
	2007			2006			2007
	(Unaudited)			(Unaudited)			(Unaudited)
Cash Flow from Operating Activities:

Net Loss for the period		(3,752,176	)		(1,713,853	)		(10,121,887	)
Adjustments to reconcile net loss for the period to net cash used in operating activities:
Income and expenses not involving cash flow:
Depreciation and amortization		121,468			14,641			179,200
Non-cash stock based compensation expenses to service provider and employees		1,338,527			52,200			3,212,695
Changes in operating assets and liabilities:
Increase in other receivables and other assets		(58,795	)		(206,168	)		(161,702	)
Increase (decrease) in accounts payable and other current liabilities		27,946			386,945			680,755

Net cash used in operating activities		(2,323,030	)		(1,466,235	)		(6,210,939	)

Cash Flows from Investing Activities
Restricted deposit		(19,803	)		(933	)		(41,067	)
Advance on account of license rights		-			-			(100,000	)
Purchase of property and equipment		(54,188	)		(375,100	)		(646,497	)
Net cash used in investing activities		(73,991	)		(376,033	)		(787,564	)

Cash Flows from Financing Activities

Issuance of share capital and warrants, net of issuance expenses		3,841,894			945,072			9,470,244
Receipts on accounts of shares to be allotted		-			1,655,799			-
Receipt on account of notes from shareholder		-			-			30,071

Net cash provided by financing activities		3,841,894			2,600,871			9,500,315

Increase in cash and cash equivalents		1,444,873			758,603			2,501,812
Cash and cash equivalents at the beginning of the period		1,056,939			895,693			-
Cash and cash equivalents at the end of the period		2,501,812			1,654,296			2,501,812

(*) Date of Inception.

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

TRACEGUARD TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE COMPANY)

(UNAUDITED)

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

IN US DOLLARS

	Number of Shares*		Common Stock Amount		Additional Paid In Capital			Receipts on Account of Shares To be Allotted			Warrants			Deficit Accumulated During The Development Stage			Total
Issuance of common stock to founders on inception		15,000,000		2,500		-			-			-			-			2,500
Issuance of Common Stock and Warrants (net of issuance expenses)		14,437,206		8,770		3,353,819			-			1,971,826			-			5,334,415
Issuance of shares to service providers (net of issuance expenses)		232,613		233		598,518			-			-			-			598,751
Issuance of dividend shares on September 12, 2005		-		18,167		(18,167	)		-			-			-			-
Compensation expenses related to RSU and options granted to employees and service providers		-		-		1,345,417			-			-			-			1,345,417
Capital surplus on account of shareholders waiver on notes payable		-		-		37,690			-			-			-			37,690
Shareholders Contribution in the form of license rights		-		-		355,000			-			-			-			355,000
Receipt on accounts of shares to be allotted		-		-		-			221,435			-			-			221,435
Net loss for the period between March 20, 2002** and December 31, 2006		-		-		-			-			-			(6,414,854	)		(6,414,854	)
Balance at December 31, 2006 (Audited)		29,669,819		29,670		5,672,277			221,435			1,971,826			(6,414,854	)		1,480,354
Issuance of shares to service providers (net of issuance expenses)		1,855,564		1,856		373,344			-			-			-			375,200
Compensation expenses related to RSU and options granted to employees and service providers		-		-		963,327			-			-			-			963,327
Issuance of Common Stock (net of issuance expenses)		6,177,971		6,178		2,201,627			(221,435	)		1,855,524			-			3,841,894
Expiration of Warrants		-		-		457,524			-			(457,524	)		-			-
Net loss for the period		-		-		-			-			-			(3,752,176	)		(3,752,176	)
Balance at June 30, 2007 (Unaudited)		37,703,354		37,704		9,668,099			-			3,369,826			(10,167,030	)		2,908,599

(*) After giving a retroactive effect to a six-to-one stock split in the form of a stock dividend of fully paid dividend shares of $0.001 par value at a rate of five shares for every one share of $0.001 par value.

(**) Date of Inception

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

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

TraceGuard Technologies, Inc. (formerly: IBHAS Technologies Inc.) ("the Company") was incorporated in Nevada on March 20, 2002. Initially the Company's plan was to develop and market an internet based computer software program known as IBHAS software. The IBHAS computer software program was intended to automate the process of submission of Internet web page information in multiple languages to major internet search engines. Changes in the market place forced the Company to seek other technologies, specifically homeland security applications. The Company is currently developing innovative security technologies and solutions for explosives detection, a growth segment of the US and global homeland security market. The Company’s systems are designed to improve the screening and detection of explosives, narcotics, biological contaminants and other hazardous materials.

