UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549









FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934





For the
fiscal year ended December 31, 2009




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934





For the
transition period from ________________ to ________________





Commission
File No.: 001-15465





Intellicheck Mobilisa,
Inc.


(Exact
name of Registrant as specified in its charter)





Delaware
            
            11-3234779(State or Other Jurisdiction of
              Incorporation or Organization)
            
            (I.R.S. Employer Identification No.)





191 Otto Street, Port Townsend, WA
      98368(Address
      of Principal Executive Offices)  (Zip
  Code)





Registrant’s
telephone number, including area code:    (360)
344-3233





Securities
registered pursuant to Section 12(b) of the Act:





Common Stock, $.001 par
value


(Title of
Class)





Securities
registered pursuant to Section 12(g) of the Act:  None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈No
x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈ No x




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.


Yes xNo
 ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈




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
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
One):





Large
      accelerated
              filer o
            
            Accelerated filer o
            
            Non-accelerated
      filer o
              (Do
      not check if a smaller 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  ̈No x





State the
aggregate market value of the voting and non-voting stock held by non-affiliates
of the Issuer: $22,468,887 (based upon the closing price of Issuer’s Common
Stock, $.001 par value, as of the last business day of the Issuer’s most
recently completed second fiscal quarter (June 30, 2009).




Indicate
the number of shares outstanding of each of the Registrant’s classes of common
stock, as of the latest practicable date.





Common Stock, $.001 Par
      Value
                26,349,305(Title
      of Class)
                (No.
      of Shares Outstanding at March 11,
2010)




DOCUMENTS
INCORPORATED BY REFERENCE: None







TABLE
OF CONTENTS





Part I1.
                                  
                                  Business
                                  31A.
                                  
                                  Risk
      Factors
                                  171B.
                                  
                                  Unresolved
      Staff Comments
                                  242.
                                  
                                  Properties
                                  243.
                                  
                                  Legal
      Proceedings
                                  244.
                                  
                                  Submission
      of Matters to a Vote of Security Holders
                                  25Part II5.
                                  
                                  Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                                  266.
                                  
                                  Selected
      Financial Data
                                  277.
                                  
                                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                  277A.
                                  
                                  Quantitative
      and Qualitative Disclosures About Market Risks
                                  398.
                                  
                                  Financial
      Statements and Supplementary Data
                                  399.
                                  
                                  Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                  399A.
                                  
                                  Controls
      and Procedures
                                  399B.
                                  
                                  Other
      Information
                                  40Part III10.
                                  
                                  Directors
      and Executive Officers and Corporate Governance
                                  4011.
                                  
                                  Executive
      Compensation
                                  4312.
                                  
                                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                  5113.
                                  
                                  Certain
      Relationships, Related Transactions and Director
    Independence
                                  5314.
                                  
                                  Principal
      Accountant, Fees and Services
                                  54Part IV15.
                                  
                                  Exhibits
      and Financial Statement Schedules
                                  54


2


PART I




Item 1.
            Business




OVERVIEW




We were originally incorporated in the
state of New York in 1994.  In August 1999, we reincorporated in
Delaware.  On March 14, 2008, our corporation was renamed
Intelli-Check - Mobilisa, Inc. after the consummation of the merger with
Mobilisa, Inc. (“Mobilisa”) as detailed in Recent Developments below (references
to “Intelli-Check” in this annual report refer to the Company prior to the
merger with Mobilisa).  On October 27, 2009, we made a further change
in our name to Intellicheck Mobilisa, Inc. (“Intellicheck Mobilisa,” “we,”
“our,” “us,” or “the Company”).  Our headquarters is in Port Townsend,
Washington, an area designated by the U.S. Small Business Administration as a
Historically Underutilized Business Zone ("HUBZone").  Our primary
businesses include commercial applications of identity card reading and
verification, government sales of defense security and identity card
applications, and the development of wireless communications applications with
an emphasis in Wireless over Water® (“WOW”TM)
applications.




Our
technologies address problems such as:




§
            Commercial Fraud –
      which may lead to economic losses to merchants from check cashing, debit
      and, credit card as well as other types of fraud such as identity theft
      that principally use fraudulent identification cards as proof of
      identity;




§
            Instant Credit Card Approval–retail stores use
      our technology to scan a Drivers License at a kiosk or at the Point Of
      Sale (POS) and send the information to a credit card underwriter to get
      instant approval for a loyalty-branded credit card.  This
      technique protects consumer data and is significantly more likely to
      result in a completed transaction compared to in-store personnel asking
      customers to fill out a paper form;




§
            Unauthorized
      Access – our systems and software are designed to increase
      security and deter terrorism at airports, shipping ports, rail and bus
      terminals, military installations, high profile buildings and
      infrastructure where security is a
concern;




§
            Underage Access to Age Restricted
      Products and Services – our systems and software are designed
      to determine the customer’s age as well as the validity of the encoded
      format on identification documents, to detect and prevent the use of
      fraudulent identification for the purchase of alcohol, tobacco and other
      age-restricted products and services and to reduce the risk to the
      retailer of substantial monetary fines, criminal penalties and the
      potential for license revocation for the sale of age-restricted products
      to under-age purchasers;




§
            Inefficiencies Associated With
      Manual Data Entry–by reading encoded
      data contained in the bar code and magnetic stripe of an identification
      card with a quick swipe or scan of the card, where permitted by law,
      customers are capable of accurately and instantaneously inputting
      information into forms, applications and the like without the errors
      associated with manual data entry;




§
            Marine Environment
      Communications – our WOW technology allows for instant
      communication between multiple points, both on land and at sea, across
      wide, over-water expanses and optimizes performance by taking into account
      sea state and Fresnel zones (Fresnel zones result from obstructions in the
      path of radio waves and impact the signal strength of radio
      transmissions). We are currently developing Floating Area Network®
      (“FANTM”) and Littoral Sensor Grid technology as the next evolutionary
      step in marine communications; and




§
            Wireless Network Design and
      Hazard Assessment– ourAIRchitect®
      tool designs optimum wireless networks based on user parameters and
      location architecture, and our Radiation Hazard (RADHAZ) tool identifies
      and assesses radio frequency (RF)
exposure.


3




RECENT
DEVELOPMENTS





On November 20, 2007, the Company and
Mobilisa, entered into a merger agreement pursuant to which our wholly-owned
subsidiary would merge with and into Mobilisa, resulting in Mobilisa becoming a
wholly-owned subsidiary (the “Merger”). At a special meeting of stockholders
held on March 14, 2008, our stockholders voted to approve the Merger, as well as
to amend Intelli-Check’s certificate of incorporation to increase the authorized
shares of common stock and to increase the number of shares issuable under our
2006 Equity Incentive Plan.  At the closing of the Merger, our
corporation was renamed Intelli-Check – Mobilisa, Inc. and our headquarters were
moved to Mobilisa’s offices in Port Townsend, Washington.





In the Merger, the former shareholders
of Mobilisa received a number of shares of Intelli-Check common stock such that
they owned 50% of Intelli-Check’s common stock and approximately 50% of the
total outstanding derivative securities post-merger.  The aggregate
value of the purchase consideration was equal to $50,722,000, based on the
closing price of our common stock on November 20, 2007, the date of the merger
agreement.





We accounted for the transaction under
the purchase method of accounting in accordance with the provisions of Statement
of Financial Accounting Standards No. 141, “Business Combinations.” Under
this accounting method, we recorded as our cost, the assets of Mobilisa, less
the liabilities assumed, with the excess of such cost over the estimated fair
value of such net assets reflected as goodwill. Additionally, certain costs
directly related to the transaction are reflected as additional purchase price
in excess of net assets acquired. Our results of operations include the
operations of Mobilisa after March 14, 2008.




Mobilisa, Inc. was incorporated in the
state of Washington in March 2001.  Mobilisa was designated as a
woman- and veteran-owned, small business.





On August
31, 2009, the Company acquired 100% of the common stock of Positive Access
Corporation, a developer of driver license reading technology. The acquisition
of Positive Access, which has an extensive distribution network, will enable the
Company to offer more products to more customers. The transaction was accounted
for using the purchase method of accounting.   The results of
Positive Access Corporation’s operations have been included in the accompanying
consolidated financial statements from September 1, 2009.  The
acquisition expands the Company’s technology portfolio and related product
offerings.




IDENTITY CARD READING AND
VERIFICATION SECTOR




Background on Identification
Documentation




Driver
license




The
driver license is the most widely used form of government issued photo
identification in North America. The Real ID Act, which became federal law in
May 2005, recognizes that the driver license is also a quasi-identification
card.   In addition to its primary function, the driver license
is used to verify identity for social services, firearm sales, check cashing,
credit card use and other applications. Our technology can read the data on all
currently encoded driver licenses (even those that do not comply with the
AAMVA/ANSI/ISO standards).  Currently, the fifty states, the District
of Columbia, and ten Canadian Provinces encode their licenses. We believe that
the number of readable licenses will continue to grow as the jurisdictions
currently not encoding begin issuing encoded documents, and the remaining
Canadian jurisdictions begin to issue encoded documents to meet the mandates put
forth in the Real ID Act and U.S. jurisdictions that have recently begun to
encode complete their issuance cycle.




Non-driver identification
card




Since
many people do not have a driver license, numerous jurisdictions offer other
identification cards that may contain encoded information. These non-driver
identification cards, as well as military IDs, are fundamentally identical to
driver licenses.  Because driver licenses are the most widely used
form of legally acceptable government documentation, we refer to all these types
of legally acceptable governmental identification documents as "driver
licenses." Our ID√Check® software
is equally capable of performing its function with these other types of
government identification.


4





Regulation of Retailers of
Tobacco Products and Alcoholic Beverages




In an
effort to combat the problems of underage drinking and smoking, the federal
government and many states and Canadian provinces have enacted laws requiring
businesses that sell age-restricted products to verify the IDs of potential
customers to determine that they are of legal age to purchase these products.
These laws impose stringent penalties for violations. For example, federal
regulations have been enacted that place a greater burden on retailers to
prevent the sale of tobacco products to minors. Clerks are required to check the
photo ID of anyone trying to purchase tobacco products that appears to be under
the age of 27, and a retailer of alcoholic products who sells to an underage
person could face potential fines, suspension of its license, or the potential
outright revocation of its license to sell alcoholic beverages. Additionally, in
states where enacted, dram shop laws allow a person who is injured by any
obviously intoxicated person to file a claim for relief for fault against any
person who knowingly sells alcoholic beverages to a person less than 21 years of
age. As a result of law enforcement efforts and regulatory penalties, we believe
retailers that sell alcohol and tobacco, such as liquor stores, bars and
convenience stores, are facing increased pressure to accurately verify the age
of their customers.  There is legislation currently pending or
proposed in some U.S. states that would make it mandatory to utilize electronic
verification devices by sellers of age-restricted products such as alcohol and
tobacco.




Current Challenges
Associated with Verifying Identification Documents




The
high-tech revolution has created a major problem for those who rely on
identification documents. In an age where scanners, computers and color printers
are commonplace, fake IDs of the highest quality are easily obtainable from a
number of locations including college campuses and from multiple sites on the
Internet. These fakes appear so real, even law enforcement agencies have
encountered difficulty distinguishing them from legally issued documents.
Additionally, these high-tech devices have the ability to easily alter properly
issued ID's. Therefore, anyone can gain access to a false identity that gives
them the ability, in a commercial transaction, to present fake and stolen credit
cards or checks that are supported by false identification. Additionally,
starting with only a fraudulent driver license, an individual may be able to
create multiple identities, commit fraud, buy age restricted products such as
alcohol and tobacco while underage, evade law enforcement and engage in other
criminal activities, such as:




§
                          committing
      identity theft;
                          
                          §
                          purchasing
      age restricted products such as alcohol and tobacco while under
      age;§
                          improperly
      boarding airplanes;
                          
                          §
                          committing
      employee fraud, including employee theft and payroll
  theft;§
                          committing
      credit card, debit card and check cashing fraud;
                          
                          §
                          engaging
      in medical fraud;§
                          unlawfully
      committing pharmacy fraud, including false narcotic
      prescriptions;
                          
                          §
                          obtaining
      welfare or other government benefits; and§
                          gaining
      entrance to high profile buildings and sensitive infrastructures, such as
      nuclear facilities;
                          
                          §
                          committing
      refund fraud.§
                          illegally
      purchasing firearms;





Given the ease with which
identification can be falsified, simply looking at a driver license may not be
sufficient to verify age or identity and determine whether or not it is
fraudulent. Since merchants are facing significant economic losses due to these
frauds, we believe that a document verification system which can accurately read
the electronically stored information is needed.  We possess patented
technology that provides an analysis of the data contained on the encoded
formats of these identification documents by reading and analyzing the encoded
format on the magnetic stripe or bar code on the driver license and comparing it
against known standards.  We believe that we are the only company able
to do this for all U.S. jurisdictions and that no other company could provide a
similar service without infringing on our patents.


5




OUR PRODUCTS AND
SERVICES




Our Products and Services can be
categorized into three main areas:  (1) Commercial Identification, (2)
Defense Security, and (3) Wireless Communications.




Commercial Identification
Products and Services




ID√Check®Family —Solutions and
Benefits




Our
patented ID√Check technology is our advanced document verification
software.  ID√Check is contained in our software products, and is
capable of reading and verifying in one swipe or scan the encoded format
contained on U.S. and Canadian driver licenses, state issued non-driver
identification cards, and military IDs.  Our technology has the
ability to verify the encoded formats on all currently encoded documents, even
those that do not comply with the standards of the American Association of
Motor Vehicle Administrators (“AAMVA”), the American National Standards
Institute (“ANSI”) and the International Standards Organization
(“ISO”).




We
believe that ID√Check and our family of software solutions contain the most
advanced, reliable and effective technology, providing users with an easy,
reliable, and cost-effective method of document and age
verification.  We have received encoding formats from all of the
issuing jurisdictions in North America.  This information, combined
with our patented technology, enables all of our ID√Check software products to
read, decode, process and verify the encoded formats on driver
licenses.  As jurisdictions change their documents and guidelines, we
believe our software can be adapted to these changes.




ID√Check
software does not require a connection to a central database to operate, thus
negating privacy concerns.  Many of our products have the ability to
operate add-on peripherals such as printers, fingerprint readers and other
devices.




The
ID√Check process is quick, simple and easy to use.  After matching the
driver license photograph to the person presenting the document for
identification, the user simply swipes the driver license through the data
capture device if the card has a magnetic stripe or scans it if it has a bar
code.  The software quickly determines if:




§
            the
      format of the document is valid;




§
            the
      document has been altered or is fake, by displaying the parsed, encoded
      data for comparison with the printed
  information;




§
            the
      document has expired; and




§
            being
      used for age verification, the encoded data contains a date of birth equal
      to or greater than the legal age to purchase age restricted products, such
      as alcohol and tobacco.




Then, the
ID√Check® software
applications can:




§
            respond
      to the user by displaying the format verification result and the parsed
      information;




§
            save
      information that is permissible by law to memory;
  and




§
            print
      a record of the transaction including the verification results, if a
      printer is part of the hardware
configuration.




ID√Check®SDK




Our
software product, ID√Check SDK, is designed for software developers that wish to
incorporate our ID√Check technology into their applications. It contains our
proprietary technology, as well as a device controller, which is also capable of
reading the smart chip contained in the military CAC.  We currently
have multiple license agreements with third parties for integration and
sub-licensing of our software applications into their core
applications.  The SDK is available for multiple platforms such as
Microsoft® Windows,
Windows Mobile, AIX, and certain versions of Linux. It can easily be ported to
other platforms as the need arises.  While we will continue to support
certain partners under existing agreements, we will no longer be pursuing sales
of our ID√Check SDK as we move our revenue model towards selling application
solutions directly to the end user.


6




ID√Check®POS




ID√Check POS is a software application
that runs on multiple VeriFone devices, such as the Omni 37xx
series.  Our software uses both the onboard magnetic stripe reader and
an optional external 2-D bar code reader that plugs into an open port on the
back of the unit.  The terminal has an integrated, high-speed thermal
printer. The VeriFone devices are multi-application terminals that allow the
ID√Check software to run side by side with credit card processing software as
well as other value added software applications certified by
VeriFone.  We have been designated as a VeriFone value added
partner.




ID√Check®BHO




This software product, formerly called
the Web Form Filler product, is a Browser Helper Object (“BHO”) for Internet
Explorer.  The BHO allows our customers to seamlessly integrate our
core ID√Check technology into their web based applications.  The BHO
can be programmed through a series of drop down menus to populate driver license
data in the fields of specific web pages based on web page URLs and web page
field names.  The technology also provides the ability to check the
encoded formats of ID documents.




ScanInnTM




ScanInn is a software application that
speeds up check-in and ID verification at hotels and motels.  This
product builds on the BHO and ID Check PC to enhance user productivity by
automating data entry thus improving accuracy.  ScanInn allows the
check in at a hotel in seconds and is incorporated into legacy Property
Management Systems.




AssureScanTM




AssureScan is an application that that
assists pharmacies with ID verification and tracking drug related
purchases.  This product focuses on the capturing data from drivers’
licenses and tracking the sale of controlled medicines such as
pseudoephedrine.  Many states are now monitoring the sale of
controlled medicines and this product tracks those sales.




C-Link®Software




Our
C-Link software, which is our networkable data management software works in
conjunction with our ID√Check POS application that runs on multiple VeriFone
secure electronic payment terminals or with our data capture
modules.  It may be used only where permitted by law, since certain
jurisdictions restrict using this information without customer
consent.  It allows the user to instantly view data from driver
licenses as well as from the smart chip contained on the military common access
card (CAC), for further verification and then archives it into a personal
computer.  C-Link can be used on a stand-alone personal computer or in
a network environment.  It contains features such as alerts, watch
lists, and recurring entry.




ID√Check®PC




ID√Check
PC is a standalone software solution that is designed to provide the features of
ID√Check for Windows based platforms.  It may be used only where
permitted by law, since certain jurisdictions restrict using this information
without customer consent.  It allows the user to instantly view data
from driver licenses as well as from the smart chip contained in the military
common access card (CAC), for further verification and then archives it into a
personal computer.  It contains features such as recurring entry and
age verification.




ID√Check®Mobile




ID√Check Mobile is the designation for
multiple hand held devices that we offer our customers.  The
form-factor is a small, lightweight mobile computer with a durable housing
design that has 2-D bar code, magnetic stripe and/or Smart card reading
capabilities.  By allowing the user to move between locations,
ID√Check Mobile products provide the ability to check the encoded format of ID
documents at multiple entry points.  It additionally has the
capability of providing a yes/no response when used for age verification
purposes.


7




Data Collection
Devices




Our
software products are designed for use with multiple data collection devices,
which are commercially available in various compact forms and may contain either
one or both of two-dimensional bar code and magnetic stripe
readers.  These devices enable our software applications to be used on
a variety of commercially available data processing devices, including credit
card terminals, PDAs, tablets, laptops, desktops and point-of-sale
terminals.  Many of these devices contain an electronic serial number
(ESN) to prevent unauthorized use of our software.




Instant Credit Application
Kiosk Software Applications





These are
custom software applications that Intellicheck Mobilisa has developed for a
variety of major financial service companies and retail stores.  The
software installed on multiple kiosk devices provides the customers of the major
financial service companies with the ability to perform in-store instant credit
approval on these devices. The hardware platforms, on which the software
applications run, range from stationary devices to handhelds to tablet PCs. The
process involves the swiping or scanning of the driver license to verify the
encoded format and after verification, the information parsed from the encoded
data is populated into the proper fields on the application displayed on the
kiosk. The applicant then completes the application by entering the remaining
required information that is not encoded on the driver license, such as social
security and telephone numbers. The software application then sends the data to
the financial service company’s backend “decisioning” tool for credit
approval.  If approved, the applicant is granted instant credit which can
then be used to make purchases.




ID√Check®Focus and
ID-Cap67TMHandheld
Imager




These
handheld imager-based bar code readers are designed to increase employee
productivity while streamlining business processes in multiple business sectors
such as retail, healthcare, government and security.  These devices
have the ability to capture images of ID documents and deliver the document
clarity required to streamline recordkeeping, thus replacing paper-based files
with electronic filing.




Upgrade
Capability




All of
the ID√Check products may be updated as states and provinces adjust or modify
the format of their electronically stored information.  We distribute
jurisdictional updates in a variety of ways depending on the product in use. Our
technology can be upgraded by the installation of a file sent on an SD card, CD
and/or e-mail to the customer.  One of our products can be upgraded by
modem using a dial-up phone connection.  Jurisdictional Updates are
included in the purchase price of Intellicheck Mobilisa products for the first
year after purchase.  We sell upgrade packages for the period
commencing after the first year of purchase.  We have also developed
an automated remote update system that customers can use to automatically
download and install updates.  This product is currently being used in
instant credit kiosk applications.





Defense Security Products
and Services





Defense ID®System





Our Defense ID System offers law
enforcement personnel and military security officers additional information for
protecting their facilities. The Defense ID System uses rugged, handheld, mobile
devices and desktop visitor/vendor approval workstations to read barcodes,
magnetic stripes, RFID (radio frequency identification) and OCR (optical
character recognition) codes printed on current forms of identification cards.
By scanning and comparing the information contained on the ID card to over 100
databases, Defense ID can immediately determine if the card has been reported
lost or stolen, the individual’s identity information matches watch lists or law
enforcement databases, or if they are on an authorized roster of
previously-cleared personnel.  In 2008, our Defense ID System received
a U.S. Navy-wide certification and accreditation referred to as an Authority to
Operate (“ATO”), and in 2009, our Defense ID System received U.S. Army-wide,
U.S. Marine Corps-wide and U.S. Air Force-wide ATO’s.  We believe
these ATO’s will facilitate further deployment of the Defense ID System at
military bases and facilities.


8




TWIC Reader (IM
2700)





One of
the first readers on the Department of Homeland Security’s Initial Capabilities
List of devices, the IM2700 verifies the Character Unique Identifier,
Certificates of Authenticity, Biometrics and Personal Indentify Number on the
Transportation Worker Identification Credential (“TWIC”).  The TWIC
reader can also be incorporated into all aspects of the Defense ID
System.  The Department of Homeland Security (“DHS”) regulations
required that all workers at ports must have a card by April 15,
2009.





