idea: use this technology for atm cards. you authenticate to your card by punching in your pin on its built in pad, then feed the atm your activated card. the card transmits a one time use number to the atm. this way, the atm never gets your pin, and your card data is never good for more than one use.
How does the server know the CVV2 code that was generated by the Emue card? Or, given the card number, and other variables like time of day, is the CVV2 code determined by some function?
Yes, it's some polynomial function initialized by pin number value. This is plain old technology which is very well used in corporate banking for years: accountants receive their "beepers" to generate authentication code to authorize their transactions (wire transfers for example).