The interim statements as of June 30, 2007 and for the six month period then ended (hereafter - the interim statements) were drawn up in condensed form, in accordance with generally accepted accounting principles applicable to interim statements and with the instructions of item 310(b) of Regulation S-B. The accounting principles applied in preparation of the interim statements are those applied in the annual financial statements. Nevertheless, the interim statements do not include all the information and explanations required for the annual financial statements. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for six-month period ended June 30, 2007 are not necessarily indicative of the results that may expected for the year ending December 31, 2007. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.

Accounting Change- Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainly in Income Taxes (an interpretation of FASB Statement No. 109) (“FIN 48”). Refer to Note 3 for additional information regarding the Company’s uncertain tax benefits.

Going Concern

As reflected in the accompanying interim statements, the Company’s operations for the six month period ended June 30, 2007, resulted in a net loss of $3,752,176 and a negative cash-flow of $2,323,030. Shareholders’ equity as of June 30, 2007 is $2,908,599. The Company expects to continue operating expenditures at the current level over the next 12 months with no substantial revenues expected. These factors raise doubt about the ability of the Company to continue as a going concern. The Company’s ability to continue operating as a going concern is dependent on its ability to raise sufficient additional working capital. Management’s plan in this regard is to seek additional financing to fund its operations. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

Recently Issued Accounting Pronouncements.

SFAS No. 157 - Fair Value Measurements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008, for the Company). Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently evaluating the impact of the provisions of FAS 157 on its financial position and results of operations.

NOTE 1 - GENERAL (Continued)

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. As applicable to the Company, this statement will be effective as of the year beginning January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS 159 would have on its consolidated financial statements.

NOTE 2 - LICENSE RIGHTS

On February 15, 2006, the Company's wholly owned subsidiary, TraceGuard Technologies Ltd. (the "Subsidiary") entered into a License Agreement (the “Agreement”) with TraceTrack Technology Ltd. ("TraceTrack"), pursuant to which, the Subsidiary, under certain terms and conditions as set forth within the Agreement, acquired an exclusive, worldwide, perpetual license to the patents and related know-how owned by TraceTrack, which involves technology being developed to be used for the collection of explosive traces. On December 11, 2006, the Company and TraceTrack amended the agreement, which resulted in increase to the value of the license rights in the form of shareholder contribution. As a result of the Agreement, the Company is considered the successor entity of TraceTrack.

NOTE 3 - INCOME TAX

In July 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48") which became effective for and was adopted by the Company as of January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income taxes and prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN No. 48.In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN No. 48. Thus, the adoption of FIN 48 did not have a material effect on the Company's financial statements.

NOTE 4 - SHAREHOLDERS’ EQUITY

On March 26, 2007 the Company completed a private placement of 5,257,400 units, each "unit" comprising one share of our common stock, one warrant to purchase one share of common stock with an exercise price of $1.5 and an exercise period of one year and one warrant to purchase one share of common stock with an exercise price of $2.5 and an exercise period of three years. Units were issued for an aggregate purchase price of $3,680,180.

On May 29, 2007 the Company completed a private placement of 776,571 units, each "unit" comprising one share of our common stock, one warrant to purchase one share of common stock with an exercise price of $1.5 and an exercise period of one year and one warrant to purchase one share of common stock with an exercise price of $2.5 and an exercise period of three years. Units were issued for an aggregate purchase price of $ 543, 600.

NOTE 5 - STOCK BASED COMPENSATION

Employees' Restricted Stock Unit Plan

On July 6, 2006, the Board of Directors of the Company adopted the 2006 Global Stock Incentive Compensation Plan (the "Plan"), pursuant to which the Company will be able to issue restricted stock units ("RSU") to its employees, consultants and independent agents. The Company reserved a total of 2,300,000 authorized but unissued shares of Common Stock of the Company, par value US$ 0.001 each, for the purposes of the Plan and the Company's other stock compensation plans, when applicable, subject to adjustments as set forth in the Plan. As of June 30, 2007 the Company has 1,077,000 shares available for future grants.

During the six month period ended June 30, 2007, the Company recorded stock-based compensation of $275,357 related to the RSUs granted. Each unit's value was determined based on the closing price for the Company's share on grant date. The Company recognized share based compensation expenses under the straight-line method over the requisite service period, which is three years.