Visitor Center (IM
3000)





The
Visitor Center is a component of our Defense ID system.  The desktop
computer performs a real time background check utilizing over 100 databases to
verify the individual is not on a wanted list and also if the individual has
been pre approved to access the facility or building.




Upgrade
Capability





Like our ID√Check products, our Defense
ID products are constantly updated to stay current with identification formats
and new forms of ID.  In addition, we continuously update the
databases related to lost or stolen cards, watch lists and law enforcement
database updates, and authorized rosters of cleared personnel.  Our
Defense ID Systems are maintained via annual subscriptions that are purchased by
our customers.





Wireless Communications
Products and Services





Wireless Over
Water®Technology (“WOW”)
TM





WOW
technology was first developed to allow passengers of moving vessels, for
example passenger ferries, high rates of data transfer through wireless 802.11
networking.  WOW technology allows users to access the Internet while
in motion on water.  WOW was used to develop the Floating Area Network
technology.





Floating Area
Network®(“FAN”)
TM





FAN
technology was developed for the US Navy.  FAN utilizes WOW technology
to create a mesh type network for Navy Vessels underway and provides an
alternative and less expensive communications methodology for the US
Navy.  Vessels may dynamically join and depart the network while
underway at sea.





Littoral Sensor Grid
(“LSG”)





LSG is
the next evolution of WOW and FAN.   Using the technology
developed for WOW and FAN, we incorporated the use of buoys to provide both
security and environmental monitoring.  A variety of sensors
measure/monitor anything above, on, or below the water and provide that
information real time to an operations control center.  This
technology allows for security monitoring of our harbors and waterways both from
a terrorist attack or accidental environmental conditions.





AIRchitect®





AIRchitect is a wireless LAN design
expert system that is tailored to military ships, installations and
infrastructure.  This product uses blueprint drawings in AutoCAD or
Visio format and allows a network engineer to optimally design a wireless
network including the best location for access points and uses requirements of
users, throughput performance, interference, physical structures, and co-channel
interference.




STRATEGY




Our
objective is to be a leading security company providing world class solutions in
the identity and wireless industry sectors. These solutions include our
commercial identity systems focusing on work-flow, productivity enhancement,
commercial fraud protection, access control and age verification segments; our
government identity systems focusing on security access, vendor validation, and
suspect identification; and our wireless communications systems, focusing on
wireless networking over water, and wireless network planning.  Key
elements of our strategy are as follows:


9




Commercial
Systems




Productivity
Enhancement.  We market our technology as a key productivity
enhancement tool.  Our patented ID√Check software can add
functionality to virtually any given software application to automatically
populate fields within a given form, when a government-issued photo ID is
presented.  Our ability to correctly read all US jurisdictions is a key
differentiator from our competitors.  The automation that results from
the intelligence added to the form dramatically increases throughput and data
integrity, and it significantly enhances the customer's experience.




Develop Additional Strategic
Alliances with Providers of Security Solutions. We have entered into
strategic alliances to utilize our systems and software as the proposed or
potential enrollment application for their technologies and to jointly market
these security applications with multiple biometric
companies:  Northrop Grumman Corporation, L-3 Communications Holdings,
Inc., AMAG Technology, Inc., in the defense industry; Intermec Inc., MaxID
Corp., Metrologic (part of Honeywell) , Roper Industries, Inc. (DAP) and
Motorola, Inc. hardware manufacturers; and Digimarc Corporation and Viisage, now
part of L1 Identity Solutions, Inc., producers of driver licenses for
approximately 90% of the jurisdictions in North America.  We are also
a member and board member of The Federation for Identity and Cross-Credentialing
Systems or (FiXs).  We believe these relationships will broaden our
marketing reach through their sales efforts and we intend to develop additional
strategic alliances with additional providers of security
solutions.




Strengthen Sales and
Marketing Efforts. We intend to capitalize on the growth in demand for
age and document verification and productivity enhancement by continuing to
market and support our systems and software.  Our sales and marketing
departments are organized by target sector rather than geographic area to
provide focus and create experts in each area.  Our recent focus has
been on large enterprise-wide license arrangements in the financial services,
retail, and hospitality services industries.




Enter into Additional
Licensing Agreements. We intend to continue to license our software for
use with a customer's system. We are currently licensing our ID√Check SDK
software product for Windows, Windows CE, Windows Mobile and other operating
system platforms and intend to similarly continue to license our C-Link,
ID√Check PC, and ID√Check PDA software solutions. Our software is intended to be
used with a compatible hardware device.  We have entered into
multiple licensing agreements to date.




Protect Intellectual
Property. We intend to strongly protect our intellectual property
portfolio in order to preserve value and obtain favorable settlements where
warranted. For example, in February 2003, we filed suit against CardCom, Inc.
d/b/a CardCom Technology, Inc., claiming that CardCom had infringed one of our
patents. Subsequently, we entered into a patent licensing agreement with CardCom
effective March 2003 which provided for a non-exclusive three year license in
connection with the manufacture, use and sale of CardCom's age verification
products in the United States and Canada.  In March 2006, we renewed
the licensing agreement with CardCom for an additional five years.  In
April 2009, the Company and TriCom Card Technologies, Inc. ended long-term
patent dispute litigation began in July 2003 by entering into a patent
settlement agreement and a license agreement.  Pursuant to the
settlement agreement, TriCom acknowledged the validity of Intellicheck
Mobilisa’s patents, and that sales of TriCom’s age verification products
are subject to the terms of a license agreement entered contemporaneously with
the settlement agreement.





Government
Identity Systems





Product
Enhancement.  Due to the success of Defense ID in the military
and government industry sectors, we intend to enhance our product line to
support other entities such as law enforcement, port security and commercial
installations. We continue our ongoing efforts to research and implement the use
of new identification cards, additional databases and upgraded equipment form
factors in order to increase the efficiency and performance of the
system.  We will also continue to work with the information technology
and privacy units within all branches of the military maintain branch-wide ATOs,
and when necessary, Interim ATOs.


10





TWIC
Program.  The TWIC program continues to undergo testing for
final rules regarding the reader technology.  We were on the first
list of ICE readers and will continue to provide our software on additional
hardware platforms to address the unique needs of each port.  We are
also combining our Defense ID and TWIC reader applications to provide customers
with the benefits of each product in a single device.




Strengthen Sales and
Marketing Efforts.  As the need for access control systems
continues to grow, our experienced sales and marketing departments is adjusting
to target new sectors. Sales and marketing materials are specially designed to
clearly outline the capabilities of the system and how it is valuable to each of
these specific sectors. We have sales staff and office locations on the West
Coast, Midwest and East Coast, which allows a quick response to questions and
personalized assistance for each customer based on location.




Additional Access to
Multiple Databases.   We continue to increase the data
source information accessed through our Defense ID system. This is achieved by
increasing the capabilities of our internally-developed scraping programs for
publicly-available information as well as by negotiating additional data source
agreements with various law enforcement and government agencies. In addition to
these general databases, we customize databases for each individual customer
based on information provided by the customer.




Wireless Communications
Systems





Research and
Development.  Our wireless communications systems program is
primarily research and development funded by the federal
government.  We intend to continue to pursue research and development
projects through funding from various government agencies for research and
development work in the wireless and security arenas. Jefferson County,
Washington, where Port Townsend is located, has been designated as a HUBZone
until June 1, 2011.  As long as the Company maintains its headquarters
in Jefferson County, Washington and one-third of the total number of employees
live in the designated HUBZone area, the combined company will maintain its
HUBZone status.




The Company enjoys an excellent
relationship with its current customers and continues to receive funding for
additional research and development work stemming from projects already
completed or in process. We will continue to work with these customers to
determine how best to continue to create innovative solutions that meet
customers’ changing technological needs. For example, our current research and
development efforts in FAN and in the Littoral Sensor Grid have the potential of
revolutionizing ship-to-ship and ship-to-shore communications. The U.S. Navy, as
well as other agencies and commercial customers, will greatly benefit from the
successful development of these technologies, and we intend to continue to
pursue these industry sectors.




Our Revenue
Sources




We derive our revenue from the
following sources:




§
            Sales
      of our systems by our own direct sales force and marketing
      partners;




§
            Per
      transaction or subscription fees from the licensed use of our
      technology;




§
            Royalties
      and licensing fees from licensing our patented technology to third
      parties;




§
            Revenue
      sharing and marketing arrangements through strategic alliances and
      partnerships;




§
            Sale
      of software upgrades and extended maintenance programs;
  and




§
            Government
      grants for research and development
projects.




Our Target Industry
Sectors




Commercial Identity
Systems




The use
of false identification cards, primarily driver licenses and non-driver
identification cards, to engage in commercial fraud, to gain access to
unauthorized areas and to gain entry to critical infrastructure, or to purchase
products from, establishments that sell age-restricted items, is
common.  Given the ease with which identification can be falsified, we
believe that simply looking at a driver license may not be sufficient to verify
age or identity and determine whether or not such an identification card is
fraudulent.  Since merchants are facing significant economic losses
due to these frauds, we believe that what they need is a document verification
system that can accurately read the electronically stored
information.  We target the industry sectors that would most benefit
from our systems and software.


11




We also
market our products to opportunities where our ID√Check technology can be used
to enhance productivity.  We have made significant progress in the
sectors for the retail issuance of instant credit.  We believe there
is a financial benefit and a compelling business model for customers in this
sector to utilize our technology.




Productivity
      Enhancement§
                    Mass
      merchandisers and retailers
                    
                    §
                    Auto
      dealerships and rental car agencies§
                    Banks
      and other financial institutions
                    
                    §
                    Casinos
      for enrollment of guests§
                    Credit
      unions
                    
                    §
                    Hospital
      patient admissions§
                    Credit
      card issuers
                    
                    §
                    Lodging
      Industry§
                    Check
      cashing services
                    
                    §
                    Airlines





Commercial
      fraud protection§
                    Mass
      merchandisers and retailers
                    
                    §
                    Auto
      dealerships and rental car agencies§
                    Banks
      and other financial institutions
                    
                    §
                    Casino
      cage operations§
                    Credit
      unions
                    
                    §
                    Hospitals,
      medical facilities and health plans§
                    Credit
      card issuers
                    
                    §
                    Lodging
      Industry§
                    Check
      cashing services
                    
                    §
                    Pharmacies




Access
control
  §
                  Airports
      and airlines
                  
                  §
                  Nuclear
      facilities§
                  Departments
      of Motor Vehicles
                  
                  §
                  Oil
      refineries and storage facilities§
                  Prisons
                  
                  §
                  Military
      establishments§
                  Law
      enforcement agencies
                  
                  §
                  College
      Campuses§
                  Notable
      buildings
                  
                  §
                  Department
      of Homeland Security§
                  Court
      houses
                  
                  §
                  Bus,
      rail and port
facilities


Age
verification




§
                Bars
      and night clubs
                
                §
                Stadiums
      and arenas§
                Convenience
      stores
                
                §
                Casinos
      and gaming establishments§
                Grocery
      chains
                
                §
                Sellers
      of sexually explicit material§
                Restaurants
                
                §
                Firearm
      dealers




Government Identity
Systems





Our Defense ID system is tailored to
locations that validate identification cards as a means of access. Historically,
the military sector has been the primary focus, followed closely by the law
enforcement sector. Military bases, for example, are an ideal location for the
use of the Defense ID system because individual ID cards are checked prior to
allowing base access and, in most cases, bases issue visitor/vendor passes to
individuals needing access that do not possess a military ID.




Because Defense ID is customizable, it
can be used in many different environments. The information provided via instant
access to multiple law enforcement databases proves invaluable to gate officers
and law enforcement personnel ensuring the security of a facility. Current
targets include:


Military


§
                  Army
                  
                  §
                  Navy§
                  Air
      Force
                  
                  §
                  Marines§
                  Coast
      Guard
                  
                  §
                  Military
      Academies§
                  Military
      and Veterans Hospitals




12


Law
Enforcement/Government


§
                  FBI
                  
                  §
                  Drug
      Enforcement Administration§
                  State
      Police
                  
                  §
                  Local
      Sheriffs§
                  Bureau
      of Alcohol, Tobacco and Firearm
                  
                  §
                  CIA§
                  Customs
                  
                  §
                  Department
      of Transportation§
                  Department
      of Homeland Security
                  
                  §
                  Border
      Patrol




Wireless Communications
Systems




We provide wireless services, including
wireless environment analysis, custom wireless network design and application
and custom wireless application development, to a range of customers across a
variety of industry sectors. Our AIRchitect product enables us to design the
ideal wireless network for a variety of different facilities. In addition to
designing shipboard networks for the U.S. Navy and the Washington State and
British Columbia Ferries, We target metropolitan areas, warehouses, hospitals,
public transportation providers and other businesses requiring wireless design
and specialty services.  Our WOW technology can be adapted for a
variety of forms of transportation, including buses and trains, and the Company
continues to further explore potential customers in those sectors. Currently,
our target customer for both FAN and the Littoral Sensor Network is the U.S.
Navy, although there are many additional sectors, such as sea ports, where such
technology may be sold in the future.





REPRESENTATIVE
CUSTOMERS





Commercial Identity
Systems





We have generated revenues from our
customers from the sale of systems, licensing of software and sale of software
upgrades.  The following representative customers are using our
systems and software for commercial fraud protection and productivity
enhancement:





§
                    Fidelity
      National Information Services
                    
                    §
                    Foxwoods
      Resorts and Casino§
                    MGM
      Grand
                    
                    §
                    Mohegan
      Sun Resort Casino§
                    Caesar’s
      Palace
                    
                    §
                    Barclaycard
      USA§
                    Vanguard
                    
                    §
                    JPMorgan
      Chase§
                    Toys
      R Us
                    
                    §
                    LL
      Bean§
                    Century
      21Department Stores
                    
                    §
                    GE
      Consumer Finance§
                    Alliance
      Data
                    
                    §
                    AT&T





The
following representative customers and programs have used or are using our
systems and software for access control:








§
                  John
      F. Kennedy International Airport in New York
                  
                  §
                  New
      York Department of Motor Vehicles§
                  O’Hare
      International Airport in Chicago
                  
                  §
                  Vermont
      Department of Motor Vehicles§
                  Reagan
      National Airport in Washington, DC
                  
                  §
                  Delaware
      Department of Motor Vehicles§
                  American
      Stock Exchange
                  
                  §
                  New
      Hampshire Department of Motor Vehicles§
                  Fort
      Sam Houston
                  
                  §
                  Port
      Authority of New York and New Jersey§
                  Fort
      Hood
                  
                  §
                  United
      States Supreme Court§
                  Pentagon
      Force Protection Agency
                  
                  §
                  Registered
      Traveler Program





The
following representative customers are using our systems and software for age
verification:





§
                  Idaho
      State Liquor Dispensary
                  
                  §
                  Drake
      Petroleum§
                  Sunoco
                  
                  §
                  Houston’s
      Restaurants§
                  Exxon/Mobil
      franchisees
                  
                  §
                  Michael
      Jordan’s
Steakhouse




13


Government Identity
Systems




We have
generated revenue from our customers from the sale of systems, licensing of
software and sale of extended service agreements. The following representative
customers have used or are using our systems and software for security and
identification purposes.





§
                          The
      United States Air Force Academy
                          
                          §
                          Fort
      Richardson§
                          Fort
      Wainwright
                          
                          §
                          Bolling
      AFB§
                          Elmendorf
      Air Force Base (“AFB”)
                          
                          §
                          Fort
      Polk§
                          Andrews
      AFB
                          
                          §
                          Fort
      Dix§
                          Fort
      Meade
                          
                          §
                          Yuma
      Marine Corps Base§
                          Fort
      Belvoir
                          
                          §
                          Walter
      Reed Army Hospital§
                          Maxwell
      AFB
                          
                          §
                          McChord
      AFB§
                          Vandenberg
      AFB
                          
                          §
                          Claremont
      County Sheriff Department§
                          The
      US Military Academy at West Point
                          
                          §
                          BAE
      Systems§
                          Bangor
      Naval Submarine Base
                          
                          §
                          Peterson
      AFB





Wireless Communications
Systems





The following representative customers
have used our wireless solutions, including AIRchitect:





§
                          United
      States Navy
                          
                          §
                          United
      States Air Force§
                          Sound
      and Sea Technologies
                          
                          §
                          Science
      Application International Corporation§
                          British
      Columbia Ferries
                          
                          §
                          Washington
      State Ferries§
                          Port
      Townsend Paper Company
                          
                          §
                          Mikros
      Systems Corporation§
                          Parsons
      Corporation
                          
                          §
                          National
      Center for Manufacturing
Sciences





MARKETING AND
DISTRIBUTION




Commercial Identity
Systems




Our
objective is to become the leading developer and distributor of document and age
verification products.  To date, our marketing efforts have been through
direct sales by our sales and marketing personnel, through resellers and license
agreements.  We are marketing our products through direct marketing
approaches such as web marketing, a small number of select trade shows and well
known public interest and trade associations.




We
generate revenues from the licensing of our software and the selling of bundled
solutions that contain hardware and software.  Depending on the
specific needs of our clients, we tailor the right solution for
them.  Our bundled solutions, which include, but are not limited to,
our ID√Check Mobile and ID√Check POS technology, offer multiple pricing
options.  We also generate revenues from various new software
solutions that are based upon a per transaction or subscription
model.




Our
ID√Check software runs on Microsoft® Windows
and Windows Mobile platforms in addition to devices such as credit card
terminals and other operating systems such as Linux.  We are marketing
our ID√Check technology to the government, airlines, airports, high profile
buildings or infrastructure, mass merchandisers, grocery, convenience and
pharmacy chains, casinos and banks.




We have
developed a comprehensive marketing plan to build customer awareness and develop
brand recognition in our target industry sectors.  We promote the
advantages and ease of use of our products through:





§
                  Endorsements
      by nationally known public interest groups and trade
      associations;
                  
                  §
                  Web
      seminars, as well as our own website; and§
                  Trade
      publications;
                  
                  §
                  Various
      conventions and industry specific seminars.§
                  Trade
      shows;


14





As we
gain industry acceptance for our ID√Check technology, we intend to develop and
market other related software applications.





Government Identity
Solutions




We have sector-specific brochures for
each product in our product line for both the military and law enforcement
sectors that the sales force utilizes when demonstrating the Defense ID system
to potential customers. These brochures serve as a quick reference guide
outlining the capabilities of our technology. Once customers have a clear
understanding of our products, they can use these brochures to discuss their
individual needs and ordering requirements.




When dealing with military and
government entities, we must comply with applicable procurement regulations. As
a HUBZone, Mobilisa has a considerable advantage in the procurement process.
This designation, which is effective until June 2011, allows us to quickly be
awarded sole source contracts with the military and government. Since our
headquarters is in Port Townsend, WA, the HUBZone designation remains in place
and we anticipate that the combined entity will continue to meet the Small
Business Administration’s definition of a “small business.”





In addition to sole source awards, we
also respond to Requests for Proposal (“RFPs”) and Requests for Qualifications
(“RFQs”) when our technological capabilities meet that of the desired system. In
many cases, we are the only company that is able to meet the requirements in the
RFP, which can lead to a quick and easy award.




Also, we have all Defense ID products,
as well as individual labor services, listed on GSA Schedule 70. This makes it
possible for government entities to make direct purchases of equipment and
services for a pre-negotiated price without competition.




We have offices in the West (Port
Townsend, WA) and the East (Alexandria, VA and Woodbury, NY) to fully support
our current and potential customers. This makes it easy to schedule and complete
installations and maintenance in an efficient, time-conscious
manner.




Wireless Communications
Systems




Marketing for our wireless products and
capabilities is performed primarily via our website and tradeshow exhibitions,
as well as through direct contacts with government agencies. We attend
market-specific tradeshows to demonstrate current products and capabilities. We
pride ourselves on being an innovative solutions provider and this is a prime
arena for showcasing the Company’s talents and for interfacing with potential
customers who can benefit from our wireless solutions.





Many of our potential wireless
customers contact the Company after seeing publicity about current wireless
projects.  Our wireless systems have garnered both local and national
publicity, which has been highly beneficial in projecting to the public the
Company’s capabilities.




COMPETITION




Commercial Identity
Systems




We
compete in an industry that is relatively new, intensely competitive and rapidly
changing.  Unless a device can read, decode and analyze all of the
information that is legally permitted to be analyzed, which is electronically
stored on a driver license, the user may not obtain accurate and reliable
confirmation that a driver license is valid and has not been altered or tampered
with. We are aware of several companies, including CardCom, TriCom Technologies,
ID-Logix and Legal Age that are currently offering products that electronically
read and calculate age from a driver license.  We have tested and
compared some of these products to ID√Check and believe that our product is
superior in quality and functionality.  We believe that units unable
to read bar codes are at a significant disadvantage because most states and
Canadian provinces currently utilize bar codes to encode their driver licenses,
as well as all U.S. military IDs and uniformed services cards.


15




In the
government identity sector, there are several companies, including L-1 Identity
Solutions, and Core Street, that are currently offering products that compete
with the Defense ID system.  The Government also has a product called
DBIDSthat competes
with our products.




We are
also aware that Motorola and Honeywell have started offering an embedded
driver’s license reading solution on a tether scanner that does not parse driver
licenses from all U.S. jurisdictions.




We have
experienced and expect to continue to experience increased competition in the
age verification sector, and have to date experienced limited competition from
companies in the document verification sector.  If any of our
competitors were to become the industry standard or were to enter into or expand
relationships with significantly larger companies through mergers, acquisitions
or otherwise, our business and operating results could be seriously
harmed.  In addition, potential competitors could bundle their
products or incorporate functionality into existing products in a manner that
discourages users from purchasing our products.





In the wireless communications sector,
we develop and apply WOW technology and believe that our Floating Area Network
and Littoral Sensor Grid projects will enhance the Company’s standing with
potential customers in the wireless industry. Several competitors have developed
technology that may compete with our products. These include EFJ, Inc.,
Sea-Mobile and Motorola. In addition, other defense or wireless companies may be
developing technology that will compete with our current products or with the
projects and products that are currently in research and
development.




MANUFACTURING




We do not
manufacture any readers or input devices, but rely upon several manufacturers,
including E-Seek and Motorola, to provide these devices.  Some of
these devices are private labeled and programmed by the supplier to work with
our ID√Check technology.  The majority of our hardware consists of
commercial off-the-shelf (“COTS”) products.  We rely on a small
number of suppliers to provide our COTS products.




Our
government identity and wireless systems products are created with COTS items
that we customize with software and specialized configurations. All products are
customized, assembled, and tested in-house and then installed and placed by our
employees in the field.




RESEARCH AND
DEVELOPMENT





Our research and development efforts
are mainly concentrated in three areas.  The most significant effort
is concentrated in the Wireless sector in the Floating Area Network and Littoral
Sensor Grid projects, which are funded by government cost plus fixed fee
contracts.   In the commercial and government identity sectors,
we modify existing software applications based on customer’s requirements, which
are fee based.  In addition, we develop new software solutions and
make improvements to existing software platforms, which are funded
internally.





INTELLECTUALPROPERTY




In
January 1999, the U.S. Patent and Trademark Office granted us a patent on our
ID√Check software technology.  In October 2002, we were granted
another patent relating to our document authentication and age verification
technology.  In January 2009, we were granted another patent that is a
continuation of our patents relating to our document authentication and age
verification technology.  Upon our acquisition of the assets of
IDentiScan, we also received equitable ownership and sole ownership rights to
its intellectual property, including other patents and patent applications
relating to age verification technology.  We currently hold six (6)
U.S. patents, two (2) Canadian patents and one (1) United Kingdom
patent.




At
present, we have other patent applications pending in the U.S. Patent and
Trademark Office as well as internationally.  These patents cover
commercially important aspects of our capabilities relating to the
authentication and verification of identification documents, and relating to our
Defense ID System technology.  We will continue to pursue patents for
all of our new technologies arising from our research and development
efforts.




We own
multiple copyrights in the United States, which are effective in Canada and in
other major industrial countries.  The copyright protection covers
software source codes and supporting graphics relating to the operation of
ID√Check and other software products.  We also have several trademarks
relating to our company, its product names and logos.


16




In
connection with the sales or licensing of our intellectual property, we have
entered into an agreement with Mr. Kevin Messina, our former Senior Executive
V.P. and Chief Technology Officer, under which we will pay royalties equal to
0.005% of cumulative gross sales for cumulative gross sales of $2,000,000 to
$52,000,000 and 0.0025% of cumulative gross sales for cumulative gross sales in
excess of $52,000,000 pertaining to those patents on which Mr. Messina was
identified as an inventor. Cumulatively, as of December 31, 2009, total fees
payable under this agreement amounted to $1,019.




Employees




As of
March 11, 2010, we had forty-eight (48) full-time employees.  Five (5)
are engaged in executive management, twenty (20) in information technology,
sixteen (16) in sales and marketing and seven (7) in
administration.  All employees, other than our CEO, Nelson Ludlow, are
employed “at will.”  We believe our relations with our employees are
generally good and we have no collective bargaining agreements with any labor
unions.





Item
1A.   Risk Factors





RISK
FACTORS




Risks
Related to Our Business and Industry




We
have incurred losses since inception and losses may continue, which could result
in a decline in the value of our securities and a loss of your
investment.




We
sustained net losses of $525,515 and $32,920,555 for the fiscal years ended
December 31, 2009 and December 31, 2008, respectively and our accumulated
deficit was $78,107,140 as of December 31, 2009.  Since we expect to
incur additional expenditures in line with the sales growth of our business, we
may not achieve operating profits in the near future.  This could lead
to a decline in the value of our securities.




Our
proprietary software relies on reference data provided by government and
quasi-government agencies. If these governmental and quasi-government agencies
were to stop sharing data with us, the utility of our proprietary software would
be diminished in those jurisdictions and our business would be
damaged.




Currently,
the fifty states, ten Canadian provinces and the District of Columbia, which in
most instances conform to the guidelines established by certain organizations
responsible for implementing industry standards, cooperate with us by providing
sample identification cards so that we may modify all of our hardware and
software products to read and analyze the encoded information found on such
jurisdiction’s identification cards. In the event that one or more of these
jurisdictions do not continue to provide this reference data, the utility of our
proprietary software may be diminished in those jurisdictions.




Our
business strategy exposes us to long sales and implementation cycles for our
products.




Our
target customers in the commercial fraud protection, access control and age
verification industry sectors include large retailers and government agencies,
which typically require longer sales and implementation cycles for our products
than do our potential customer base solely interested in age verification, such
as restaurant, bar and convenience store operators. The longer sales and
implementation cycles for larger retail companies continue to have an adverse
impact on the timing of realizing our revenues. In addition, budgetary
constraints and potential economic slowdowns may also continue to delay
purchasing decisions by these prospective customers. These initiatives have
costs associated with them, and we cannot assure you that they ultimately will
prove successful or result in, an increase to our revenues or
profitability.




In
addition, the loss or significant reduction in government spending by government
entities could materially limit our ability to obtain government contracts.
These limitations, if significant, could also have a material adverse effect on
our business, financial condition and results of operations.  In
addition, we will need to develop additional strategic relationships with large
government contractors in order to successfully compete for government
contracts. Should we lose or fail to develop these strategic relationships we
may not be able to implement our business strategy.


17





The
industry for our systems and software is evolving and its growth is
uncertain.




Demand
and industry acceptance for recently introduced and existing systems, and
software and sales from such systems and software, are subject to a high level
of uncertainty and risk.  With changing administration in government,
changes in government budgets, and slowly evolving government standards on use
of identity products, the government sector is slowly
developing.  Commercial sectors have the ability to develop faster
than the government sector space, but are also subject to a high level of
uncertainty and risk including factors of the economic affects of our customers
and long sales cycles.  Our business may suffer if the industry
develops more slowly than anticipated and does not sustain industry
acceptance.





Failure
to manage our operations if they expand could impair our future
growth.




If we are
able to expand our operations, particularly through multiple sales to large
retailers and government agencies in the document verification industry, the
expansion will place significant strain on our management, financial controls,
operating systems, personnel and other resources. Our ability to manage future
growth, should it occur, will depend to a large extent upon several factors,
including our ability to do the following:




§
            build
      and train our sales force;




§
            establish
      and maintain relationships with
distributors;




§
            develop
      customer support systems;




§
            develop
      expanded internal management and financial controls adequate to keep pace
      with growth in personnel and sales, if they occur;
  and




§
            manage
      the use of third-party manufacturers and
  suppliers.




If we are
able to grow our business but do not manage our growth successfully, we may
experience increased operating expenses, loss of customers, distributors or
suppliers and declining or slowed growth of revenues.





We
are subject to risks associated with product failure and technological
flaws.




Products
as complex as those offered by us may contain undetected errors or result in
failures when first introduced or when new versions are
released.  Despite vigorous product testing efforts and testing by
current and potential customers, it is possible that errors will be found in a
new product or enhancement after commencement of commercial shipments. The
occurrence of product defects or errors could result in adverse publicity, delay
in product introduction, diversion of resources to remedy defects, loss of, or a
delay in industry acceptance, claims by customers against us, or could cause us
to incur additional costs, any of which could adversely affect our
business.





Failure
to protect our proprietary technology may impair our competitive
position.





We continue to allocate significant
resources to developing new and innovative technologies that are utilized in our
products and systems. Because our continued success depends on, to a significant
degree, our ability to offer products providing superior functionality and
performance over those offered by our competitors, we consider the protection of
our technology from unauthorized use to be fundamental to our success. This is
done by processes aimed at identifying and seeking appropriate protection for
newly-developed intellectual property, including patents, trade secrets,
copyrights and trademarks, as well as policies aimed at identifying unauthorized
use of such property. These processes include:





§
            contractual
      arrangements providing for nondisclosure of proprietary
      information;




§
            maintaining
      and enforcing issued patents and filing patent applications on innovative
      solutions to commercially important
problems;




§
            protecting
      trade secrets;




§
            protecting
      copyrights and trademarks by registration and other appropriate
      means;


18




§
            establishing
      internal processes for identifying and appropriately protecting new and
      innovative technologies; and




§
            establishing
      practices for identifying unauthorized use of intellectual
      property.




We may
have to litigate to enforce patents or trademarks or to determine the scope and
validity of other parties’ proprietary rights. Litigation could be very costly
and divert management’s attention. An adverse outcome in any litigation may have
a severe negative effect on our financial results. To determine the priority of
inventions, we may have to participate in interference proceedings declared by
the U.S. Patent and Trademark Office or oppositions in foreign patent and
trademark offices, which could result in substantial cost and limitations on the
scope or validity of our patents or trademarks.





In addition, foreign laws treat the
protection of proprietary rights differently from laws in the United States. The
failure of foreign laws or judicial systems to adequately protect our
proprietary rights or intellectual property, including intellectual property
developed on our behalf by foreign contractors or subcontractors may have a
material adverse effect on our business, operations and financial
results.




If
our future products incorporate technologies that infringe the proprietary
rights of third parties, and we do not secure licenses from them, we could be
liable for substantial damages.




We are
not aware that our current products infringe the intellectual property rights of
any third parties. We also are not aware of any third party intellectual
property rights that may hamper our ability to provide future products and
services. However, we recognize that the development of our services or products
may require that we acquire intellectual property licenses from third parties so
as to avoid infringement of those parties’ intellectual property rights. These
licenses may not be available at all or may only be available on terms that are
not commercially reasonable.  If third parties make infringement
claims against us whether or not they are upheld, such claims
could:




§
            consume
      substantial time and financial
resources;




§
            divert
      the attention of management from growing our business and managing
      operations; and




§
            disrupt
      product sales and shipments.




If any
third party prevails in an action against us for infringement of its proprietary
rights, we could be required to pay damages and either enter into costly
licensing arrangements or redesign our products so as to exclude any infringing
use. As a result, we would incur substantial costs, delays in product
development, sales and shipments, our revenues may decline substantially and we
may not be able to achieve the minimum, necessary growth for our continued
success.





Failure
to attract and retain management and other personnel may damage our operations
and financial results and cause our stock price to decline.




We depend
to a significant degree on the skills, experience and efforts of our executive
officers and other key management, technical, finance, sales and other
personnel. Our failure to attract, integrate, motivate and retain existing or
additional personnel could disrupt or otherwise harm our operations and
financial results. We do not carry key man life insurance policies covering any
employees. The loss of services of certain of our key employees, an inability to
attract or retain qualified personnel in the future, or delays in hiring
additional personnel could delay the development of our business and could cause
our stock price to decline.




Our
share price may be volatile and could decline substantially




The
market price of our common stock, like the price of shares of technology
companies generally, has been and may continue to be volatile. From January 1,
2002 to March 11, 2010, the closing price of our common stock has varied from a
high of $19.45 to a low of $0.50 per share, as reported on the American Stock
Exchange and NYSE Amex.  Many factors may cause the market price for
our common stock to decline, including:




§
            shortfalls
      in revenues, cash flows or continued losses from
    operations;




§
            delays
      in development or roll-out of any of our
  products;


19




§
            announcements
      by one or more competitors of new product acquisitions or technological
      innovations; and





§
            unfavorable
      outcomes from outstanding
litigation.




In
addition, the stock market experiences extreme fluctuations in price and volume
that particularly affect the market price of shares of emerging technology
companies, such as ours. These price and volume fluctuations are often unrelated
or disproportionate to the operating performance of the affected companies.
Because of this volatility, we may fail to meet the expectations of our
stockholders or of securities analysts and our stock price could decline as a
result. Declines in our stock price for any reason, as well as broad-based
market fluctuations or fluctuations related to our financial results or other
developments, may adversely affect your ability to sell your shares at a price
equal to or above the price at which you purchased them. Decreases in the price
of our common stock may also lead to de-listing of our common
stock.




We
incur significant accounting and other control costs that impact our financial
condition




As a publicly traded corporation, we
incur certain costs to comply with regulatory requirements.  If
regulatory requirements were to become more stringent or if controls thought to
be effective later fail, we may be forced to make additional expenditures, the
amounts of which could be material.  Some of our competitors are
privately owned so their accounting and control costs could create a competitive
advantage over us. Should our sales decline or if we are unsuccessful at
increasing prices to cover higher expenditures for internal controls and audits,
our costs associated with regulatory compliance will rise as a percentage of
sales.





Currently, we derive a significant portion of our
revenue from government R&D (Research and Development) contracts, which are
often non-standard, involve competitive bidding, may be subject to cancellation
and may produce volatility in earnings and revenue.





In the years ended December 31, 2009,
2008 and 2007, Intellicheck Mobilisa derived 36.7% and 35.5% and Mobilisa
derived 40.2% of its revenue respectively from government R&D contracts.
These government contracts often include provisions that substantially differ
from those found in typical private commercial transactions. For instance,
government contracts may:





§
            include
      provisions that allow the agency, in certain circumstances, to terminate
      the contract without penalty;




§
            be
      subject to purchasing decisions by agencies that are subject to political
      influence;




§
            include
      bonding requirements;




§
            contain
      comprehensive procurement provisions that require us to expend substantial
      resources in pursuing the contract;




§
            specify
      performance criteria that we must satisfy before the customer accepts the
      products and services; and




§
            be
      subject to cancellation or reduction if funding is reduced or becomes
      unavailable.




Securing government contracts typically
involves a lengthy competitive bidding process. Often, unsuccessful bidders have
the ability to challenge contract awards. Such challenges may increase costs,
result in delays and risk the loss of the contract by the winning bidder.
Protests or other delays related to material government contracts that may be
awarded to us could result in revenue volatility. State and local government
agency contracts may depend on the availability of matching funds from federal,
state or local entities. State and local government agencies are subject to
political, budgetary, purchasing and delivery constraints that may result in
irregular revenue and operating results. Revenue volatility makes management of
our business difficult. Outright loss of any material government contract
through the protest process or otherwise, could significantly reduce our
revenues.





20




We could be adversely affected by a
negative audit by the U.S. government.


We, like
other government contractors, are subject to various routine audits, reviews and
investigations by U.S. government agencies, including the Defense Contract
Audit Agency and various agency inspectors. These agencies review a contractor’s
performance under its contracts, cost structure and compliance with applicable
laws, regulations, and standards. Any costs found to be misclassified may be
subject to repayment. If an audit or investigation uncovers improper or illegal
activities, we may be subject to civil or criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of profits, suspension
of payments, fines, and suspension or prohibition from doing business with the
U.S. government.





We
have been granted contracts based on our status as a small business in a HUBZone
and, in the future, we may not continue to meet the qualifications for such
status.





At times, we have been granted
government contracts in part due to our status as a small business in a HUBZone.
There is a possibility that, due to future growth, we will no longer meet the
Small Business Administration’s definition of a “small business,” or that we
will relocate all or a portion of our operations outside of a
HUBZone.  In addition, Port Townsend, WA’s status as a HUBZone expires
in June 2011 and may not be renewed.  If any of these things were to
happen, we may be at a disadvantage when competing for future government
contracts, which may in turn reduce our revenue.





Our
business strategy exposes us to long sales and implementation cycles for our
products.





Historically, our primary target
customers have been government agencies and branches of the U. S. military, both
of which require long sales and implementation cycles for products, which may
result in a long period of time prior to revenue realization. The loss or
significant reduction in government spending could limit our ability to obtain
government contracts. These limitations, if significant, could significantly
reduce our revenues. We will need to develop additional strategic relationships
with large government contractors in order to successfully compete for
government contracts. Should we lose or fail to develop these strategic
relationships, we may not be able to implement our business
strategy.





We
cannot be certain that our backlog estimates will result in actual revenues in
any particular fiscal period because our clients may modify or terminate
projects or may decide not to exercise contract options.





Our backlog represents sales value of
firm orders for products and services not yet delivered and, for long-term,
executed contractual arrangements (contracts, subcontract and customer
commitments), the estimated future sales value of product shipments,
transactions processed and services to be provided over the term of the
contractual arrangements, including anticipated renewal options. For contracts
with indefinite quantities, our backlog is estimated based on current activity
levels. Our backlog includes estimates of revenues, the receipt of which require
future government appropriations, depend on option exercise by clients or are
subject to contract modification or termination. At December 31, 2009, our
backlog approximated $10 million, of which $5.5 million is estimated to be
realized in the next twelve months. These estimates are based on our experience
under such contracts and similar contracts, and we believe that such estimates
are reasonable. If we do not realize a substantial amount of our backlog, as we
presently anticipate, our operations could be harmed and future revenues could
be significantly reduced.





Long
lead times for the components used in certain products creates uncertainty in
our supply chain and may result in our taking a write-down for obsolete
inventory or prevent us from making required deliveries to our customers on
time.





We rely exclusively on commercial
off-the-shelf technology in manufacturing our products. The lead-time for
ordering certain components used in our products and for the production of
products can be lengthy. As a result, we must, from time to time, order products
based on forecasted demand. If demand for products lags significantly behind
forecasts, we may purchase more product than we can sell, which may result in
write-downs of obsolete or excess inventory. Conversely, if demand exceeds
forecasts, we may not have enough products to meet our obligations to our
customers.





We
rely on commercial off-the-shelf technology to provide hardware
products.





Although we believe that we can find
alternative sources for hardware, any disruption in our ability to obtain
required hardware could result in delaying deliveries or in the loss of sales.
Loss of suppliers may result in delays or additional expenses, and we may not be
able to meet our obligations to our customers.


21




We
obtain certain hardware and services, as well as some software applications,
from a limited group of suppliers, and our reliance on these suppliers involves
significant risks, including reduced control over quality and delivery
schedules.





Any financial instability of our
suppliers could result in having to find new suppliers. We may experience
significant delays in manufacturing and deliveries of products and services to
customers if we lose our sources or if supplies and services delivered from
these sources are delayed. As a result, we may be required to incur additional
development, manufacturing and other costs to establish alternative supply
sources. It may take several months to locate alternative suppliers, if
required. We cannot predict whether we will be able to obtain replacement
hardware within the required time frames at affordable costs, or at all. Any
delays resulting from suppliers failing to deliver hardware or delays in
obtaining alternative hardware, in sufficient quantities and of sufficient
quality, or any significant increase in the cost of hardware from existing or
alternative suppliers could result in delays on the shipment of product which,
in turn, could result in the loss of customers we may not be able to
successfully complete.





Our
Defense ID system relies on access to databases run by various government
agencies. If these governmental agencies were to stop sharing data with us, the
utility of the Defense ID system would be diminished and business would be
damaged.





Currently, our Defense ID system
accesses over 100 separate databases run by various government and law
enforcement agencies. We cannot be assured that each of these agencies will
continue to cooperate with us. In the event that one or more of these agencies
does not continue to provide access to these databases, the utility of the
Defense ID system may be diminished.





Our
Defense ID system requires permission from each branch of the U.S. military in
the form of an Authority To Operate (ATO).  If an existing ATO is
revoked, we would risk losing our ability to install our Defense ID system at
military bases.





Currently, we have a Navy-wide,
Army-wide, Marine-wide and Air Force-wide ATOs, and permissions to operate at
all locations where our Defense ID System is operating.  We cannot be
assured that these permissions will be renewed, and it is possible that they
could be revoked.  If one or more of these permissions is revoked or not
renewed, then the sector for the Defense ID system would be
reduced.





Our
Defense ID system manages private personal information and information related
to sensitive government functions and a breach of the security systems
protecting such information may result in a loss of suppliers or customers or
result in litigation.





The protective security measures
designed to protect sensitive information and contained in our products may not
prevent all security breaches. Failure to prevent security breaches may disrupt
our business, damage our reputation and expose us to litigation and liability. A
party who is able to circumvent protective security measures used in these
systems could misappropriate sensitive information or cause interruptions or
otherwise damage our products, services and reputation as well as the property
and privacy of customers. If unintended parties obtain sensitive data and
information, or create bugs or viruses or otherwise sabotage the functionality
of our products, we may receive negative publicity, incur liability to our
customers or lose the confidence of our customers, any of which may cause the
termination or modification of contracts.  Further, our existing
insurance coverage may be insufficient to cover losses and liabilities that may
result from such events.





In addition, we may be required to
expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by the occurrence of any such
breaches. However, protective or remedial measures may not be available at a
reasonable price or at all, or may not be entirely effective if
commenced.





22




Future
government regulation restricting the capture of information electronically
stored on identification cards could adversely affect our
business.


The Defense ID system is designed to
read, verify and capture information from identification cards. Currently, some
jurisdictions have restrictions on what can be done with this information
without consent. Because issues of personal privacy continue to be a major topic
of public policy debate, it is possible that, in the future, these or other
jurisdictions may introduce similar or additional restrictions on capturing this
information. Therefore, the implementation of unfavorable regulations or
unfavorable interpretations of existing regulations by courts or regulatory
bodies could require us to incur significant compliance costs, cause the
development of the affected industry sectors to become impractical and reduce
revenues and potential revenues.





We
are subject to risks associated with product failure and technological
flaws.





Our products are complex and may
contain undetected errors or result in failures when first introduced or when
new versions are released. Despite vigorous product testing efforts and testing
by current and potential customers, it is possible that errors will be found in
a new product or enhancement after commercial shipments have commenced. The
occurrence of product defects or errors could result in negative publicity,
delays in product introduction, the diversion of resources to remedy defects and
loss of or delay in industry acceptance or claims by customers against us and
could cause us to incur additional costs, any one of which could adversely
affect our business. Because of the risk of undetected error, we may be
compelled to accept liability provisions that vary from our preferred
contracting model in certain critical transactions. There is a risk that in
certain contracts and circumstances we may not be successful in adequately
minimizing product and related liabilities or that the protections negotiated
will not ultimately be deemed enforceable.





We carry product liability insurance,
but existing coverage may not be adequate to cover potential claims. The failure
of our products to perform as promised could result in increased costs, lower
margins, liquidated damage payment obligations and harm to our
reputation.





We
may not be able to keep up with rapid technological change.





The sectors for all of our products are
characterized by rapid technological advancements. Significant technological
change could render existing technology obsolete. If we are unable to
successfully respond to these developments, or do not respond in a
cost-effective manner, our business, financial condition and results of
operations will be materially adversely affected.