As of June 30, 2007 the total compensation cost related to unvested RSUs not yet recognized is $752,941 and is expected to be recognized over the weighted average vesting period of 1.4 years.

Stock Option Plans for Employees and Service Providers

On February 15, 2007 the Company's Board of Directors approved the grant of an option for the purchase of up to 100,000 shares of common stock of the Company, par valued $0.001 each, to Mr. Jacob Eluz, who served as a director of the Company until February 16, 2007. The options are fully vested, are exercisable at $0.70 each, with an exercise period of 3 years.

On May 21, 2007 the Company's Board of Directors approved the grant of options for the purchase of up to 480,000 shares of the Company's common stock, par value $0.001 each, to acting board members and other service providers. Options are subject to the following terms:

Options to buy 360,000 shares are exercisable for $0.70 each. Options will vest in equal installments, on a quarterly basis, over a service period of 3 years, and will expire 3 years after the vesting of the final installment with respect to all such options.

Options to buy 120,000 shares are exercisable for a $0.70 each. Options will vest in equal installments on a quarterly basis over a service period of 2 years. Each installment will expire 5 years after its vesting.

On May 29, 2007, the Company granted to Dr. Ehud Ganani, Chairman, President and CEO of the Company, a stock option to purchase 1,450,000 shares of the Company’s common stock, at an exercise price of $0.35 per share. See note 6c for further details.

The fair value of the stock options granted by the Company, is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions: expected term is based on the Company’s management estimate for future performance; expected volatility is based on the historical volatility of the share price for similar companies over a period equal to, or greater than, the expected term; the risk free rate is based on the U.S. Treasury constant maturity for a term consistent with the expected term of the award (or weighed average of the two closest available bonds), as in effect at the date of measurement.

NOTE 5 - STOCK BASED COMPENSATION (Continued)

The fair value of stock options granted until June 30, 2007 was estimated using the following assumptions: (a) average expected term of the option of 3.2 years (b) average risk free interest rate of 4.89% (c) dividend yield of 0% and (d) volatility of 100%.

During the six month period ended June 30, 2007, the Company recorded compensation expenses related to options granted at a total amount of $622,593

As of June 30, 2007 the total unrecognized compensation cost related to unvested options was $5,137,129 out of which $1,668,964 will be recognized over an average 1.7 years period vesting period, and the remaining $3,468,165 in accordance with the achievement of certain milestones.

Shares Granted to Service Providers

The Company from time to time has entered into service agreements with several service providers. In consideration for services provided, the Board of Directors of the Company issued during the six month period ended June 30, 2007 a total of 1,315,564 shares of its Common Stock, par value $0.001 each. An additional 540,000 shares that were approved for issuance by the Board of Directors of the Company in 2006 were issued to service providers in January 2007.

Total stock-based compensation to service providers recognized during the six month period ended June 30, 2007 was $1,270,391. This value is based upon the closing price for the Company's common stock on the award's grant date.

NOTE 6 - MATERIAL AGREEMENT AND TRANSACTIONS WITH RELATED PARTY

On May 7th, 2007 the Subsidiary has entered into a second amendment (the "Amendment") of its Consulting Agreement (the "Agreement") with Dr. Ehud Ganani, the Company's Chairman, President and CEO. Pursuant to the amendment, a certain milestone related to the vesting of options to purchase 200,000 shares of the Company's common stock, was restated to be 'the receipt of the written approval of a Security Organization for the fulfillment of the security demands by the CompactSafe and for the operational use of the CompactSafe' (rather than the original security demands and operational use of the CarrySafe, which was originally intended to be the Company’s first product, rather than CompactSafe).

Fair value of the aforementioned award, as of June 30, 2007 was calculated as $149,361. However, achievement of the above milestone is not estimated by the Company's management as probable, and as such, the Company did not record any compensation expenses in the six month period ended June 30, 2007, related to this grant (see note 5b-6).

"Ornath Options"

Dr. Fredy Ornath is the holder of 10,629,990 shares of common stock of the Company and the holder of 99.8% shares of common stock M.S. Materials Ltd., which is the sole owner of Tracetrack.

On May 29, 2007 Dr. Ornath granted the Company a stock option, pursuant to which the Company may purchase up to 1,450,000 shares of the Company’s common stock owned by Dr. Ornath (the "Ornath Option"). The purpose of this grant was to fulfill the Company's obligation upon exercise of an option granted to Dr. Ganani, see the “Ganani Option” as described below in 6c.