We
are currently developing several new systems, including Floating Area Networks
(FANs) and Littoral Sensor Grids that rely on government funding for continued
research and development, and the failure to meet project milestones and
development targets could impact that funding.





We anticipate that projects currently
in research and development, including FANs and Littoral Sensor Grids, will play
a critical role in our future growth. Because these projects are in development
and being funded by various government agencies, we have certain ongoing
milestones and development targets that we must meet. If these milestones or
development targets are not met, we could lose our research and development
funding for these projects. In addition, even if milestones and development
targets are met, there is no guarantee that the funding agencies will continue
to grant the same level of, or any, research and development
funds.  Failure to attract research and development funding adequate
to fully fund these projects could result in the termination of those projects,
which could have a significant impact on our revenue.





We
cannot guarantee that projects currently in research and development stage,
including FANs and Littoral Sensor Grids, will result in operational systems or
prototypes or that such systems or prototypes, if produced, will be commercially
marketable.





Projects in the research and
development stage have not yet been proven operational. While we anticipate that
we will be able to produce operational systems or prototypes based on our
research and development, there is no guarantee that we will be able to do so.
Furthermore, even if we are able to produce operational systems or prototypes,
there is no guarantee that those systems or prototypes will prove commercially
marketable.




Future
capital requirements may require incurring debt or dilution of existing
stockholders.




Acquisition
and development opportunities and other contingencies may arise, which could
require us to raise additional capital or incur debt. If we raise additional
capital through the sale of equity, including preferred stock, or convertible
debt securities, the percentage ownership of our then existing stockholders will
be diluted.


23





Because
we do not intend to pay dividends on our Common Stock, stockholders will benefit
from an investment in our stock only if it appreciates in value.





We have never declared or paid any cash
dividends on our shares of stock. We currently intend to retain all future
earnings, if any, for use in the operations and expansion of the business. As a
result, we do not anticipate paying cash dividends in the foreseeable future.
Any future determination as to the declaration and payment of cash dividends
will be at the discretion of our Board of Directors and will depend on factors
the Board of Directors deems relevant, including among others, our results of
operations, financial condition and cash requirements, business prospects, and
the terms of Intellicheck Mobilisa’s credit facilities and other financing
arrangements. Accordingly, realization of a gain on stockholders’ investments
will depend on the appreciation of the price of our stock. There is no guarantee
that our stock will appreciate in value.





Our
management team controls a substantial interest in Intellicheck
Mobilisa and thus may influence certain actions requiring a stockholder
vote.





Our management team (including all
of our directors) own approximately 49.6% of our issued and outstanding
common stock, approximately 46.5% of which is owned by Nelson Ludlow and Bonnie
Ludlow.  By owning this many shares, our management team will be
able to control decisions to be made by our stockholders.




Item
1B. Unresolved Staff
Comments





Not applicable.





Item
2. Properties




Our
corporate headquarters is currently located in Port Townsend, WA, where we
occupy approximately 5,840 square feet pursuant to a lease that expires on
July 31, 2017.  We also lease approximately 7,100 square feet in
Woodbury, NY pursuant to an amended lease expiring on December 31,
2010.  In addition, we lease approximately 3,289 square feet in
Alexandria, VA pursuant to an amended lease that expires on January 31, 2015.
 Most U.S. sales, marketing and technical personnel for all product
divisions are in these locations, with a small number of individuals operating
out of home offices. We believe that our existing facilities are adequate to
meet current requirements and that additional or substitute space will be
available as needed to accommodate any expansion of operations.




Item
3. Legal
Proceedings





In
December 2009, the Company was named a defendant in a lawsuit filed by Eid
Passport Inc. The Complaint filed and served by Eid Passport asserts claims for
monopolization and attempted monopolization under federal and Oregon antitrust
laws, as well as an Oregon state law claim for intentional interference with
contract, business relationships and/or prospective advantage.  In
connection with these claims, Eid Passport alleges that Intellicheck Mobilisa
engaged in unlawful exclusionary and predatory conduct in competing with Eid
Passport and others in the sale/licensing of drivers license reading technology
and products. In January, 2010, the Company moved to dismiss all antitrust
claims and moved to compel arbitration of the intentional interference claim. On
February 26, 2010, before the Company's motions were heard by the Court, Eid
Passport filed an Amended Complaint. The amended complaint reasserts the same
antitrust claims, withdraws the claim for intentional interference, and makes an
additional claim for false advertising in violation of the Lanham
Act.  The Company is vigorously defending against the
lawsuit.





On April
28, 2009, the Company and TriCom Card Technologies, Inc. ended long-term patent
dispute litigation by entering into a patent settlement agreement and a license
agreement.  Intellicheck Mobilisa sued TriCom in 2003 for infringement
of two patents relating to machine reading of identification cards, including
driver licenses.  Pursuant to the settlement agreement, TriCom acknowledged
the validity of Intellicheck Mobilisa’s patents, and that sales of TriCom’s age
verification products are subject to the terms of a license agreement
entered contemporaneously with the settlement agreement, the terms of which are
confidential.  This settlement did not have a material impact on the
financial statements.


24




We are not aware of any infringement by
our products or technology on the proprietary rights of others.





Other
than as set forth above, we are not currently involved in any legal or
regulatory proceeding, or arbitration, the outcome of which is expected to have
a material adverse effect on our business.




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





Our
Annual Meeting of Shareholders was held October 27, 2009.





A
proposal to elect five (5) directors each to serve for a one-year term was
approved by the stockholders.  The nominees received the following
votes:





Name
                          
                          Votes For
                          
                          
                          Votes WithheldLieutenant
      General Emil R. Bedard
                          
                          
                          23,389,393
                          
                          
                          
                          218,839Bonnie
      Ludlow
                          
                          
                          23,135,078
                          
                          
                          
                          473,154Nelson
      Ludlow
                          
                          
                          23,338,081
                          
                          
                          
                          270,151John
      W. Paxton
                          
                          
                          23,369,167
                          
                          
                          
                          239,065Guy
      L. Smith
                          
                          
                          23,365,467
                          
                          
                          
                          242,765





Our
stockholders ratified the appointment of Amper, Politziner & Mattia, LLP as
the Company’s independent registered public accounting firm for the year ended
December 31, 2009.  This proposal received the following
votes:





For
                    
                    Against
                    
                    Abstain23,323,270
                    
                    265,502
                    
                    19,460





Our
stockholders ratified the change of the Company name from Intelli-Check –
Mobilisa, Inc. to Intellicheck Mobilisa, Inc.  This proposal received
the following votes:





For
                    
                    Against
                    
                    Abstain23,305,772
                    
                    265,498
                    
                    36,962


25





PART
II




Item
5. Market for Registrant’s Common Equity and Related
Stockholder Matters




(a)           Our
common stock is traded on the NYSE Amex Stock Exchange under the symbol “IDN.”
The following table indicates high and low sales quotations for the
periods.





Low
                          
                          
                          High2008First
      Quarter
                          
                          $
                          2.43
                          
                          
                          $
                          3.68Second
      Quarter
                          
                          $
                          2.02
                          
                          
                          $
                          3.35Third
      Quarter
                          
                          $
                          1.01
                          
                          
                          $
                          2.75Fourth
      Quarter
                          
                          $
                          1.13
                          
                          
                          $
                          2.802009First
      Quarter
                          
                          $
                          0.50
                          
                          
                          $
                          1.78Second
      Quarter
                          
                          $
                          0.93
                          
                          
                          $
                          2.09Third
      Quarter
                          
                          $
                          1.30
                          
                          
                          $
                          1.80Fourth
      Quarter
                          
                          $
                          0.95
                          
                          
                          $
                          4.832010First
      Quarter*
                          
                          $
                          2.43
                          
                          
                          $
                          4.73




* Portion
of first fiscal quarter through March 11, 2010.




(b)           Number of Record Holders of
Common Stock. The number of holders of record of our common stock on
March 11, 2010 was 73, which does not include individual participants in
security position listings held in “street name.”




(c)           Dividends. There were
no cash dividends or other cash distributions made by us during the fiscal year
ended December 31, 2009.  Future dividend policy will be determined by
our Board of Directors based on our earnings, financial condition, capital
requirements and other then existing conditions. It is anticipated that cash
dividends will not be paid to the holders of our common stock in the foreseeable
future.




(d)           Recent Sales of Unregistered
Securities





On August
31, 2009, in connection with the Merger, we issued 608,520 shares of its common
stock to two former shareholders of Positive Access.  No commissions
or fees were paid in connection with the issuance of such
securities.  The shares were issued pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended, and the regulations promulgated there under, because the shares were
issued to a small number of sophisticated individuals in a private
transaction.





(e)          Repurchases of Equity
Securities




There
were no shares purchased during 2009.


26




Item 6.
            Selected Financial
      Data




The
following selected financial data presented under the captions “Statement of
Operations Data” and “Balance Sheet Data” as of the end of each of the five
years ended December 31, 2009, are derived from the financial statements of
Intellicheck Mobilisa, Inc.  The selected financial data should be
read in conjunction with the financial statements as of December 31, 2009 and
2008 and for each of the three years in the period ended December 31, 2009, the
accompanying notes and the report of independent registered public accounting
firms thereon, which are included elsewhere in this Form
10-K.  The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”) and
Positive Access Corporation (“Positive Access”).  The acquisition of
Mobilisa was completed on March 14, 2008, and therefore Mobilisa’s results of
operations are included in the financial statements beginning from March 15,
2008.  The acquisition of Positive Access was completed on August 31,
2009, and therefore Positive Access’s results of operations are included in the
financial statements beginning from September 1, 2009.




Years
      Ended December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009(In
      thousands)Statement
      of Operations Data:Revenue
                
                $
                2,384
                
                
                $
                3,162
                
                
                $
                3,512
                
                
                $
                10,017
                
                
                $
                12,415Loss
      from operations
                
                
                (3,385
                )
                
                
                (3,103
                )
                
                
                (2,835
                )
                
                
                (32,969
                )
                
                
                (517
                )Net
      Loss
                
                
                (3,239
                )
                
                
                (2,880
                )
                
                
                (2,673
                )
                
                
                (32,921
                )
                
                
                (526
                )Net
      loss per common share - basic and diluted
                
                
                (0.31
                )
                
                
                (0.24
                )
                
                
                (0.22
                )
                
                
                (1.47
                )
                
                
                (0.02
                )Common
      shares used in computing per share amounts - basic and
    diluted
                
                
                11,201
                
                
                
                12,146
                
                
                
                12,263
                
                
                
                22,454
                
                
                
                25,673





As
      of December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009(In
      thousands)Balance
      sheet data:Cash
      and cash equivalents
                
                $
                528
                
                
                $
                527
                
                
                $
                393
                
                
                $
                3,401
                
                
                $
                3,008Working
      capital
                
                
                5,289
                
                
                
                3,860
                
                
                
                1,763
                
                
                
                2,374
                
                
                
                2,257Total
      assets
                
                
                6,909
                
                
                
                5,656
                
                
                
                4,074
                
                
                
                24,335
                
                
                
                25,758Total
      liabilities
                
                
                1,519
                
                
                
                1,719
                
                
                
                2,054
                
                
                
                3,555
                
                
                
                4,179Stockholders’
      equity
                
                
                5,390
                
                
                
                3,937
                
                
                
                2,020
                
                
                
                20,781
                
                
                
                21,579




Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations





Overview





At a special meeting of stockholders
held on March 14, 2008, our stockholders voted to approve the Merger, as well as
to amend Intelli-Check’s certificate of incorporation to change our name to
Intelli-Check-Mobilisa, Inc., increase the authorized shares of common stock and
to increase the number of shares issuable under our 2006 Equity Incentive
Plan.  The headquarters of Intelli-Check was moved to Mobilisa’s
offices in Port Townsend, Washington.





In the Merger, the former shareholders
of Mobilisa received shares of Intelli-Check common stock representing 50% of
Intelli-Check’s common stock and options and warrants to purchase 2,429,932
shares of Intelli-Check Mobilisa common stock.  The aggregate value of
the purchase consideration was $51,321,461, based on the closing price of our
common stock on November 20, 2007.





Mobilisa, Inc. was incorporated in the
state of Washington in March 2001. Mobilisa was designated as a woman- and
veteran-owned small business. Mobilisa’s headquarters in Port Townsend,
Washington are located in a Historically Underutilized Business Zone
("HUBZone"). Mobilisa specializes in custom software development for mobile and
wireless devices and Wireless Over Water (“WOW”) technology implementation and
is comprised of two business units—ID systems and wireless technologies—designed
to address the following issues:


27




§
            Access
      Control: Mobilisa’s Defense ID®
      system is designed to increase security at access
      points   manned by law enforcement and military
      personnel.


§
            Marine
      Environment Communications: Mobilisa’s WOW technology allows for
      high-speed communication between multiple points, both on land and at sea,
      across wide or over-water expanses, and optimizes performance by making
      point-to-point systems work as point-to-multipoint, using intelligent
      routing across a dynamic network topology, and minimizing Fresnel zones
      (Fresnel zones result from obstructions in the path of radio waves and
      impact the signal strength of radio transmissions). Mobilisa is currently
      developing Floating Area Network (“FAN”) technology, which allows ships
      within line of site to communicate with each other wirelessly at speeds
      faster than current, and overused, satellite communications.  In
      addition, our Littoral Sensor Grid technology is being developed as the
      next evolutionary step in marine communications and port
      security.  Through the use of buoys, we have created
      multipurpose systems with environmental and military applications that are
      capable of having wireless connectivity and networking capabilities, are
      environmental sensors data collectors and have mobile and configurable
      plug-n-play surveillance packages.


§
            Network
      Design: Mobilisa’s AIRchitectTM tool designs optimum wireless networks
      based on equipment capabilities, user requirements and physical
      architecture of location where the wireless is to be
      installed.





Mobilisa
also derives its revenue from selling handheld communication devices with
patent-pending software which allows users to send various forms of
identification and compare it to information on databases. A key component of
Mobilisa’s business strategy is its commitment to cutting-edge research and
development in both ID systems and advanced applications of wireless
technologies.





Intellicheck was formed in 1994 to
address a growing need for a reliable document and age verification system that
could be used to detect fraudulent driver licenses and other widely accepted
forms of government-issued identification documents. Since then, our technology
has been further developed for application in the commercial fraud protection,
access control and governmental security sectors.  Additionally, it is
currently being used to increase productivity by addressing inefficiencies and
inaccuracies associated with manual data entry.  The core of
Intellicheck’s product offerings is our proprietary software technology that
verifies the authenticity of driver licenses and state issued non-driver and
military identification cards used as proof of identity.  Our patented
ID-Check® software
technology instantly reads, analyzes, and verifies the encoded format in
magnetic stripes and barcodes on government-issued IDs from over 60
jurisdictions in the U.S. and Canada to determine if the encoded format is
valid.  We have served as the national testing laboratory for the
AAMVA since 1999.





Because
of continuing terrorist threats worldwide, we believe there has been a
significant increase in awareness of our software technology to help improve
security across many industries, including airlines, rail transportation and
high profile buildings and infrastructure, which we believe may enhance future
demand for our technology. The adaptation of Homeland Security Presidential
Directive 12 (“HSPD 12”) and the promulgation of Federal Identity Processing
Standards 201 have raised the awareness of our technology in the government
sector. Therefore, we have begun to market to various government and state
agencies, which have long sales cycles, including extended test periods. In view
of the acquisition of Mobilisa and evolving nature of our business and our
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.




28


By
verifying the encoded format, our ID-Check® patented
technology provides the ability to verify the validity of military IDs, driver
licenses and state issued non-driver ID cards that contain magnetic stripes, bar
codes SMART chips, and Radio Frequency ID technologies, which enables us to
target three distinct sectors.  Our original target sector was focused
on resellers of age-restricted products, such as alcohol and tobacco, where the
proliferation of high-tech fake IDs exposes merchants to fines and penalties for
the inadvertent sale of these products to underage purchasers.  We now
also target commercial fraud, which includes identity theft, and our technology
is designed to help prevent losses from these frauds.  We are also
marketing our products for security applications involving access
control.  As a result of its applicability in these sectors, we have
sold our products to some of the largest companies in the gaming industry,
significant retailers, several large financial service companies and military
facilities.  Our technology is currently being used or tested by
several Fortune 500 Companies.  We have a strategic alliance with
VeriFone, the largest provider of credit card terminals in the U.S., several
system integrators in the defense industry and hardware manufacturers to utilize
our systems and software as the proposed or potential verification application
for their proposed solutions for credentialing in the government sector and to
jointly market these security applications.  Recent Department of
Homeland Security initiatives, along with the regulations arising from HSPD-12,
which sets the policy for a common identification standard for federal employees
and contractors, and the new Transportation Worker Identity Credential or TWIC
card, which is currently required for all sea-port workers, have additionally
created opportunities for our verification technology in the governmental sector
at the federal, state and local levels.  In addition, we have executed
agreements with some high profile organizations to promote the use of our
technology and our products.  We believe these relationships have
broadened our marketing reach through their sales efforts and we intend to
develop additional strategic alliances with additional high profile
organizations and providers of security solutions.





We have
developed additional software products that take advantage of our patented
software technology.  Our products include ID-Check® POS,
ID-Check® BHO,
ScanInnTM and
AssureScanTM.  ID-Check® POS is
the technology that has been integrated into multiple VeriFone platforms such as
the 37xx series to enable the user to do verification of the encoded format on
driver licenses as an additional function of the
terminal.  ID-Check® BHO is a
browser helper object that enables a customer to add the ID-Check®
technology as a “plug-in” to Internet Explorer pages without requiring software
programming expertise.  ScanInn is a software application that speeds
up check-in and ID verification at hotels and motels.  AssureScan is
an application that assists pharmacies with ID verification and tracking related
drug purchases.  Additional software solutions include ID-Check® PC and
ID-Check® Mobile,
which replicate the features of ID-Check®. Another
application is C-Link®, the
company’s networkable data management software. Additionally, ID-Check® PC and
C-Link® are
designed to read the smart chip contained on the military Common Access Card
(CAC). These products, which run on a personal computer, were created to work in
conjunction with our ID-Check®
technology and allow a user to first verify the encoded format and then view the
encoded data for further verification.  Our ID-Check® Mobile
product gives the user the additional flexibility of utilizing our software in a
hand-held product.  To date, we have entered into multiple licensing
agreements and are in discussions with additional companies to license our
software to be utilized within other existing systems.  We also have
created the IM2700, or Mobile TWIC Reader, for use with the Department of
Homeland Security’s new TWIC card.





Critical Accounting Policies
and the Use of Estimates





The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the Company’s
financial statements and accompanying notes.  Significant estimates
and assumptions that affect amounts reported in the financial statements include
impairment of goodwill, valuation of intangible assets, deferred tax valuation
allowances, allowance for doubtful accounts and the fair value of stock options
granted under the Company’s stock-based compensation plans.  Due to
the inherent uncertainties involved in making estimates, actual results reported
in future periods may be different from those estimates.




We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates.  These significant accounting
policies relate to revenue recognition, stock based compensation, deferred taxes
and commitments and contingencies.  These policies and our procedures
related to these policies are described in detail below.





Valuation
of goodwill and other long-lived assets





Our
long-lived assets include property and equipment, intangible assets and
goodwill. As of December 31, 2009, the balances of property and equipment,
intangible assets and goodwill, all net of accumulated depreciation and
amortization, were $482,077, $7,445,234 and $12,258,661,
respectively.  As of December 31, 2008 the balances of property and
equipment, intangible assets and goodwill, all net of accumulated depreciation
and amortization, were $464,790, $6,877,752 and $11,736,660,
respectively.





In the
fourth quarter of 2009 and 2008, we performed impairment tests as described
below.  As of December 31, 2009, we determined that no impairment had
taken place.  As of December 31, 2008, we recorded impairments of
goodwill and intangible assets of $25,799,547 and $6,293,083,
respectively.


29




We
depreciate property and equipment and amortize intangible assets that have
finite lives over their estimated useful lives. For purposes of determining
whether there are any impairment losses, as further discussed below, management
evaluates the carrying amounts of identifiable long-lived tangible and
intangible assets, including their estimated useful lives, when indicators of
impairment are present. If such indicators are present, we compare the related
undiscounted cash flows before interest and taxes to the long lived assets
carrying amounts. If the undiscounted cash flows are less than the carrying
amounts, an impairment loss is recorded based on the fair value of the asset, as
compared to the carrying amounts of the asset, such loss is recorded in the
period we identify the impairment. Based on our review of the carrying amounts
of the long-lived tangible and intangible assets with finite lives, we may also
determine that shorter estimated useful lives are appropriate. In that event, we
record depreciation and amortization over shorter future periods, which would
reduce our earnings.





SFAS No. 142,
Goodwill and Other Intangible
Assets (ASC Topic 350). SFAS No. 142 requires us to test
goodwill for impairment on an annual basis, or earlier if indicators of
potential impairment exist, and to write-down goodwill when impaired. We
evaluate goodwill for impairment using the two-step process as prescribed in
this pronouncement. The first step is to compare the estimated fair value of the
reporting unit to the carrying amount of the reporting unit. If the carrying
amount exceeds the estimated fair value, a second step must be followed to
calculate impairment. Otherwise, if the estimated fair value of the reporting
unit exceeds the carrying amounts, the goodwill is not considered to be impaired
as of the measurement date. We estimate the fair value of our reporting units
after considering a number of factors, including the present value of future
cash flows, our market capitalization, an assessment of the fair value of the
reporting units based on comparable companies, comparable transactions and
multiples. The date of our annual goodwill impairment test is December 31
each year.





Factors
we generally consider important and which could trigger an impairment review of
the carrying value of intangible assets and goodwill include the
following:





•
            Significant
      changes in the manner of use of assets or the strategy for our overall
      business;•
            Significant
      negative industry or economic trends;•
            Significant
      decline in our stock price for a sustained
  period; and•
            Significant
      decline in our market capitalization relative to net book
      value.





Although
we believe that the remaining recorded amounts of our long-lived tangible and
intangible assets and goodwill were realizable as of December 31, 2009,
future events could cause us to conclude otherwise.





If our
stock price were to decrease below $1.00 and remain at that level for a
sustained period of time we may be required to assess the carrying amount of
goodwill and long lived assets of our reporting units before our scheduled
annual impairment test.  If at that time the estimated fair values of
our reporting units are less than their respective carrying amounts, we would
need to determine whether our goodwill and long lived assets would be impaired.
Moreover, if economic conditions continue to deteriorate and capital markets
conditions continue to adversely impact the valuation of enterprises, the
estimated fair values of our reporting units could be adversely impacted, which
could result in future impairments.





Purchase
price allocations of acquired businesses





Valuations
of acquired businesses require us to make significant estimates, which are
derived from information obtained from the management of acquired businesses,
our business plans for the acquired business or intellectual property and other
sources. Critical assumptions and estimates used in the initial valuation of
goodwill and other intangible assets include, but are not limited
to:





§
              Assessments
      of appropriate valuation methodologies in the
    circumstances;
 30




§
              Future
      expected cash flows from product sales, customer contracts and acquired
      developed technologies, patents and other intellectual
      property;


§
              Expected
      costs to complete any in process research and development projects and
      commercialize viable products and estimated cash flows from sales of such
      products;


§
              The
      acquired companies’ brand awareness and industry
  position;


§
              Assumptions
      about the period of time over which we will continue to use the acquired
      brand and intangible
assets; and


§
              Discount
      rates.


The
estimates and assumptions may not materialize because unanticipated events and
circumstances may occur. If estimates and assumptions used to initially value
goodwill and intangible assets prove to be different from actual results,
ongoing reviews of the carrying values of such goodwill and intangible assets
may indicate impairment, which will require us to record an impairment charge in
the period in which it is identified.





Revenue Recognition and
Deferred Revenue




Revenue
is generally recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed and determinable, collectability is
probable, and there is no future Company involvement or
commitment.  The Company sells its commercial products directly
through its sales force and through distributors.  Revenue from
directsales of our
products is recognized when shipped to the customer and title has passed. The
Company’s products require continuing service or post contract customer support
and performance; accordingly, a portion of the revenue pertaining to the service
and support is deferred based on its fair value and recognized ratably over the
period in which the future service, support and performance are provided, which
is generally one to three years.





The
Company recognizes sales from licensing of its patented software to customers.
The Company’s licensed software requires continuing service or post contract
customer support and performance; accordingly, a portion of the revenue is
deferred based on its fair value and recognized ratably over the period in which
the future service, support and performance are provided, which is generally one
to three years.  Royalties from the licensing of the Company’s
technology are recognized as revenues in the period they are
earned.





We receive revenue from research and
development contracts.  These contracts are generally with government
agencies under long-term cost-plus fixed-fee contracts, where revenue is based
on time and material costs incurred.  Revenue from these arrangements
is recognized as time is spent on the contract and materials are
purchased.  Research and development costs are expensed as
incurred.





The Company also performs consulting
work for other companies.  These services are billed based on time and
materials.  Revenue from these arrangements is also recognized as time
is spent on the contract and materials are purchased.





Subscriptions to database information
can be purchased for month-to-month, one, two, and three year
periods.  Revenue from subscriptions are deferred and recognized over
the contractual period, which is typically three years.





The Company offers enhanced extended
warranties for its sales of hardware and software at a set price.  The
revenue from these sales are deferred and recognized on a straight-line basis
over the contractual period, which is typically three years.





Stock-Based
Compensation





We are
required to record compensation expense for all awards granted.  SFAS
No. 123(R) (ASC Topic 715 and 505) requires that the cost resulting from all
share based payment transactions be recognized in the financial
statements.  SFAS No. 123(R) establishes fair value as the measurement
objective in accounting for share based payment arrangements and requires us to
apply a fair value based measurement method in accounting for generally all
share based payment transactions with employees.


31





Deferred Income
Taxes




Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss carry forwards.  Deferred tax assets and
liabilities are measured using expected tax rates in effect for the year in
which those temporary differences are expected to be recovered or
settled.  We have recorded a full valuation allowance for our net
deferred tax assets as of December 31, 2009, due to the uncertainty of the
realizability of those assets.





Commitments and
Contingencies





We are
currently involved in certain legal proceedings as discussed in Item 3,
above.  We do not believe these legal proceedings will have a material
adverse effect on our financial position, results of operations or cash
flows.





The above
listing is not intended to be a comprehensive list of all of our accounting
policies.  In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.





Results of
Operations




COMPARISON OF THE YEAR ENDED
DECEMBER 31, 2009 TO THE YEAR ENDED DECEMBER 31,
2008




The
acquisition of Mobilisa was completed on March 14, 2008, and therefore
Mobilisa’s results of operation are included in the financial statements for the
period March 15, 2008 through December 31, 2009.  The acquisition of
Positive Access was completed on August 31, 2009, and therefore Positive
Access’s results of operations are included in the financial statements
beginning from September 1, 2009.




REVENUE.  Revenues
increased by 24%, or $2,397,773, from $10,016,806, for the year ended December
31, 2008 to $12,414,579 for the year ended December 31, 2009.





As
      Reported
                
                
                
                
                
                Pro
      FormaYear Ended December 31,
                
                
                %
                
                
                Year Ended December 31,
                
                
                %2009
                
                
                2008
                
                
                Change
                
                
                2008
                
                
                Change(Revised)
                
                
                
                
                
                (Revised)Commercial
      ID
                
                $
                5,009,368
                
                
                $
                3,950,627
                
                
                
                27
                
                
                $
                3,950,627
                
                
                
                27Government
      ID
                
                
                2,853,120
                
                
                
                2,505,213
                
                
                
                14
                
                
                
                2,920,398
                
                
                
                (2
                )Wireless
      R&D
                
                
                4,552,091
                
                
                
                3,560,966
                
                
                
                28
                
                
                
                4,192,691
                
                
                
                9$
                12,414,579
                
                
                $
                10,016,806
                
                
                
                24
                
                
                $
                11,063,716
                
                
                
                12





The
increase in the Commercial ID revenues in 2009 is primarily a result of a large
sale to a telecommunications company, including an enterprise wide software
license. The wireless R&D contract revenue increased primarily due to the
continued development in the FAN and Buoy projects.    Total
booked orders were $12.3 million in 2009 compared to $12.9 million in
2008.  As of December 31, 2009, our backlog, which represents
non-cancelable sales orders for products not shipped and services not yet
performed, was approximately $10 million compared to $11.3 million at December
31, 2008.  Period to period comparisons may not be indicative of
future operating results, since we still face long sales cycles, particularly in
the government sector, and, therefore, we cannot predict with certainty in which
period the opportunities currently in the pipeline will develop into sales or if
they will develop at all.  Approximately $4.6 million of the current
backlog could be recognized in excess of one year.  Mobilisa has a
significant amount of multi-year research and development contracts with the US
government that will be recognized as the research is performed.  In
the commercial ID sector, the actual recognition periods are determined
depending upon the release dates by the customer.




32


GROSS
PROFIT.  Gross profit increased by $1,795,814 or 29% from
$6,289,416 for the year ended December 31, 2008 to $8,085,230 for the year ended
December 31, 2009.  Our gross profit, as a percentage of revenues,
increased to 65% in the year ended December 31, 2009 compared to the 63%
reported for the year ended December 31, 2008.  The gross profit
percentage increase in 2009 was principally a result of a reduction in merger
related intangible amortization costs which amounted to $718,995 in 2009
compared to $1,163,277 in 2008.  We took an intangible asset
impairment charge the end of 2008 resulting in lower merger amortization costs
going forward.





OPERATING
EXPENSES.  Excluding the goodwill and intangible assets
impairment charges in 2008, operating expenses, which consist of selling,
general and administrative and research and development expenses increased 20%
to $8,601,792 for the year ended December 31, 2009 from $7,165,800 for the year
ended December 31, 2008.  Approximately $597,000 of the increase in
expenses in 2009 is because Mobilisa operating expenses were included for a
period of 9 1/2 months in the 2008 period.  In addition, during 2009
we increased expenses in support of increased revenue growth and shareholder
value.  During 2009, we added three additional salespersons and paid
higher commissions resulting from higher sales levels.  We also
increased our shareholder relations expenses, including the hiring of a new
investor relations firm.  As we experience sales growth, we expect
that we will incur additional operating expenses to support this
growth.  Research and development expenses may also increase as we
integrate additional products and technologies with our patented ID-Check
technology and enter into additional research and development
contracts.





The
Company completed its annual impairment testing of goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards (SFAS) 142
"Goodwill and Other Intangible Assets" and SFAS 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets.”  Based upon this review,
it was determined that there was no impairment of goodwill or other intangible
assets as of December 31, 2009.  However, as a result of a substantial
decrease in the market price of the Company's common stock, reflecting the very
difficult overall market conditions in the latter half of 2008, the Company
reassessed the carrying value of its goodwill and intangible assets as of
December 31, 2008 and concluded that both of these were impaired.  The
Company recorded non-cash impairment charges to goodwill and intangible assets
of $32,092,630 in the fourth quarter of 2008 related to the Mobilisa reporting
unit.





INTEREST
INCOME.  Interest income decreased from $60,589 for the year
ended December 31, 2008 to $2,443 for the year ended December 31, 2009, which is
a result of a decrease in our average invested cash and cash equivalents, as
well as lower interest rates received on investments during 2009.  Due
to continued uncertainties in the financial markets, we continued to invest our
excess cash in highly liquid bank and government insured money market accounts,
with low yields in 2009.





INTEREST
EXPENSE.  Interest expense of $10,000 in 2009 represents the
amortization of deferred debt discount on the notes payable to the former
principals of Positive Access.





INCOME
TAXES.  We have incurred net losses to date; therefore, we have
paid nominal income taxes.





NET
LOSS.  Excluding the impact of the non-cash goodwill and
intangible assets impairment charge, as a result of the factors noted above, our
net loss decreased 37% from $827,925 for the year ended December 31, 2008 to
$525,515 for the year ended December 31, 2009.  Total net loss for
2008, after the impairment charge, was $32,920,555.




COMPARISON OF THE YEAR ENDED
DECEMBER 31, 2008TO THE YEAR ENDED DECEMBER
31, 2007




The
acquisition of Mobilisa was completed on March 14, 2008, and therefore
Mobilisa’s results of operation are included in the financial statements for the
period March 15 through December 31, 2008.




REVENUE.  Revenues
increased by 185%, or $6,504,898, from $3,511,908, for the year ended December
31, 2007 to $10,016,806 for the year ended December 31,
2008.  Revenues from the historical Intelli-Check business increased
12% to $3,950,627 and Mobilisa’s revenues contributed
$6,066,179.  Total booked orders increased 76% in 2008 to $8.1 million
from $4.6 million in 2007.  As of December 31, 2008, our backlog,
which represents non-cancelable sales orders for products not shipped and
services not yet performed, was approximately $11.3 million compared to $1.9
million at December 31, 2007.  This significant increase is
principally a result of $8.7 million added by Mobilisa.


33





GROSS
PROFIT.  Gross profit increased by $4,168,449 or 197% from
$2,120,967 for the year ended December 31, 2007 to $6,289,416 for the year ended
December 31, 2008.  Our gross profit, as a percentage of revenues,
increased to 63% in the year ended December 31, 2008 compared to the 60%
reported for the year ended December 31, 2007.  The gross profit
percentage increase in 2008 was a result of a change in product
mix.  The increase in margin was principally a result of the impact of
the high margined Mobilisa revenues during the year including research and
development contracts where the related costs are included in research and
development costs.  This amount was offset by merger related
amortization expenses of $1,163,277 included in cost of sales in 2008 that are
not included in comparable cost of sales expenses in 2007.  In
addition, in 2008 there were higher software upgrade fees, software development
fees and enterprise license fees in our historical business.





OPERATING
EXPENSES.  Excluding the goodwill and intangible assets
impairment charges, operating expenses, which consist of selling, general and
administrative and research and development expenses increased 45% to $7,165,800
for the year ended December 31, 2008 from $4,955,818 for the year ended December
31, 2007.  Expenses in 2008 include $3,573,099 of Mobilisa operating
expenses as well as merger related intangible amortization costs of $123,640
that are not included in the comparative expenses in 2007.  On a
comparative basis Intellicheck’s historical operating costs decreased by
$1,610,396.  Selling expenses were reduced by $833,454, general and
administrative expenses were reduced by $543,043 and research and development
costs were reduced by $233,899.  These reductions were principally a
result of merger related savings, including reductions in headcount, reductions
in sales and marketing expenses and lower legal and consulting
fees.  The 2007 period also included a $152,000 death benefit paid to
the spouse of the former CEO.





The
Company completed its annual impairment testing of goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards (SFAS) 142
"Goodwill and Other Intangible Assets" and SFAS 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets.”  As a result of a
substantial decrease in the market price of the Company's common stock,
reflecting the very difficult overall market conditions in the second half of
2008, the Company reassessed the carrying value of its goodwill and intangible
assets as of December 31, 2008 and concluded that both of these were
impaired.  The Company recorded non-cash impairment charges to
goodwill and intangible assets of $32,092,630 in the fourth quarter of 2008
related to the Mobilisa reporting unit.





Despite
the fact that Mobilisa had strong cash flows and this business unit has strong
long-term growth potential in both sales and earnings, this charge was required
because our market capitalization declined to a level below our book value and
deteriorating economic conditions that manifested themselves in the fourth
quarter of 2008.  We do not believe our market capitalization at the
end of 2008 reflected the true long-term value of our Company.  As
with similar impairment charges announced by several of the Company’s peers, the
impairment was a non-cash charge to earnings, and did not affect the Company's
liquidity or cash flows from operating activities, nor will it have any impact
on future operations.





INTEREST
INCOME.  Interest income decreased from $161,633 for the year
ended December 31, 2007 to $60,589 for the year ended December 31, 2008, which
is a result of a decrease in our average invested cash and cash equivalents,
marketable securities and short term investments, as well as lower interest
rates received on investments during 2008.





INCOME
TAXES.  We have incurred net losses to date; therefore, we have
paid nominal income taxes.





NET
LOSS.  Excluding the impact of the non-cash goodwill and
intangible assets impairment charge, as a result of the factors noted above, our
net loss decreased 69% from $2,673,218 for the year ended December 31, 2007 to
$827,925 for the year ended December 31, 2008. Total net loss for 2008, after
the impairment charge, was $32,920,555.





Liquidity and Capital
Resources





Prior to the acquisition of Mobilisa in
2008, we financed our operations through several private and public placements
of equity and debt securities, as well as from the proceeds received from the
exercise of warrants, stock options and rights.  We used the net
proceeds of the financings for the primary purpose of funding working capital
and general corporate purposes.  Mobilisa principally self funded its
business though cash generated by operations and to a lesser extent, through
cash and guaranties provided by its principal owners and founders. Excluding the
$638,000 cash used for the purchase of Positive Access in 2009, since the
merger, our business has been cash flow positive.


34




As of December 31, 2009, the Company
had cash and cash equivalents of $3,008,472, working capital (defined as current
assets minus current liabilities) of $2,257,046, total assets of $25,758,172 and
stockholders’ equity of $21,579,141.





On August
31, 2009, the Company acquired 100% of the common stock of Positive Access
Corporation, the leading competitor to Intellicheck Mobilisa for developing
drivers’ license reading software for $1,948,001.  The terms include
cash payments of $1,225,000, payable $625,000 at August 31, 2009, $400,000 at
August 31, 2010 and $200,000 at August 31, 2011.  The notes payable
have been recorded in the financial statements net of deferred debt discount of
$40,000.  In addition, the Company issued 608,520 shares of common
stock fair valued at $750,001, plus direct issue costs of
$13,000.  The recorded fair value of the stock is based on the closing
stock price on August 31, 2009, net of a discount of 15%, since the stock was
unregistered and is subject to restrictions on its sale.  Acquisition
related costs of approximately $37,000 were expensed in connection with this
transaction.  The transaction was accounted for using the purchase
method of accounting.   The initial cash payments were funded out
of the operating cash of the Company.





During
2009, the Company decreased its cash and cash equivalents by
$392,476.  Cash generated from operating activities was $319,814 in
2009 compared to $805,121 in 2008.  This was primarily a result of an
increase in working capital requirements to support increased revenue
growth.  We used cash of $766,540 in investing activities in 2009
principally related the cash paid for the acquisition of Positive Access and for
capital expenditures.  This compares to net cash provided of
$1,881,929 in 2008 which resulted from the sales of marketable securities and
cash received from Mobilisa at the date of acquisition.  Cash provided
by financing activities was $54,250 in 2009 compared to $320,915 in 2008, which
resulted from lower proceeds from the exercise of stock options.





At year
end, the Company’s excess cash was invested in money market
funds.  These investments, totaling $1,316,793, have been classified
as cash equivalents as of December 31, 2009.  The Company’s investing
strategy is to continue to invest in short term liquid investments with emphasis
on FDIC and SIPC insured protection.





Our
Company’s Mobilisa subsidiary has a $250,000 revolving line of credit with Bank
of America which renews annually.  Interest is payable monthly at the
bank’s prime rate (3.25% at December 31, 2009), plus 1% per annum. The facility
is secured by the assets of Mobilisa and is financially guaranteed by two
directors of the Company, who are also members of management.  The
Company currently has no bank financing.





While
there is no tax expense recorded in the results of operations in all periods
presented, we made an income tax payment of approximately $145,000 in 2009 in
settlement of the pre-merger taxable liability of Mobilisa.





We
currently anticipate that our available cash on hand and marketable securities,
as well as cash from operations will be sufficient to meet our anticipated
working capitals and capital expenditure requirements for at least the next 12
months.





We may
need to raise additional funds to respond to business contingencies which may
include the need to fund more rapid expansion, fund additional marketing
expenditures, develop new targets for our technology, enhance our operating
infrastructure, respond to competitive pressures, or acquire complementary
businesses or necessary technologies.  There can be no assurance that
the Company will be able to secure the additional funds when needed or obtain
such on terms satisfactory to the Company, if at all.





We are
currently involved in certain legal proceedings as discussed in Item 3
above.  We do not believe these legal proceedings will have a material
adverse effect on our financial position, results of operations or cash
flows.




35


Adjusted
EBITDA





The
Company uses Adjusted EBITDA as a non-GAAP financial performance measurement.
Adjusted EBITDA is calculated by adding back to net loss interest, income taxes,
impairments of long-lived assets and goodwill, depreciation, amortization and
stock-based compensation expense.  Adjusted EBITDA is provided to
investors to supplement the results of operations reported in accordance with
GAAP.  Management believes that Adjusted EBITDA provides an additional
tool for investors to use in comparing Intellicheck Mobilisa financial results
with other companies that also use Adjusted EBITDA in their communications to
investors. By excluding non-cash charges such as impairments of long-lived
assets and goodwill, amortization, depreciation and stock-based compensation, as
well as non-operating charges for interest and income taxes, investors can
evaluate the Company's operations and can compare its results on a more
consistent basis to the results of other companies. In addition, adjusted EBITDA
is one of the primary measures management uses to monitor and evaluate financial
and operating results.





Intellicheck
Mobilisa considers Adjusted EBITDA to be an important indicator of the Company's
operational strength and performance of its business and a useful measure of the
Company's historical operating trends. However, there are significant
limitations to the use of Adjusted EBITDA since it excludes interest income and
expense, impairments of long lived assets and goodwill, stock based compensation
expense, all of which impact the Company's profitability, as well as
depreciation and amortization related to the use of long term assets which
benefit multiple periods. The Company believes that these limitations are
compensated by providing Adjusted EBITDA only with GAAP net loss and clearly
identifying the difference between the two measures. Consequently, Adjusted
EBITDA should not be considered in isolation or as a substitute for net loss
presented in accordance with GAAP. Adjusted EBITDA as defined by the Company may
not be comparable with similarly named measures provided by other
entities.




A
reconciliation of GAAP net loss to Adjusted EBITDA follows:





Year
      Ended December 31,(Unaudited)2009
                    
                    
                    2008
                    
                    
                    2007Net
      loss
                    
                    $
                    (525,515
                    )
                    
                    $
                    (32,920,555
                    )
                    
                    $
                    (2,673,218
                    )Reconciling
      items:(Benefit)
      provision for income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      – net
                    
                    
                    7,557
                    
                    
                    
                    (60,589
                    )
                    
                    
                    (161,633
                    )Stock-based
      compensation costs
                    
                    
                    519,730
                    
                    
                    
                    396,276
                    
                    
                    
                    523,927Depreciation
      and amortization
                    
                    
                    978,055
                    
                    
                    
                    1,414,429
                    
                    
                    
                    38,336Impairments
      of long lived assets and goodwill
                    
                    
                    -
                    
                    
                    
                    32,092,630
                    
                    
                    
                    -Adjusted
      EBITDA
                    
                    $
                    979,827
                    
                    
                    $
                    922,191
                    
                    
                    $
                    (2,272,588
                    )




Related Party
Transactions





Mobilisa
leases office space from a company (“Lessor Company”) that is wholly-owned by
two directors, who are members of management.  For the year ended
December 31, 2009 total rent payments for this office space were
$74,976.  For the period beginning March 15, 2008 through December 31,
2008, total rental payments for this office space were $59,357.  The
Company entered into a 10-year lease for the office space ending in
2017.  The annual rent for this facility is currently $74,976 and is
subject to annual increases based on the increase in the CPI index plus
1%.





The
Lessor Company's entire operations consist of the leased property and related
bank debt.  The Company is a guarantor of the loans for the leased
property.  As of December 31, 2009, the Company's maximum
exposure to loss is $404,000.





Under
FASB Interpretation ("FIN") No. 46 (revised December 2003) "Consolidation of
Variable Interest Entities – an Interpretation of ARB No. 51," companies are
required to consolidate a related variable interest entity ("VIE") when the
reporting company is the "primary beneficiary" of that entity and holds a
variable interest in the VIE.  The determination of whether a
reporting company is the primary beneficiary of a VIE ultimately turns on
whether the reporting entity will absorb a majority of the VIE's anticipated
losses or receive a majority of the VIE's anticipated gains.