NOTE 6 - MATERIAL AGREEMENT AND TRANSACTIONS WITH RELATED PARTY (Continued)

The Ornath Option is exercisable according to a certain vesting schedule throughout April 1, 2009. However, the Ornath Option is exercisable if, and only if, and to the extent that, certain stock option between the Company and its Chairman, President and CEO, Dr. Ehud Ganani ("Ganani Option"), is exercised. The Ornath Option shall be terminated immediately upon termination of the Ganani Option with respect to shares that are unvested, according to the aforementioned vesting schedule. (See also Note 6c).

Ornath Option is exercisable for $0.35 per share and expires on the 7th anniversary of its grant.

Ornath Option was accounted as shareholder's contribution, which was credited to equity and as a derivative instrument, which was debited to equity, pursuant to provisions of EITF 00-19.

"Ganani Option"

On May 29, 2007, the Company granted to Dr. Ehud Ganani, Chairman, President and CEO of the Company, a stock option (the “Ganani Option”) to purchase 1,450,000 shares of the Company’s common stock, at an exercise price of $0.35 per share.

The Ganani Option has a term of seven years, may only be exercised to the extent that the Company has sufficient surplus to exercise the Ornath Option (see Note 6b) and vests according to a vesting schedule, identical to the Ornath Option. In addition, the Ganani Option terminates upon the cessation of Dr. Ganani’s employment with the Company or its subsidiary under certain specified conditions.

NOTE 7 - SUBSEQUENT EVENTS

In July 2007, the Board of Directors of the Company has approved a grant of additional 520,000 RSUs to several of the Subsidiary's employees in accordance to the Company's 2006 Global Stock Incentive Plan. The vesting of the aforementioned RSUs is subject to certain service and performance conditions.

On July 15, 2007 the Board of Directors of the Company has approved a grant of the following awards to several of the Subsidiary's service providers:

Options to purchase up to 752,500 shares of its common stock, par value $0.001 each. Options are exercisable for $0.70 per share, shall vest according to a certain task performance schedule, and shall expire 3 years commencing as of the date on which each option vests.

Up to 6,000 shares of the Company's common stock, par value $0.001 each, per each month of service provided by one of the aforementioned service providers, effective January 15, 2007. 108,000 shares were approved for immediate issuance in respect of services rendered within the 18 months period prior to January 2007.

Item 2. Management's Discussion and Analysis or Plan of Operation.

FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. They include statements concerning: our business strategy; expectations of market and customer response; liquidity and capital expenditures; future sources of revenues; expansion of our proposed product line; and trends in industry activity generally. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. For example, risks that could cause actual results to vary materially from future results include, but are not limited to: our lack of an operating history, issues related to intellectual property infringement, issues relating to the introduction of our products in target markets, the need to raise capital to fund operations, our dependency on key personnel, approval of our products by regulatory authorities, matters related to the location of our operations in Israel; the extent of competition; technological developments in our target markets and the development of alternate, competing technologies in them; and sales of shares by existing shareholders.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. You should carefully consider such risks, uncertainties and other information, disclosures and discussions, which contain cautionary statements identifying important factors, that could cause actual results to differ materially from those provided in the forward looking statements. You should carefully review the risks factors and other cautionary statements contained in our annual report on form 10-KSB and other public filings. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise.

Our financial statements are stated in United States Dollars (US$) and are prepared in conformity with generally accepted accounting principles in the United States of America for interim financial statements. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report.

As used in this quarterly report, the terms "we", "us", "our company", "the Company" and "TraceGuard Technologies" mean TraceGuard Technologies Inc., unless otherwise indicated. All dollar amounts refer to US dollars unless otherwise indicated.

THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION WHICH OUR MANAGEMENT BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF OUR COMPANY'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION. THIS DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES TO FINANCIAL STATEMENTS WHICH ARE INCLUDED IN THIS REPORT, AND WITH OUR COMPANY'S FORM 10-KSB.

General

Up until June 29, 2005 our business plan was to develop and market an Internet computer software program that was designed to automate the process of submission of Internet web page information in multiple languages to major Internet search engines. Since February 2006, our business plan strategy has been focused on developing technologies for homeland security applications. This new focus is based on an exclusive technology licensing agreement with Tracetrack Technologies Ltd., ("TraceTrack"), which was finalized in a licensing agreement between our wholly owned subsidiary, TraceGuard Technologies Ltd. (the "Subsidiary") and Tracetrack on February 15, 2006.