36




The
Company analyzed its transactions with and relationship to the Lessor Company
and concluded that it had an implicit variable interest in the Lessor
Company.  However, the primary beneficiary, based on an assessment of
what entity absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, is the common owners.  Accordingly, the Company is
not required to consolidate the operations of the Lessor Company.





In
addition, the Company’s Mobilisa subsidiary has a $250,000 revolving credit line
with a bank that is guaranteed by two directors of the Company who are also
members of management.





Net Operating Loss Carry
Forwards





As of
December 31, 2009, the Company had net operating loss carryforwards (“NOLs”) for
federal income tax purposes of approximately $37.2 million.  There can
be no assurance that the Company will realize the benefit of the NOLs. The
federal NOLs are available to offset future taxable income and expire from 2018
to 2029 if not utilized.  The Company has not yet completed its review
to determine whether or not these NOLs will be limited under Section 382 of the
Internal Revenue Code due to the ownership change from the acquisition of
Mobilisa, Inc.





Contractual
Obligations





Below is
a table, which presents our contractual obligations and commitments at December
31, 2009:





Payments Due by
Period





Total
                
                
                Less than
                  1 year
                
                
                1-3 years
                
                
                3-5 years
                
                
                More than
                  5 yearsOperating
      Leases
                
                $
                1,446,002
                
                
                $
                425,296
                
                
                $
                400,388
                
                
                $
                415,596
                
                
                $
                204,722Employment
      Agreements
                
                
                66,063
                
                
                
                66,063
                
                
                
                -
                
                
                
                -
                
                
                
                -Consulting
      Agreements
                
                
                329,083
                
                
                
                295,333
                
                
                
                33,750
                
                
                
                -
                
                
                
                -Purchase
      Obligations
                
                
                18,128
                
                
                
                18,128
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      Contractual Cash Obligation
                
                $
                1,859,276
                
                
                $
                804,820
                
                
                $
                434,138
                
                
                $
                415,596
                
                
                $
                204,722





Recently Issued Accounting
Pronouncements





Except as discussed below, the Company
does not expect the impact of the future adoption of recently issued accounting
pronouncements to have a material impact on the Company’s financial
statements.





In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.





Following
the Codification, the Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.





The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification was effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
was limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.


37




In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (ASC Topic 320-10-65).
This update provides guidance for allocation of charges for other-than-temporary
impairments between earnings and other comprehensive income. It also revises
subsequent accounting for other-than-temporary impairments and expands required
disclosure. The update was effective for interim and annual periods ending after
June 15, 2009. The adoption of FAS 115-2 and FAS 124-2 did not have a material
impact on the results of operations and financial condition.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (ASC Topic 810-10). This updated guidance requires a qualitative
approach to identifying a controlling financial interest in a variable interest
entity (VIE), and requires ongoing assessment of whether an entity is a VIE and
whether an interest in a VIE makes the holder the primary beneficiary of the
VIE. This guidance became effective for the Company on January 1, 2010 and
is not expected to have a material impact on the Company’s consolidated
financial statements.





In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable
Revenue Arrangements.” This ASU establishes the accounting and reporting
guidance for arrangements including multiple revenue-generating activities. This
ASU provides amendments to the criteria for separating deliverables, measuring
and allocating arrangement consideration to one or more units of accounting. The
amendments in this ASU also establish a selling price hierarchy for determining
the selling price of a deliverable. Significantly enhanced disclosures are also
required to provide information about a vendor’s multiple-deliverable revenue
arrangements, including information about the nature and terms, significant
deliverables, and its performance within arrangements. The amendments also
require providing information about the significant judgments made and changes
to those judgments and about how the application of the relative selling-price
method affects the timing or amount of revenue recognition. The amendments in
this ASU are effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15,
2010. Early application is permitted. The Company is currently evaluating this
new ASU.





In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements.” This ASU changes the accounting
model for revenue arrangements that include both tangible products and software
elements that are “essential to the functionality,” and scopes these products
out of current software revenue guidance. The new guidance will include factors
to help companies determine what software elements are considered “essential to
the functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating this new
ASU.





Off-Balance Sheet
Arrangements




We have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.




Forward Looking
Statements





This
document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements anticipating
future growth in revenues, loss from operations and cash flow. Words such as
“anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,”
“believes” and words and terms of similar substance used in connection with any
discussion of future operating or financial performance identify forward-looking
statements. These forward-looking statements are based on management’s current
expectations and beliefs about future events. As with any projection or
forecast, they are inherently susceptible to uncertainty and changes in
circumstances, and the Company is under no obligation to, and expressly
disclaims any obligation to, update or alter its forward-looking statements
whether as a result of such changes, new information, subsequent events or
otherwise.




38





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





Financial
instruments, which subject the Company to concentrations of credit risk, consist
primarily of cash and cash equivalents.  The Company maintains cash
between three financial institutions.  The marketable securities and
short term investments are invested in money market funds and bank certificates
of deposit.  The Company performs periodic evaluations of the relative
credit standing of these institutions.





Item
8.  Financial Statements and Supplementary Data





Our
financial statements and supplementary data are attached hereto beginning on
Page F-1.





Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures





There
have been no changes in or disagreements with the Company’s principal
independent registered public accounting firm for the two-year period ended
December 31, 2009.





Item
9A(T).  Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




Our Chief
Executive Officer and our Chief Financial Officer evaluated, with the
participation of our management, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Annual Report on Form
10-K.  As of December 31, 2009, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures,
as defined in Securities Exchange Act Rule 13a-15(e), were
effective.




Our
disclosure controls and procedures have been formulated to ensure (i) that
information that we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 were recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms and (ii) that the information required to be
disclosed by us is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosures.




Changes
in Internal Control Over Financial Reporting




There
wasno change in
the Company’s internal control over financial reporting that occurred during our
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




Annual
Report of Management on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 15d-15(f) under the Exchange Act)
for the Company. Management, with the participation of our principal executive
officer and our principal financial officer, evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2009 (the end
of our fiscal year), based on the framework and criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on this evaluation,
management concluded that our internal control over financial reporting was
effective as of December 31, 2009.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




39




Item
9B.  Other Information




None




PART III




Item 10.
            Directors and
      Executive Officers of the Company and Corporate
      Governance




As of
March 11, 2010, the Company's directors and executive officers were as
follows:




Name
                            
                            Age
                            
                            PositionDr.
      Nelson Ludlow
                            
                            48
                            
                            Chief
      Executive Officer and DirectorSteven
      D. Williams
                            
                            47
                            
                            Chief
      Operating OfficerRussell
      T. Embry
                            
                            46
                            
                            Chief
      Technology OfficerBonnie
      Ludlow
                            
                            55
                            
                            Senior
      Vice President and DirectorPeter
      J. Mundy
                            
                            53
                            
                            Chief
      Financial Officer, Treasurer & SecretaryJohn
      W. Paxton
                            
                            73
                            
                            Chairman
      of the Board and DirectorLt.
      General Emil R. Bedard
                            
                            66
                            
                            DirectorGuy
      L. Smith
                            
                            60
                            
                            Director





Nelson Ludlow, PhD was named
the Chief Executive Officer and Director of the Company on March 14,
2008.  He was a co-founder of Mobilisa and was its Chief Executive
Officer and a director since its inception in March 2001. Dr. Ludlow has over 25
years experience in software development for the military and corporate sectors.
From 1982 to 1988, while in the Air Force, Dr. Ludlow served as a mathematician,
a pilot, an intelligence officer at the National Air Intelligence Center,
Technical Director for Artificial Intelligence at USAF Rome Laboratory,
Assistant Professor of Computer Science at the Naval Postgraduate School, and
the Director of Technology and Services for Radar Evaluation Squadron. In the
corporate sector, Dr. Ludlow served as the Director of C2 Modeling for SAIC,
Chief Scientist for the ORINCON Corporation and Chief Technology Officer for
Ameranth Wireless—all in San Diego.  He holds a PhD in Artificial
Intelligence from the University of Edinburgh, Scotland and completed
Post-Doctoral work in Computer Science at the University of Cambridge, England.
Additional degrees include a Bachelor of Science Degree from Washington State
University in Math and Physical Sciences, as well as a Master of Science degree
in Computer Science from Wright State University in Dayton, Ohio.  Dr.
Ludlow was selected to be a Director in part due to his knowledge of the
Company, including as a founder and director of Mobilisa, his position with the
Company, his extensive experience working with government contracts, and his
considerable knowledge of the sectors in which the Company does
business.  Dr. Ludlow is married to Bonnie Ludlow, a Director of the
Company.




Steven D. Williams was
appointed Chief Operating Officer of the Company in March 2008.  From
February 6, 2006 to March 2008, Mr. Williams was the Senior Vice President of
Business Development for Mobilisa, where he focused on sustainable growth,
developing and defending industry niche, and strategic
partnerships.  For the prior eight years he has worked in Washington,
DC, and in the Pentagon, as a Program Manager, Contracting Officer,
Congressional Liaison and Public Affairs Manager.  Mr. Williams has
successfully managed teams of over 450 people, assets over $1 billion and
budgets over $100 million in diverse national and international environments. As
well, he was a primary editor/author for the Air Forces lessons learned from
Operations Noble Eagle, Enduring Freedom and Iraqi Freedom.  Mr.
Williams has developed business opportunities leading to contracts with the
Department of Defense, Joint Staff and Department of the Air Force in his past
positions. He has created sub-contracts with major companies including Lockheed
Martin, General Dynamics, and SAIC, among others. He has developed relationships
with contracting officers technical representatives (COTRs), facilitating the
attainment of corporate revenue goals. Mr. Williams is a Certified Federal
Contracts Manager (CFCM).  Mr. Williams holds a Master of Business
Administration from the University of North Dakota, a Master of Arts in
Organizational Management from The George Washington University in Washington,
DC and a Bachelor of Science in Business Administration from Methodist College,
graduating magna cum laude.




40




Russell T. Embry was appointed
Senior Vice President and Chief Technology Officer in July 2001 and has been
Vice President, Information Technology, since July 1999. From January 1998 to
July 1999, Mr. Embry was Lead Software Engineer with RTS Wireless. From April
1995 to January 1998, he served as Principal Engineer at GEC-Marconi Hazeltine
Corporation. From August 1994 through April 1995, he was a staff software
engineer at Periphonics Corporation. From September 1989 to August 1994, Mr.
Embry served as Senior Software Engineer at MESC/Nav-Com. From July 1985 through
September 1989, he was a software engineer at Grumman Aerospace. Mr. Embry holds
a B.S. in Computer Science from Stony Brook and an M.S. in Computer Science from
Polytechnic University, Farmingdale.





Bonnie Ludlow was named Senior
Vice President and was appointed a member of the Board of Directors on March 14,
2008.  Ms. Ludlow was a co-founder of Mobilisa and was its Sr. Vice
President, Finance and a director since its inception in March 2001. As Senior
Vice President of Finance, Ms. Ludlow was responsible for all financial
transactions, including contracting and purchasing agreements, invoicing, and
payroll as well as managing human resources for recruiting, hiring, and benefits
administration. Ms. Ludlow has fifteen years of experience working with the
Federal Government, six of which were active duty in the United States Air Force
(March 1980 to February 1986), and nine as a Department of Defense civilian
(February 1986 to October 1995). While on active duty, she was assigned to the
Defense Security Agency (DSA) as a Czech linguist (September 1981 to September
1983). As a civil servant, Ms. Ludlow worked as a geodetic surveyor and
engineering assistant, in which she positioned navigational aids on military
runways. Additional duties in this position included the generation of technical
drawings, maps and reports.  Ms. Ludlow was selected to be a Director
in part due to her knowledge of the Company, including as a director and founder
of Mobilisa, as well as her extensive experience working with government
contracts.  Ms. Ludlow is married to Nelson Ludlow, PhD, a Director of
the Company.





Peter J. Mundy joined
Intellicheck Mobilisa on March 26, 2007 as its Vice President of
Finance, Chief Financial Officer, Secretary and Treasurer.  Prior to
joining Intellicheck Mobilisa, Mr. Mundy spent over 24 years at Sentry
Technology Corporation, a publicly held company in the electronic security
industry, and its predecessors. From February 2001 until December 2006, Mr.
Mundy was Vice President of Finance, Chief Financial Officer, Secretary and
Treasurer of Sentry Technology Corporation. From December 1994 through February
2001, Mr. Mundy was Vice President of Finance, Chief Financial Officer,
Secretary and Treasurer of Knogo North America Inc.  Prior thereto, Mr.
Mundy served as an officer of Knogo Corporation where he was Vice President -
Corporate Controller from May 1994 and, prior to such time, Corporate Controller
and Controller since 1982. Mr. Mundy was a supervisor with the accounting firm
of Ernst & Whinney (predecessor to Ernst & Young).  Mr. Mundy
received his BBA in accounting from Adelphi University and is a certified public
accountant.





John W. Paxton was appointed
Chairman of the Board on October 20, 2008 and became a director on March 14,
2008.  He was a director and Chairman of the Board of Mobilisa in
September 2005. Mr. Paxton brings 30 years of experience in the wireless
networking field to Mobilisa's board. Mr. Paxton was the President of Zebra
Technologies’ Bar Code Business Unit in 2003. Prior to 2000, Mr. Paxton served
as Chairman and Chief Executive Officer of Telxon Corporation, President and
Chief Executive Officer of Monarch Marking Systems, Executive Vice President of
Paxar Corporation and President of Paxar’s Printing Solutions Group. Mr. Paxton
joined Litton Industries as a corporate Vice President in 1991, when the company
acquired Intermec Corporation. Between 1986 and 1991, he led Intermec, joining
as President and Chief Operating Officer, and becoming Chairman and Chief
Executive Officer in 1988. In addition to Mr. Paxton’s corporate experience, he
brings venture capital experience as the Chairman of Odyssey Industrial
Technologies, LLC, a joint venture partnership with Odyssey Investment Partners,
as well as consulting experience as the head of Paxton Associates LLC, a
business consulting firm.  In October, 2007, Mr. Paxton filed a
voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code
related to a business jointly owned by Mr. Paxton and Janet R.
Paxton.  The bankruptcy petition was dismissed on September 2, 2008
and there are no current bankruptcy proceedings involving Mr.
Paxton.  Mr. Paxton has a Bachelor of Science degree and a Master of
Science degree in Business Management from LaSalle University, is a registered
Professional Engineer and is a fellow of Seattle Pacific University. He has
served on the board of the National Association of Manufacturers, and has been
the Chairman and Vice Chairman of the Automatic Identification Manufacturers
(AIM), a leading industry association.  Mr. Paxton was selected to
serve as a Director in part due to his extensive public company experience, his
knowledge of the Company, including as a director of Mobilisa, his general
business experience, as well as his background knowledge of accounting and
auditing.  Mr. Paxton qualifies as an “audit committee financial
expert” under SEC regulations.


41




Lieutenant General Emil R. "Buck"
Bedard was appointed a member of the Board of Directors on March 14,
2008,  General Bedard was appointed a director of Mobilisa in
September 2004. He retired from the US Marine Corps with over 37 years of
active duty service in 2003. General Bedard’s military career included two
combat tours in Vietnam, as well as commanding the 7th Marine Regiment in
Somalia and the 1st Marine Expeditionary Force during Operation Desert Storm.
General Bedard’s final active duty tour was as the Deputy Commandant for Plans,
Policies and Operations for the US Marine Corps Headquarters in Washington,
D.C., where he served until his retirement in 2003. He has continued to serve
with the Marine Corps in Afghanistan and Iraq since his retirement. General
Bedard’s many military awards include a Distinguished Service Medal, Legion of
Merit, and Bronze Star (with Combat V). General Bedard graduated from the
University of North Dakota in 1967 with a Masters in Science.  General
Bedard was selected to serve as a Director in part due to his considerable
experience as an officer in the U.S. military working with government contracts
and his knowledge of the Company, including as a director of
Mobilisa.





Guy L. Smith was appointed a
member of Intellicheck Mobilisa’s Board of Directors in June 2005. Mr. Smith has
been the Executive Vice President of Diageo, the world’s leading premium drinks
company, since 2000 and is responsible for Corporate Relations and Marketing
Public Relations. At Diageo, Mr. Smith’s responsibilities include overseeing the
corporation’s civic and social responsibility efforts in North America,
including the Diageo Marketing Code. The code governs the company’s social
responsibility activities with regard to the marketing and sale of alcoholic
beverages and the company’s undertakings to reduce underage access and abuse of
alcohol. From 1998 - 1999, prior to joining Diageo, Mr. Smith was Special
Advisor to President Clinton on The White House staff, where he served on the
impeachment defense team. Mr. Smith also served as an informal strategic
communications advisor to President Clinton from the beginning of the Clinton
Administration. From 1999 to 2000, Mr. Smith was associated with The Hawthorn
Group, a Washington-based public affairs firm, as well as with his own firm,
Smith Worldwide Inc., from 1994 to 1996, which focused on reputation and crisis
management. He was Chief Operating Officer of Hill & Knowlton International
Public Relations, from 1992 to 1993, where he consulted with the firm's largest
consumer product, technology, and legal clients. Prior to that Mr. Smith was
Vice President-Corporate Affairs, the senior public affairs and public relations
officer, for Philip Morris Companies Inc. from 1975 to 1992. During his 17 years
with Philip Morris, Mr. Smith led the Corporate Affairs departments of the
Miller Brewing Company and The Seven-Up Company, both then Philip Morris
operating companies. Mr. Smith began his career as a reporter and assistant city
editor for The Knoxville Journal. He is currently chairman of the Barrier Island
Trust, an environmental protection organization and sits on the Board of
Advisors of Mount Vernon, George Washington’s home outside Washington, D.C. Mr.
Smith also serves as an Honorary Battalion Chief of the Fire Department of New
York.  Mr. Smith was selected to serve as a Director in part due to
his extensive experience with the alcoholic beverage business and other
businesses that rely on age verification, his work in government and public
relations, his knowledge of the Company, including as a pre-merger director of
Intelli-Check, Inc. and his general business experience.





There
have been no material changes to the procedures by which security holders may
recommend nominees to our Board of Directors.




Audit Committee of the Board
ofDirectors





The Board
of Directors has a separately designated Audit Committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
which is currently comprised of Mr. Paxton, chairperson, General Bedard and Mr.
Smith.  The members of the Audit Committee are independent as defined
in Section 121(A) of the American Stock Exchange’s listing standards. The Audit
Committee recommends to the Board of Directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, the Company’s internal accounting controls and
audit practices and professional services rendered to Intellicheck Mobilisa by
the independent accountants. The Audit Committee has adopted a written charter,
which sets forth the responsibilities, authority and specific duties of the
Audit Committee.





The Board
of Directors has determined that it has at least one audit committee financial
expert serving on the audit committee. John W. Paxton has vast corporate
experience including his positions as Chairman, CEO and President of several
publicly traded companies. He brings venture capital experience as the Chairman
of Odyssey Industrial Technologies, LLC, a joint venture partnership with
Odyssey Investment Partners, as well as consulting experience as the head of
Paxton Associates LLC, a business consulting firm. Mr. Paxton has a Master of
Science degree in Business Management from LaSalle University.  Mr.
Paxton is an “audit committee financial expert” and is an independent member of
the Board of Directors.


42




Section 16(a) Beneficial
Ownership Reporting Compliance





The
Securities and Exchange Commission has adopted rules relating to the filing of
ownership reports under Section 16(a) of the Securities Exchange Act of
1934.  One such rule requires disclosure of filings, which under the
Commission’s rules, are not deemed to be timely.  Based on a review of
the filings received, Intellicheck Mobilisa is not aware of any non-timely
filings for fiscal year 2009, except that a Form 4 filing was not timely filed
for Emil R. Bedard, Jeffrey Levy, John E. Maxwell, Arthur L. Money, John W.
Paxton and Guy L. Smith.





Code of
Ethics





We maintain a code of ethics that
applies to our Chief Executive Officer and Chief Financial Officer, and other
persons who perform similar functions.  A copy of our Code of Ethics
is incorporated by reference as an exhibit to the 2003 Annual Report on Form
10-K.  Our Code of Ethics is intended to be a codification of the
business and ethical principles which guide us, and to deter wrongdoing, to
promote honest and ethical conduct, to avoid conflicts of interest, and to
foster full, fair, accurate, timely and understandable disclosures, compliance
with applicable governmental laws, rules and regulations, the prompt internal
reporting of violations and accountability for adherence to this
Code.  The Code of Ethics is also available on our website at www.icmobil.com.  To
the extent permitted, we intend to post on our web site any amendments to, or
waivers from, our Code of Ethics.




Item
11.  Executive Compensation





INTELLICHECK
MOBILISA EXECUTIVE COMPENSATION





COMPENSATION DISCUSSION AND
ANALYSIS





Overview





This compensation discussion describes
the material elements of compensation awarded to, earned by, or paid to each of
Intellicheck Mobilisa’s executive officers who served as named executive
officers during the last completed fiscal year. This compensation discussion
focuses on the information contained in the following tables and related
footnotes and narrative for primarily the last completed fiscal year,
but also describes compensation actions taken before or after the last
completed fiscal year to the extent it enhances the understanding of
Intellicheck Mobilisa’s executive compensation disclosure.





The Compensation Committee currently
oversees the design and administration of Intellicheck Mobilisa’s executive
compensation program and compensation for the Board of Directors.





The principal elements of Intellicheck
Mobilisa’s executive compensation program are base salary, annual cash
incentives, long-term equity incentives in the form of stock options and other
benefits. Intellicheck Mobilisa’s other benefits consist of reimbursed business
travel and entertainment expenses, a vehicle allowance, health insurance
benefits, vacation and sick pay and a qualified 401(k) savings plan.
Intellicheck Mobilisa’s philosophy is to position the aggregate of these
elements at a level that is commensurate with Intellicheck Mobilisa’s size and
performance.





Compensation
Program Objectives and Philosophy





In
General.   The objectives of Intellicheck Mobilisa’s
compensation programs are to:





§
            attract,
      motivate and retain talented and dedicated executive
    officers;




§
            provide
      Intellicheck Mobilisa’s executive officers with both cash and equity
      incentives to further Intellicheck Mobilisa’s interests and those of
      Intellicheck Mobilisa’s stockholders;
and




43




§
            provide
      employees with long-term incentives so Intellicheck Mobilisa can retain
      them and provide stability during Intellicheck Mobilisa’s growth
      stage.





Generally, the compensation of
Intellicheck Mobilisa’s executive officers is composed of a base salary, an
annual incentive compensation award and equity awards in the form of stock
options. In setting base salaries, the Compensation Committee generally reviewed
the individual contributions of the particular executive. The annual incentive
compensation awards for 2009 and 2010 have been and will be paid in accordance
with the Executive Compensation Bonus Plan approved by the Compensation
Committee based on expected Company performance. No annual incentive
compensation was paid to executive officers in 2007 or 2008. In addition, stock
options are granted to provide the opportunity for long-term compensation based
upon the performance of Intellicheck Mobilisa’s common stock over
time.





Intellicheck Mobilisa generally intends
to qualify executive compensation for deductibility without limitation under
Section 162(m) of the Internal Revenue Code. Section 162(m) provides
that, for purposes of the regular income tax and the alternative minimum tax,
the otherwise allowable deduction for compensation paid or accrued with respect
to a covered employee of a publicly-held corporation (other than certain exempt
performance-based compensation) is limited to no more than $1.0 million per
year. The non-exempt compensation paid to any of our executive officers for
fiscal 2009 as calculated for purposes of Section 162(m) did not exceed the
$1.0 million limit.





Competitive
Marketplace for Talent.    Intellicheck Mobilisa
defines its competitive marketplace for executive talent and investment capital
to be the technology and business services industries. To date, Intellicheck
Mobilisa has not engaged in the benchmarking of executive compensation but
Intellicheck Mobilisa may choose to do so in the future.





Compensation
Process.     For each of Intellicheck Mobilisa’s
named executive officers, the Compensation Committee reviews and approves all
elements of compensation, taking into consideration recommendations from
Intellicheck Mobilisa’s CEO (for compensation other than his own), as well as
competitive marketplace guidance. Based upon its review, the Compensation
Committee approves salaries for executive officers. The Compensation Committee
sets the salary level of each executive officer on a case by case basis, taking
into account the individual’s level of responsibilities and performance. All
executive officer salaries are reviewed on an annual basis. Salary changes for
executives are based primarily on their performance in supporting the strategic
initiatives of the Chief Executive Officer, economic and competitive factors,
meeting individual goals and objectives set by the Chief Executive Officer, and
improving the operating efficiency of the company. Also, where applicable,
changes in the duties and responsibilities of each other executive officer may
be considered in deciding on changes in annual salary. For 2009, the aggregate
of the compensation paid to Intellicheck Mobilisa’s Chief Executive Officer and
other executive officers was 96% cash and 4% non-cash option
awards.





Executive Officer
Bonuses.The Board of Directors approved an Executive
Compensation Bonus Plan beginning with the third quarter of 2009 and effective
until otherwise stopped or revised.  The Compensation Committee will
review the bonus plan each year in accordance with its duties to ensure that the
plan continues to be in the best interest of the Company.  As long as
the following named executives are contributing to the overall success of the
Company, quarterly cash bonuses will be paid if there is net income under GAAP
as shown below:





Quarterly Net Income$30,000 - $499,000
                          
                          
                          $500,000 - $999,999
                          
                          
                          $1,000,000 or moreNelson Ludlow
                          
                          $
                          5,000
                          
                          
                          $
                          10,000
                          
                          
                          $
                          25,000Steven
      Williams
                          
                          
                          5,000
                          
                          
                          
                          10,000
                          
                          
                          
                          25,000Russell
      Embry
                          
                          
                          2,500
                          
                          
                          
                          5,000
                          
                          
                          
                          12,500John
      Lange
                          
                          
                          2,500
                          
                          
                          
                          5,000
                          
                          
                          
                          12,500Bonnie
      Ludlow
                          
                          
                          2,500
                          
                          
                          
                          5,000
                          
                          
                          
                          12,500Peter
      Mundy
                          
                          
                          2,500
                          
                          
                          
                          5,000
                          
                          
                          
                          12,500





For the
third quarter of 2009, the Company had net income of $109,803 and paid a total
of $20,000 in bonuses under the plan.  No bonuses were paid in the
fourth quarter of 2009.


44





Stock Option
Grants. The Compensation Committee currently administers Intellicheck
Mobilisa’s stock option and equity incentive plans for executive officers,
employees, consultants and outside directors. Under the plans, the Compensation
Committee grants options to purchase Common Stock with an exercise price of no
less than the fair market value of the Common Stock on the date of grant. The
Compensation Committee believes that providing stock options to the executive
officers, who are responsible for Intellicheck Mobilisa’s management and growth,
gives them an opportunity to own Intellicheck Mobilisa stock and better aligns
their interests with the interests of the stockholders. It also promotes
retention of the officers because of the vesting provisions of the option grants
and the potential for stock price appreciation.





For these reasons, the Compensation
Committee considers stock options as an important element of compensation when
it reviews executive officer compensation. At its discretion, the Compensation
Committee also grants options based on individual and corporate
achievements.





Normally, the Chief Executive Officer
makes a recommendation to the Committee for awards to be made to executive
officers other than the Chief Executive Officer. The Committee approves grants
made to the Chief Executive Officer and other executive officers and, in certain
cases, recommends grants for approval by the entire Board. The Compensation
Committee determines the number of shares underlying each stock option grant
based upon the executive officer’s and Intellicheck Mobilisa’s performance, the
executive officer’s role and responsibilities at Intellicheck Mobilisa and the
executive officer’s base salary. Effective November 7, 2006, the Board enacted a
new policy regarding all future stock option grants. Such policy requires that
all future stock option issuances will be granted on the third Thursday of each
month after they have been approved and that each such issuance will have a
strike price per share equal to the closing price of the Corporation’s common
stock on such day.





Chief Executive
Officer Compensation.   On March 14, 2008, the Company entered into
an employment agreement with Dr. Ludlow, pursuant to which Dr. Ludlow was
appointed the Company’s Chief Executive Officer.  Dr. Ludlow receives
a salary of $220,000 ($226,500 effective October 1, 2009) per year, was granted
options to purchase 25,000 shares of the Company’s common stock on March 20,
2008 that are immediately exercisable at a price per share equal to 110% of the
fair market value of the Company’s common stock on the date of grant, and an
annual bonus based on reasonable objectives established by the Company’s Board
of Directors.  In the first quarter of 2008, the Company recorded
$66,120 of stock-based compensation related to these options.  Dr.
Ludlow will be entitled to receive benefits in accordance with the Company’s
existing benefit policies and will be reimbursed for Company expenses in
accordance with the Company’s expense reimbursement policies.  The
employment agreement has a term of two years.  Dr. Ludlow may
terminate the agreement at any time on 60 days prior written notice to the
Company.  In addition, the Company or Dr. Ludlow may terminate the
employment agreement immediately for cause, as described in the employment
agreement.  If the Company terminates the agreement without cause, Dr.
Ludlow will be entitled to severance equal to one year of his base salary, in
addition to salary already earned.  If Dr. Ludlow terminates the
agreement for cause, Dr. Ludlow will be entitled to receive a payment equal to
$50,000, in addition to salary already earned.





The determination of the base salary to
be paid to the Chief Executive Officer was based on a number of factors
including the historical compensation of Dr. Ludlow and the relative
compensation in comparison to the other existing senior executives in the
Company.  In deciding on future changes in the base salary of the
Chief Executive Officer, the Compensation Committee will consider several
performance factors. Among these are operating and administrative efficiency and
the maintenance of an appropriately experienced management team. The
Compensation Committee also evaluates the Chief Executive Officer’s performance
in the area of finding and evaluating new business opportunities to establish
the most productive strategic direction for Intellicheck Mobilisa.





INTELLICHECK MOBILISA
SUMMARY COMPENSATION TABLE





The following table sets forth
compensation paid to executive officers whose compensation was in excess of
$100,000 for any of the three fiscal years ended December 31,
2009.  No other executive officers received total salary and bonus
compensation in excess of $100,000 during any of such fiscal
years.


45




Name and Principal Position
                                            
                                            Year
                                            
                                            Salary
                                              ($)
                                            
                                            
                                            Bonus
                                              ($)
                                            
                                            
                                            Option
                                              Awards
                                              ($) (1)
                                            
                                            
                                            All Other
                                              Compensation
                                              ($) (2)
                                            
                                            
                                            Total
                                              ($)Nelson
      Ludlow
                                            
                                            2009
                                            
                                            
                                            221,375
                                            
                                            
                                            
                                            5,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            22,423
                                            (6)
                                            
                                            
                                            248,798Chief
      Executive Officer
                                            
                                            2008
                                            
                                            
                                            169,583
                                            (3)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            66,120
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            235,7032007
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Steven
      D. Williams
                                            
                                            2009
                                            
                                            
                                            201,250
                                            
                                            
                                            
                                            5,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            23,826
                                            (7)
                                            
                                            
                                            230,076Chief
      Operating Officer
                                            
                                            2008
                                            
                                            
                                            155,417
                                            (3)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            29,750
                                            
                                            
                                            
                                            4,663
                                            (8)
                                            
                                            
                                            189,8302007
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Russell
      T. Embry
                                            
                                            2009
                                            
                                            
                                            181,125
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            15,635
                                            
                                            
                                            
                                            10,798
                                            (9)
                                            
                                            
                                            210,058Chief
      Technology Officer
                                            
                                            2008
                                            
                                            
                                            179,413
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            59,250
                                            
                                            
                                            
                                            170
                                            (10)
                                            
                                            
                                            238,8332007
                                            
                                            
                                            170,652
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            33,706
                                            
                                            
                                            
                                            2,040
                                            (10)
                                            
                                            
                                            206,398Bonnie
      Ludlow
                                            
                                            2009
                                            
                                            
                                            97,708
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,543
                                            (6)
                                            
                                            
                                            104,751Senior
      Vice President
                                            
                                            2008
                                            
                                            
                                            55,417
                                            (3)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            29,750
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            85,1672007
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Peter
      J. Mundy
                                            
                                            2009
                                            
                                            
                                            160,083
                                            
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            15,635
                                            
                                            
                                            
                                            4,863
                                            (8)
                                            
                                            
                                            183,081Chief
      Financial Officer
                                            
                                            2008
                                            
                                            
                                            156,330
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            74,971
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            231,3012007
                                            
                                            
                                            105,961
                                            (4)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            98,317
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            204,278John
      Lange
                                            
                                            2009
                                            
                                            
                                            176,093
                                            (5)
                                            
                                            
                                            2,500
                                            
                                            
                                            
                                            15,635
                                            
                                            
                                            
                                            5,283
                                            (8)
                                            
                                            
                                            199,511Former
      General Counsel
                                            
                                            2008
                                            
                                            
                                            117,979
                                            (5)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            59,250
                                            
                                            
                                            
                                            3,281
                                            (8)
                                            
                                            
                                            180,5102007
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -





(1)
            The
      amounts reported in the “Option Awards” column reflect the aggregate grant
      date fair value of awards for the years ended December 31, 2009, 2008 and
      2007 computed in accordance with FASB ASC Topic 718.  See Note
      10 of the Notes to Consolidated Financial Statements in our Annual Report
      on Form 10-K, filed in this report, for information regarding assumptions
      underlying the valuation of equity
awards.




(2)
            No
      other compensation in excess of $10,000, including perquisites, was paid
      to any of Intellicheck Mobilisa’s named executive
  officers.




(3)
            Represents
      amounts paid after March 14, 2008, the date of the Mobilisa
      acquisition.




(4)
            Mr.
      Mundy started with Intellicheck Mobilisa as of March 26,
    2007.




(5)
            Mr.
      Lange started with Intellicheck Mobilisa as of April 14, 2008 and resigned
      as of December 23, 2009.




(6)
            Represents
      pay in lieu of vacation time.




(7)
            Represents
      matching contribution under the Company’s 401(K) Plan of $6,038 and pay in
      lieu of vacation time of $17,788.




(8)
            Represents
      matching contribution under the Company’s 401(K)
  Plan.




(9)
            Represents
      matching contribution under the Company’s 401(K) Plan of $2,836 and pay in
      lieu of vacation time of $7,962.




(10)
            Amount
      represents a car allowance.  Currently, there is no one under a
      car allowance program.




46





Stock
Option and Equity Incentive Plans





The principal purpose of the Stock
Option and Equity Incentive Plans is to attract, motivate, reward and retain
selected employees, consultants and directors through the granting of
stock-based compensation awards. The Plans provide for a variety of awards,
including non-qualified stock options, incentive stock options (within the
meaning of Section 422 of the Code), stock appreciation rights, restricted
stock awards, performance-based awards and other stock-based
awards.





Intellicheck Mobilisa adopted a Stock
Option Plan (the “1998 Stock Option Plan”) covering up to 400,000 of the
Company’s Common Stock, pursuant to which officers, directors, key employees and
consultants to the Company are eligible to receive incentive stock options and
nonqualified stock options. The Compensation Committee of the Board of Directors
currently administers the 1998 Stock Option Plan and determines the terms and
conditions of options granted, including the exercise price. The 1998 Stock
Option Plan provides that all stock options will expire within ten years of the
date of grant. Incentive stock options granted under the 1998 Stock Option Plan
must be granted at an exercise price that is not less than the fair market value
per share at the date of grant and the exercise price must not be less than 110%
of the fair market value per share at the date of grant for grants to persons
owning more than 10% of the voting stock of Intellicheck Mobilisa. The 1998
Stock Option Plan also entitles non-employee directors to receive grants of
non-qualified stock options as approved by the Board of Directors.





In August 1999, Intellicheck Mobilisa
adopted the 1999 Stock Option Plan covering up to 1,000,000 of the Company’s
Common Stock, pursuant to which officers, directors, key employees and
consultants to Intellicheck Mobilisa are eligible to receive incentive stock
options and nonqualified stock options. The Compensation Committee of the Board
of Directors currently administers the 1999 Stock Option Plan and determines the
terms and conditions of options granted, including the exercise price. The 1999
Stock Option Plan provides that all stock options will expire within ten years
of the date of grant. Incentive stock options granted under the 1999 Stock
Option Plan must be granted at an exercise price that is not less than the fair
market value per share at the date of grant and the exercise price must not be
less than 110% of the fair market value per share at the date of grant for
grants to persons owning more than 10% of the voting stock of the company. The
1999 Stock Option Plan also entitles non-employee directors to receive grants of
non-qualified stock options as approved by the Board of Directors.





At the Company’s Annual Meeting held on
July 11, 2001, the stockholders approved the 2001 Stock Option Plan covering up
to 500,000 of the Company’s Common Stock, pursuant to which the officers,
directors, key employees and consultants to Intellicheck Mobilisa are eligible
to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors currently administers the 2001
Stock Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 2001 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 2001 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of the
grant and the exercise price must not be less than 110% of the fair market value
per share at the date of the grant for grants to persons owning more than 10% of
the voting stock of the company. The 2001 Stock Option Plan also entitles
non-employee directors to receive grants on non-qualified stock options as
approved by the Board of Directors.





At the Company’s Annual Meeting held on
July 10, 2003, the stockholders approved the 2003 Stock Option Plan covering up
to 500,000 of the Company’s Common Stock, pursuant to which the officers,
directors, key employees and consultants to Intellicheck Mobilisa are eligible
to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors currently administers the 2003
Stock Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 2003 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 2003 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of the
grant and the exercise price must not be less than 110% of the fair market value
per share at the date of the grant for grants to persons owning more than 10% of
the voting stock of the company. The 2003 Stock Option Plan also entitles
non-employee directors to receive grants on non-qualified stock options as
approved by the Board of Directors.




47


At the Company’s Annual Meeting held on
June 16, 2006, the stockholders approved the 2006 Equity Incentive Plan, which
amends and restates the Company’s 2004 Stock Option Plan (the “2006 Plan”)
covering up to 850,000 of the Company’s Common Stock, pursuant to which the
officers, directors, key employees and consultants to the company are eligible
to receive incentive stock options, nonqualified stock options and restricted
stock awards. The Compensation Committee of the Board of Directors currently
administers the 2006 Plan and determines the terms and conditions of options or
restricted stock awards granted, including the option exercise price. The 2006
Plan provides that all stock options or restricted stock awards will expire
within ten years of the date of grant. Incentive stock options granted under the
2006 Plan must be granted at an exercise price that is not less than the fair
market value per share at the date of the grant and the exercise price must not
be less than 110% of the fair market value per share at the date of the grant
for grants to persons owning more than 10% of the voting stock of the company.
The 2006 Plan also entitles non-employee directors to receive grants on
non-qualified stock options as approved by the Board of Directors.  At
the Company’s special meeting of Stockholders held on March 14, 2008, the
stockholders voted to amend the 2006 Plan to increase the number of shares of
Common Stock authorized to be issued by 3,000,000.





Administration. The Stock
Option and Equity Incentive Plans are currently administered by the Compensation
Committee as designated by the Board of Directors. The Compensation Committee
has the power to interpret the Stock Option and Equity Incentive Plans and to
adopt rules for the administration, interpretation and application according to
terms of the plans.





Grant of Awards; Shares Available
for Awards. Certain employees, consultants and directors are eligible to
be granted awards under the Plans. The Compensation Committee will determine who
will receive awards under the Plans, as well as the form of the awards, the
number of shares underlying the awards, and the terms and conditions of the
awards consistent with the terms of the Plans.





A total of 1,653,101 shares of
Intellicheck Mobilisa’s Common Stock are available for issuance or delivery
under the existing Stock Option and Equity Incentive Plans. The number of shares
of the Company’s Common Stock issued or reserved pursuant to the Plans will be
adjusted at the discretion of the Board of Directors or the Compensation
Committee as a result of stock splits, stock dividends and similar changes in
the Company’s Common Stock.




Stock Options. The Stock
Option and Equity Incentive Plans permit the Compensation Committee to grant
participants incentive stock options, which qualify for special tax treatment in
the United States, as well as non-qualified stock options. The Compensation
Committee will establish the duration of each option at the time it is granted,
with maximum ten-year duration for incentive stock options, and may also
establish vesting and performance requirements that must be met prior to the
exercise of options. Stock option grants (other than incentive stock option
grants) also may have exercise prices that are less than, equal to or greater
than the fair market value of the Company’s Common Stock on the date of grant.
Incentive stock options must have an exercise price that is at least equal to
the fair market value of the Company’s Common Stock on the date of grant. Stock
option grants may include provisions that permit the option holder to exercise
all or part of the holder’s vested options, or to satisfy withholding tax
liabilities, by tendering shares of the Company’s Common Stock already owned by
the option holder for at least six months (or another period consistent with the
applicable accounting rules) with a fair market value equal to the exercise
price.





Other Equity-Based Awards. In
addition to stock options, the Compensation Committee may also grant certain
employees, consultants and directors shares of restricted stock, with terms and
conditions as the Compensation Committee may, pursuant to the terms of the 2006
Plan, establish. The 2006 Plan does not allow awards to be made under terms and
conditions which would cause such awards to be treated as deferred compensation
subject to the rules of Section 409A of the Code.




Change-in-Control Provisions.
In connection with the grant of an award, the Compensation Committee may provide
that, in the event of a change in control, any outstanding awards that are
unexercisable or otherwise unvested will become fully vested and immediately
exercisable.





Amendment and Termination.
The Compensation Committee may adopt, amend and rescind rules relating to the
administration of the Plans, and amend, suspend or terminate the Plans, but no
amendment will be made that adversely affects in a material manner any rights of
the holder of any award without the holder’s consent, other than amendments that
are necessary to permit the granting of awards in compliance with applicable
laws. Intellicheck Mobilisa attempted to structure the Plans so that
remuneration attributable to stock options and other awards will not be subject
to a deduction limitation contained in Section 162(m) of the
Code.




48





GRANTS OF PLAN-BASED AWARDS
TABLE





The following table summarizes options
granted during the year ended December 31, 2009 to the named executive
officers:


Name
                        
                        Grant
                          Date
                        
                        Approval
                          Date
                        
                        Number of
                          Securities
                          Underlying
                          Options
                          Granted
                        
                        
                        Exercise
                          or Base
                          Price of
                          Option
                          Awards
                          ($/Sh)
                        
                        
                        Fair Value
                          at Grant
                          Date ($) (1)
                        
                        Expiration
                          DateRussell
      T. Embry
                        
                        9/25/09
                        
                        9/23/09
                        
                        
                        20,000
                        
                        
                        
                        1.57
                        
                        
                        
                        15,635
                        
                        9/25/14John
      Lange
                        
                        9/25/09
                        
                        9/23/09
                        
                        
                        20,000
                        
                        
                        
                        1.57
                        
                        
                        
                        15,635
                        
                        9/25/14Peter
      J. Mundy
                        
                        9/25/09
                        
                        9/23/09
                        
                        
                        20,000
                        
                        
                        
                        1.57
                        
                        
                        
                        15,635
                        
                        9/25/14




(1)
            
            The
      grant date fair value of each equity award has been computed in accordance
      with ASC 718.  Options vest at a rate of 25% per year on the
      anniversary of the date of grant.