Cash Requirements

As of June 30, 2007 we had $2,501,812 in cash and cash equivalents, and $1,964,274 in working capital. The Company’s ability to fund its cash requirements over the next 12 months is discussed below at “Liquidity and Capital Resources. “

Estimated use of funds over the following 12 month period, beginning July 1, 2007 (in thousands $):

Marketing & Business Dev.			585
Engineering			2,328
General and Administrative			1,087
Investment in Equipment & Initial Inventory			500
Total			4,500

Product Research and Development

A prototype of our first product, the CompactSafe was deployed since January, 2007 in several beta-sites, including Israel's main international airport for testing purposes. We plan to further deploy the CompactSafe in key facilities throughout 2007. Over the next 12 months we intend to focus our R&D efforts on achieving a fully commercial CompactSafe and finishing the development of our second product - the CarrySafe, which is intended for explosive trace extraction in carry-on luggage.

Lease agreements & investments

The Company and its wholly owned subsidiary, has agreements to lease office space and office services in New York City and Petach-Tikva (Israel). Total expected lease expenses for the next 12 months are approximately $76,500. We have lease agreements for our Israeli facilities until November 2007, with option for additional 2 years extension, at our own discretion.

As of June 30, 2007 the Company and its subsidiary have invested approximately $263,000 in leasehold improvements and furniture for its new facilities.

In addition, as of June 30, 2007, a sum of approximately $384,000 has been invested in equipment, computer hardware and computer software for the Subsidiary's development group.

Employees

As of May 6, 2006 there are 27 full time employees, other than its directors, and 6 part time employees being employed by our subsidiary. We expect to further recruit a number of part time and full time employees in the field of engineering, R&D, administrative and business development over the next 12-month period.

Off Balance-Sheet Arrangements

The Company has no off balance-sheet arrangements.

Recently Issued Accounting Standards

SFAS No. 157 - Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). The Company is currently evaluating the impact, if any, the adoption of FIN 157 will have on its financial statements.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities

ACCOUNTING POLICIES

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. We have historically incurred losses, and through June 30, 2007 have incurred losses of $10,167,030.

Effective January 1, 2006 the Company adopted SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”) using the Modified Prospective Approach. SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123") and requires the measurement and recognition of compensation of all share-based payments, to be based on their estimated fair values at grant date, or the date of later modification, over the requisite service period. The interim statements as of June 30, 2007 and for the six month period then ended reflect the impact of SFAS No. 123R. For the six month period ended June 30, 2007 the Company recorded stock based compensation expense related to issuance of restricted stock units and stock options to employees in the amount of $340,734.

The Company accounts for stock-based payment issued to non-employees on a fair value basis in accordance with SFAS No. 123 “Accounting for Stock-Based Compensation” and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and related interpretations. For the six month period ended June 30, 2007 the Company recorded stock based compensation related to issuance of Shares of its Common Stock and of Stock Options in the amount of $1,892,914.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions relate to recording realizability of other intangible assets, accruals, income taxes, stock-based compensation expenses and other factors. Management has exercised reasonable judgment in deriving these estimates; however, actual results could differ from these estimates. Consequently, changes in conditions could affect our estimates.

Fair Value of Financial Instruments

The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents The financial instruments of the Company consist mainly of non-derivative current assets and current liabilities. In view of their nature, the fair value of financial instruments included in working capital of the Company is usually identical or close to their carrying value.

Results of Operations

Six months ended June 30, 2007 and 2006

The Company's operating expenses for the six month periods ended June 30, 2007 and 2006, were $3,778,193 and $1,723,247, respectively. The principal components of the expenses were for R&D activities, in respect of the development of our 2 new products: the CarrySafe and the CompactSafe, as well as general and administrative expenses, mainly consisting of payroll cost and consulting expenses including stock based compensation.

Our Company recorded losses of $3,752,176 and $1,723,247 for the six month periods ended June 30, 2007 and 2006, respectively, and losses of $10,167,030 since March 20, 2002 (date of inception).

Liquidity and Capital Resources

The Company did not record revenues since inception.

During the period of the six months ended June 30, 2007, the Company had an average total burn rate of approximately $400,000 per month, mainly consisting of per six months (in thousands $):

Employees and consultants			931
Engineering & R&D activities			550
Marketing & Business Dev.			135
General & Administrative			725
Investment in equipment			53
Total			2,394

The Company has incurred losses of $10.1 million and negative cash flow of $6.2 million from operations since inception. In addition the Company has not yet derived income from sale of its products and it is mainly engaged in research and development activities with respect to such products. All of the Company’s cash requirements to date were generated from its stockholders through issuance of the Company’s common stock and warrants to purchase common stock. These factors raise doubt about the Company's ability to continue as a going concern. We intend to continue to fund our operations through financings for the foreseeable future, until we generate positive cash flow from operations. Our ability to continue operating as a going concern is dependent on our ability to raise sufficient additional working capital. We cannot be certain that such financing will be available on acceptable terms, or at all. Our current cash reserves are sufficient to fund our operations through approximately the end of January 2008 based on current budgeted expenditures.

The Company has no long-term debt and does not regard long-term borrowing as a good, prospective source of financing.

Item 3. Controls and Procedures.

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report, being June 30, 2007, we have carried out an evaluation of the effectiveness of the design and operation of our Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. There have been no significant changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.

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

On May 21, 2007 the Company granted options to purchase up to 480,000 shares of its common stock, par value $.001 each, to several of its Directors and service providers, at an exercise price of $0.70 per share, in consideration for their services. The aforementioned securities were issued in reliance upon the exemption afforded by the provisions of Regulation S, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, based on the fact that at the time of the offer and purchase of such securities to the Director, the Director was not inside the U.S., and in reliance on the Director's representation that he was not a "U.S. person" (as defined in Regulation S) and is not acquiring the securities for the account or benefit of any U.S. person.

On May 29 2007 the Company granted 323,373 shares of its common stock, par value $0.001 each, to several service providers, in consideration for service provided. The aforementioned securities were issued in reliance upon the exemption afforded by the provisions of Regulation S, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, based on the fact that at the time of the offer and sale of such securities to such service providers, the service providers were not inside the U.S., and in reliance on each of the service providers' representation that such person was not a "U.S. person" (as defined in Regulation S) and is not acquiring the securities for the account or benefit of any U.S. person.

In July 2007, the Board of Directors of the Company granted 520,000 Restricted Stock Units ("RSUs"), par value $0.001 each, to several of its wholly owned subsidiary's employees in accordance to the Company's 2006 Global Stock Incentive Plan. The vesting of the aforementioned RSUs is subject to certain service and performance schedules. The aforementioned securities were issued in reliance upon the exemption afforded by the provisions of Regulation S, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, based on the fact that at the time of the offer and sale of such securities to such service providers, the service providers were not inside the U.S., and in reliance on each of the service providers'' representation that such person was not a "U.S. person" (as defined in Regulation S) and is not acquiring the securities for the account or benefit of any U.S. person. In addition, the securities bear a Regulation S restrictive legend.

On August 9, 2007 the Company granted options to purchase up to 752,500 shares of its common stock, par value $.001 each, to several of its service providers, at an exercise price of $0.70 per share, in consideration for their services. The aforementioned securities were issued in reliance upon the exemption afforded by the provisions of Regulation S, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, based on the fact that at the time of the offer and sale of such securities to such service providers, the service providers were not inside the U.S., and in reliance on each of the service providers' representation that such person was not a "U.S. person" (as defined in Regulation S) and is not acquiring the securities for the account or benefit of any U.S. person.

On August 9, 2007 the Company granted 108,000 shares of its common stock, par value $.001 each, to a service provider, in consideration for services provided. The aforementioned securities were issued in reliance upon the exemption afforded by the provisions of Regulation S, as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended, based on the fact that at the time of the offer and sale of such securities to such service providers, the service providers were not inside the U.S., and in reliance on each of the service providers' representation that such person was not a "U.S. person" (as defined in Regulation S) and is not acquiring the securities for the account or benefit of any U.S. person.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits and Reports on Form 8-K.

Item Number		Exhibit

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TraceGuard Technologies, Inc.

By:

/s/ Dr. Ehud Ganani

Dr. Ehud Ganani, President, Chief Executive

Officer

(Principal Executive Officer)

Date: August 9, 2007

/s/ David Ben-Yair

David Ben-Yair, Chief Financial Officer

(Principal Financial Officer)

Date: August 9, 2007

TraceGuard (TCGD) Inactive 10QSB2007 Q2 Quarterly report (small business)