The
following table summarizes unexercised options as of year-end December 31, 2009
for the named executive officers:




OUTSTANDING EQUITY AWARDS AT
FISCAL YEAR END TABLE




No. of Securities
                                Underlying Unexercised
                                Options / Warrants
                              
                              
                              Option
                                Exercise
                              
                              Option
                                ExpirationName
                              
                              Exercisable
                              
                              
                              Unexercisable
                              
                              
                              Price ($)
                              
                              DateNelson
      Ludlow
                              
                              
                              25,000
                              
                              
                              
                              -
                              
                              
                              
                              3.63
                              
                              3/20/18Steven
      D. Williams
                              
                              
                              218,200
                              
                              
                              
                              -
                              
                              
                              
                              0.46
                              
                              3/14/1316,365
                              
                              
                              
                              -
                              
                              
                              
                              0.92
                              
                              3/14/136,250
                              
                              
                              
                              18,750
                              (1)
                              
                              
                              2.36
                              
                              7/17/13Russell
      T. Embry
                              
                              
                              5,000
                              
                              
                              
                              -
                              
                              
                              
                              4.37
                              
                              6/03/105,000
                              
                              
                              
                              -
                              
                              
                              
                              3.18
                              
                              11/17/105,000
                              
                              
                              
                              -
                              
                              
                              
                              6.65
                              
                              5/17/125,000
                              
                              
                              
                              -
                              
                              
                              
                              6.65
                              
                              11/17/126,250
                              
                              
                              
                              18,750
                              (1)
                              
                              
                              2.36
                              
                              7/17/136,250
                              
                              
                              
                              18,750
                              (2)
                              
                              
                              2.35
                              
                              8/21/13-
                              
                              
                              
                              20,000
                              (3)
                              
                              
                              1.57
                              
                              9/25/14John
      Lange
                              
                              
                              12,500
                              
                              
                              
                              12,500
                              (1)
                              
                              
                              2.36
                              
                              7/17/1310,417
                              
                              
                              
                              14,583
                              (2)
                              
                              
                              2.35
                              
                              8/21/13-
                              
                              
                              
                              20,000
                              (3)
                              
                              
                              1.57
                              
                              3/23/10Bonnie
      Ludlow
                              
                              
                              6,250
                              
                              
                              
                              18,750
                              (1)
                              
                              
                              2.60
                              
                              7/17/13Peter
      J. Mundy
                              
                              
                              12,500
                              
                              
                              
                              -
                              
                              
                              
                              7.00
                              
                              4/19/126,250
                              
                              
                              
                              -
                              
                              
                              
                              7.00
                              
                              10/19/126,250
                              
                              
                              
                              -
                              
                              
                              
                              7.00
                              
                              4/19/1310,000
                              
                              
                              
                              -
                              
                              
                              
                              3.07
                              
                              2/21/136,250
                              
                              
                              
                              18,750
                              (1)
                              
                              
                              2.36
                              
                              7/17/136,250
                              
                              
                              
                              18,750
                              (2)
                              
                              
                              2.35
                              
                              8/21/13-
                              
                              
                              
                              20,000
                              (3)
                              
                              
                              1.57
                              
                              9/25/14


49




(1)
            These
      shares vest 25% per year on the anniversary of the date of grant beginning
      July 2009.


(2)
            These
      shares vest 25% per year on the anniversary of the date of grant beginning
      August 2009.


(3)
            These
      shares vest 25% per year on the anniversary of the date of grant beginning
      September 2010.





OPTION EXERCISES AND STOCK
VESTED TABLE





None of
our officers named in the Summary Compensation Table exercised stock options or
received shares from vested or unrestricted awards during fiscal year
2009.





Pension
Benefits





The company does not sponsor any
qualified or non-qualified defined benefit plans.





Nonqualified
Deferred Compensation




Intellicheck Mobilisa does not maintain
any non-qualified defined contribution or deferred compensation plans. The
Compensation Committee, which is comprised solely of “outside directors” as
defined for purposes of Section 162(m) of the Code, may elect to provide
Intellicheck Mobilisa’s officers and other employees with non-qualified defined
contribution or deferred compensation benefits if the Compensation Committee
determines that doing so is in the company’s best interests. Intellicheck
Mobilisa sponsors a tax qualified defined contribution 401(k) plan in which Mr.
Williams, Mr. Embry, and Mr. Mundy and Mr. Lange participate. Mobilisa made a
matching contribution to the plan equal to 50% of the first 6% an employee
contributes into the plan.





Compensation
of Directors




The table below sets forth certain
information concerning compensation of Intellicheck Mobilisa’s directors who
served in 2009.





Name and Principal Position
                  
                  Fees Paid
                    in Cash
                    ($)
                  
                  
                  Option
                    Awards
                    ($)(1)
                  
                  
                  Stock
                    Awards
                    ($)(1)
                  
                  
                  All Other
                    Compensation
                    ($) (8)
                  
                  
                  Total
                    ($)John
      W. Paxton, Chairman
                  
                  
                  93,015
                  
                  
                  
                  6,894
                  (2)
                  
                  
                  20,000
                  (2)
                  
                  
                  -
                  
                  
                  
                  119,909General
      Emil Bedard, Director
                  
                  
                  18,299
                  
                  
                  
                  -
                  
                  
                  
                  11,001
                  (3)
                  
                  
                  -
                  
                  
                  
                  29,300Bonnie
      Ludlow, Director
                  
                  
                  3,516
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,516Nelson
      Ludlow, Director
                  
                  
                  3,516
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,516Guy
      L. Smith, Director
                  
                  
                  15,049
                  
                  
                  
                  9,500
                  (4)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  24,549Jeffrey
      Levy, Former Director
                  
                  
                  7,500
                  
                  
                  
                  -
                  
                  
                  
                  11,001
                  (5)
                  
                  
                  -
                  
                  
                  
                  18,501John
      E. Maxwell, Former Director
                  
                  
                  5,750
                  
                  
                  
                  10,000
                  (6)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,750Arthur
      L. Money, Former Director
                  
                  
                  5,000
                  
                  
                  
                  -
                  
                  
                  
                  12,500
                  (7)
                  
                  
                  -
                  
                  
                  
                  17,500





(1)
            The
      amounts reported in the “Option Awards” and “Stock Awards” columns reflect
      the aggregate grant date fair value of awards computed in accordance with
      FASB ASC Topic 718.  See Note 10 of the Notes to Consolidated
      Financial Statements in our Annual Report on Form 10-K, filed in this
      report, for information regarding assumptions underlying the valuation of
      equity awards.(2)
            Fair
      value of 7,500 options granted May 21, 2009 at an exercise price of $1.70
      per share.  These options vested ratably over a six month
      period.  Fair value of 13,072 restricted shares granted on
      August 27, 2009 at market price of $1.53 per share.  These
      shares vested ratably over a three month period.  As of December
      31, 2009, Mr. Paxton had aggregate options to purchase 314,800 shares of
      common stock and holds 39,671 shares of restricted common
      stock.(3)
            Fair
      value of 7,190 restricted shares granted on August 27, 2009 at market
      price of $1.53 per share.  These shares vested ratably over a
      three month period.  As of December 31, 2009, General Bedard had
      aggregate options to purchase 278,400 shares of common stock and holds
      32,094 shares of restricted common
stock.




50





(4)
            Fair
      value of 12,002 options granted on August 27, 2009 at an exercise price of
      $1.53 per share.  These options vested ratably over a three
      month period.  As of December 31, 2009, Mr. Smith had aggregate
      outstanding options to purchase 141,667 shares of common
      stock.(5)
            Fair
      value of 7,190 restricted shares granted August 27, 2009 at market price
      of $1.53 per share.  These shares vested ratably over a three
      month period.  As of December 31, 2009, Mr. Levy had aggregate
      outstanding options to purchase 90,350 shares of common stock and holds
      53,474 shares of restricted common stock.  Mr. Levy resigned
      from the Board of Directors as of October 27, 2009.(6)
            Fair
      value of 12,634 options granted on August 27, 2009 at an exercise price of
      $1.53 per share.  These options vested ratably over a three
      month period.  As of December 31, 2009, Mr. Maxwell had
      aggregate outstanding options to purchase 108,417 shares of Common Stock
      and holds 8,254 shares of restricted common stock.  Mr. Maxwell
      resigned from the Board of Directors as of October 27, 2009.(7)
            Fair
      value of 8,170 restricted shares granted August 27, 2009 at market price
      of $1.53 per share.  These shares vested ratably over a three
      month period.  As of December 31, 2009, Mr. Money had aggregate
      outstanding options to purchase 206,683 shares of Common Stock and holds
      11,345 shares of restricted common stock.  Mr. Money resigned
      from the Board of Directors as of October 27, 2009.(8)
            No
      other compensation, including perquisites in excess of $10,000, was paid
      to any of the directors.





During 2008 and 2009, non-employee
directors received cash fees of $3,000 for in-person attendance at board
meetings and $500 for attendance at such meetings telephonically. Each
non-employee director also received a fee of $250 for participation, either
in-person or telephonically, at each separately convened committee meeting not
held in conjunction with a board meeting.  Prior to October 27, 2009,
for the annual retainer, non-employee directors were granted the choice of
restricted shares of Intellicheck Mobilisa’s Common Stock in lieu of stock
options or a number of stock options equal to that of the stock grant at the
director’s option. In addition, the Board further recommended that non-employee
directors, who are members of a committee, should be granted the choice of
restricted shares of Intellicheck Mobilisa’s Common Stock in lieu of stock
options or a number of stock options equal to that of the stock grant at the
director’s option. The number of restricted shares as proposed would be
determined by the Board at each annual board meeting. This plan was included in
the Intellicheck Mobilisa’s proxy statement for a vote by Intellicheck’
Mobilisa’s stockholders at the 2006 Annual Meeting of Stockholders.





As of October 27, 2009, the Board
changed its compensation structure.  All directors will receive annual
cash retainers as follows: the Chairman of the Board $80,000; other non-employee
directors $60,000; and employee directors $20,000.  The amounts are
payable quarterly.




Item 12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





BENEFICIAL
OWNERSHIP OF SECURITIES





The following table sets forth
information with respect to the beneficial ownership of the Company’s common
stock as of March 11, 2010, after the consummation of the acquisition of
Mobilisa, by each person who is known by Intellicheck Mobilisa to beneficially
own more than 5% of Intellicheck Mobilisa’s common stock, each officer, each
director and all officers and directors as a group.





Shares of
common stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.





The
applicable percentage of ownership is based on 26,289,580 shares
outstanding.


51




Name
                    
                    Shares
                      Beneficially
                      Owned
                    
                    
                    PercentDr.
      Nelson Ludlow (1)
                    
                    
                    4,216,726
                    
                    
                    
                    16.0Bonnie
      Ludlow (2)
                    
                    
                    8,024,434
                    
                    
                    
                    30.5John
      W. Paxton (3)
                    
                    
                    375,607
                    
                    
                    
                    1.4L.
      Gen. Emil R. Bedard (4)
                    
                    
                    468,494
                    
                    
                    
                    1.8Russell
      T. Embry (5)
                    
                    
                    37,500
                    
                    
                    
                    *Peter
      J. Mundy (6)
                    
                    
                    54,300
                    
                    
                    
                    *Guy
      L. Smith (7)
                    
                    
                    157,124
                    
                    
                    
                    *Steven
      D. Williams (8)
                    
                    
                    244,415
                    
                    
                    
                    *All
      Executive Officers & Directors as a group (8 persons)
    (9)
                    
                    
                    13,578,600
                    
                    
                    
                    49.6




*
Indicates beneficial ownership of less than one percent of the total outstanding
Common Stock.





(1)
            Includes
      25,000 shares issuable upon exercise of stock options exercisable within
      60 days.(2)
            Includes
      6,250 shares issuable upon exercise of stock options exercisable within 60
      days.(3)
            Includes
      314,800 shares issuable upon exercise of stock options exercisable and
      restricted stock vesting within 60 days; excludes the right to purchase
      218,200 shares pursuant to a Right to Call Agreement with Bonnie Ludlow, a
      director of the Company, entered into in April 2007.(4)
            Includes
      278,400 shares issuable upon exercise of stock options exercisable and
      restricted stock vesting within 60 days.(5)
            Includes
      37,500 shares issuable upon exercise of stock options exercisable within
      60 days.(6)
            Includes
      47,500 shares issuable upon exercise of stock options exercisable within
      60 days.(7)
            Includes
      141,667 shares issuable upon exercise of stock options exercisable within
      60 days.(8)
            Includes
      240,815 shares issuable upon exercise of stock options exercisable within
      60 days; excludes the right to purchase 310,935 shares pursuant to a Right
      to Call Agreement with Bonnie Ludlow, a director of the Company, entered
      into in April 2007.(9)
            Includes
      1,091,933 shares issuable upon exercise of stock options exercisable
      within 60 days.





Equity Compensation Plan
Information





The
followingtable sets forth information
regarding Intellicheck Mobilisa’s Equity
Compensation Plans as of December 31, 2009:




PlanCategory
                    
                    Numberof
                      Securities
                      tobeissuedupon
                      exerciseof
                      outstanding
                      options,warrants
                      andrights
                    
                    
                    Weightedaverage
                      exercisepriceof
                      outstanding
                      options,warrants
                      andrights
                    
                    
                    Numberofsecurities
                      remainingavailableforfuture
                      issuanceunderequity
                      compensationplans
                      (excludingsecuritiesreflected
                      incolumna)(a)
                    
                    
                    (b)
                    
                    
                    (c)Equity
      compensation plans approved by security holders
                    
                    
                    2,607,117
                    
                    
                    $
                    1.68
                    
                    
                    
                    1,653,101Equity
      compensation plans not approved by security holders
                    
                    
                    25,000
                    
                    
                    $
                    5.10
                    
                    
                    NoneTotal
                    
                    
                    2,632,117
                    
                    
                    $
                    1.72
                    
                    
                    
                    1,653,101


52


From time
to time the Board of Directors of the Company approves the grant of non-plan
options to officers and employees of, or consultants to, the Company, which are
included in this table.  The shares of common stock listed under equity
compensation plans not approved by stockholders in the above table consist of
shares of common stock issuable pursuant to such options.  The non-plan
options currently outstanding have been granted to one
consultant.




Item
13. Certain Relationships,
Related Transactions and Director Independence





Intellicheck
Mobilisa





Since the beginning of 2007,
Intellicheck Mobilisa did not have any transactions with related persons as
described under Item 404(a) of Regulation S-K. The Governance Committee reviews
transactions with firms associated with directors and nominees for director.
Intellicheck Mobilisa’s management also monitors such transactions on an ongoing
basis. Executive officers and directors are governed by Intellicheck Mobilisa’s
Code of Business Conduct and Ethics which provides that waivers may only be
granted by the Board of Directors and must be promptly disclosed to
stockholders. No such waivers were granted nor applied for in 2009. Intellicheck
Mobilisa’s Corporate Governance Guidelines require that all directors recuse
themselves from any discussion or decision affecting their personal, business or
professional interests.




Mobilisa




The Company entered into a 10-year
lease for the office space ending in 2017.Mobilisa leases office space from
Eagle Coast, LLC, an entity that is wholly-owned by Dr. and Mrs. Ludlow, our
Chief Executive Officer and director and one of our directors, respectively. For
the year ended December 31, 2009 total rent payments for this office space were
$74,976.  For the period beginning March 15, 2008 through December 31,
2008, total rental payments for this office space were $59,357.  In
2008, Mobilisa entered into a 10-year lease for the office space ending in
2017.





The majority owners, who are members of
management, have guaranteed all Mobilisa credit lines.





The Board
of Directors has determined that Messrs.  Bedard, Paxton and Smith are
each independent directors as
defined in Section 121(A) of the American Stock Exchange's
listing standards.




The board
of directors has  established a compensation  committee which is
currently comprised of Mr. Smith, chairperson, Mr. Bedard and Mr. Paxton, each
of whom  is  independent  as  defined  in 
Section  121(A)  of the  American  Stock Exchange's listing
standards.  The compensation committee reviews and recommends to the board
the compensation for all officers and directors of our company and reviews
general policy matters relating to the compensation and benefits of all
employees. The compensation committee also administers the stock option
plans.





The 
board  of  directors  has  established  a 
corporate  governance  and nominating committee, which is comprised of
Mr. Bedard, chairperson, Mr. Paxton and Mr.  Smith, each of whom
is independent as defined in Section 121(A) of the American
Stock Exchange's listing standards.  The
corporate governance and nominating committee reviews our internal policies
and procedures and by-laws.  With respect to nominating
director candidates, this committee identifies and evaluates  
potential   director   candidates and recommends  
candidates for appointment or election to the Board.





The 
board  of  directors  has a  separately 
designated  audit  committee established in accordance  with
Section  3(a)(58)(A) of the Securities  Exchange Act of 1934, which is
currently comprised of Mr. Paxton,  chairperson,  Mr. Bedard and Mr.
Smith.  The members of the Audit Committee are independent as defined in
Section 121(A) of the American Stock Exchange's listing standards. 
The audit committee  recommends to the board of directors the annual 
engagement of a firm of independent  accountants  and reviews with
the  independent  accountants  the scope  and 
results  of  audits,  our  internal  accounting 
controls  and audit practices  and  professional  
services   rendered  to  us  by  our 
independent accountants.


53




Item
14. Principal Accountant Fees
and Services





For the
fiscal years ended December 31, 2009 and December 31, 2008, Intellicheck
Mobilisa’s principal independent auditor was Amper, Politziner & Mattia,
LLP, the services of which were provided in the following categories and
amount:





Audit
Fees





The
aggregate fees billed by Amper, Politziner and Mattia, LLP for professional
services rendered for the audit of Intellicheck Mobilisa’s annual financial
statements for the fiscal years ended December 31, 2009 and 2008 and for the
reviews of the financial statements included in the company’s Quarterly Reports
on Form 10-Q for such fiscal years amounted to $173,000 and $200,500,
respectively.





Audit Related
Fees





Other
than the fees described under the caption “Audit Fees” above, Amper, Politziner
and Mattia, LLP did not bill any fees for services rendered to Intellicheck
Mobilisa during fiscal year 2009 or 2008 for assurance and related services in
connection with the audit or review of the company’s financial
statements.





Tax Fees





Amper,
Politziner and Mattia, LLP billed Intellicheck Mobilisa for tax related services
for the fiscal years ended December 31, 2009 and 2008 amounts totaling $14,489
and $8,428, respectively.





All Other
Fees





There
were no other fees paid in 2009.  The aggregate fees billed by Amper,
Politziner and Mattia, LLP for professional services rendered in connection with
the Company’s Proxy and Registration Statements on Forms S-3 and S-8 to register
certain shares relating to the Mobilisa merger and certain shares under the 2006
Stock Option Plan amounted to $8,357 in 2008 .





Pre-approval of
Services





The Audit
Committee pre-approves all services, including both audit and non-audit
services, provided by Intellicheck Mobilisa’s independent registered public
accounting firm. For audit services, each year the independent auditor provides
the Audit Committee with an engagement letter outlining the scope of proposed
audit services to be performed during the year, which must be formally accepted
by the Committee before the audit commences. The independent auditor also
submits an audit services fee proposal, which also must be approved by the
Committee before the audit commences.




PART IV




Item
15. Exhibits andFinancial Statement Schedules




(a)(1)
            Financial
  Statements




Consolidated Balance Sheets as of December 31, 2009 and
      2008Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2007,
      2008 and 2009Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007





(2)
            Schedule II–Valuation
      and Qualifying Accounts


54





(b)
            Exhibits





Exhibit No.
                                                                      
                                                                      Description3.1
                                                                      
                                                                      Certificate of Incorporation of the Company
      (1)3.2
                                                                      
                                                                      Amendment to the Certificate of Incorporation of
      the Company (13)3.3
                                                                      
                                                                      By-laws of the Company (1)3.4
                                                                      
                                                                      Amendment to the By-laws of the Company
      (9)3.5
                                                                      
                                                                      Certificate of Designation of Preferred Stock of
      Intelli-Check, Inc. (6)4.1
                                                                      
                                                                      Specimen Stock Certificate
    **4.2
                                                                      
                                                                      Warrant to JMP Securities, LLC
      (8)10.1
                                                                      
                                                                      Agreement of Lease between the Company and
      Industrial and Research Associates,
      dated as of  October 15, 2000 (5)10.2
                                                                      
                                                                      Agreement of Lease between Mobilisa and Eagle
      Coast, LLC, dated as of August 1, 2007. **10.3
                                                                      
                                                                      Agreement of Lease between the Company and King I,
      LLC, dated as of February 1, 2010.**10.4
                                                                      
                                                                      1998 Stock Option Plan (1)
  *10.5
                                                                      
                                                                      1999 Stock Option Plan (1)
  *10.6
                                                                      
                                                                      2001 Stock Option Plan (2)
  *10.7
                                                                      
                                                                      2003 Stock Option Plan (3)
  *10.8
                                                                      
                                                                      2006 Equity Incentive Plan (4)
      *10.9
                                                                      
                                                                      Memorandum of Understanding between AAMVAnet, Inc.
      and Intelli-Check, Inc. effective
      January 29, 2002 (5)10.10
                                                                      
                                                                      Merger
      Agreement dated November 20, 2007 by and among Intelli-Check Inc.,
      Intelli-Check Merger Sub, Inc., Mobilisa, Inc., and the Principal
      Shareholders of Mobilisa, Inc. (10)10.11
                                                                      
                                                                      Employment
      Agreement between Intelli-Check – Mobilisa, Inc and Nelson Ludlow dated
      March 15, 2008 (11)*10.12
                                                                      
                                                                      Agreement and Plan of Merger dated August 31, 2009
      by and among Intelli-Check–Mobilisa
      Inc., PA Acquisition Corporation, Positive Access Corporation, and the
      Principal Shareholders of Positive
      Access Corporation (12)14.1
                                                                      
                                                                      Code of Business Conduct and Ethics
      (7)21
                                                                      
                                                                      List of Subsidiaries **23.1
                                                                      
                                                                      Consent of Amper, Politziner and Mattia, LLP
      **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
                                                                      
                                                                      Certification of Chief Executive Officer and Chief
      Financial pursuant to Section 906 of The Sarbanes-Oxley Act of
      2002
  **





*
              Denotes
      a management contract or compensatory plan, contract or
      arrangement.


**
              Filed
      herewith.


(1)
              Incorporated
      by reference to Registration Statement on Form SB-2 (File No. 333-87797)filedSeptember
      24,
1999.


(2)
              Incorporated
      by reference to Registrant’s
      Proxy Statement on Schedule 14A filed May 31,
      2001.


(3)
              Incorporated
      by reference to Registrant’s
      Proxy Statement on Schedule 14A filed June 13,
      2003.


(4)
              Incorporated
      by reference toRegistrant’s
      Proxy Statement on Schedule 14A filed May 19,
      2006.


(5)
              Incorporated
      by reference to Registrant’s
      Annual Report on Form 10-K filed March 29,
    2001.


(6)
              Incorporated
      by reference to Registrant’s
      Annual Report on Form 10-K filed March 31,
    2003.


(7)
              Incorporated
      by reference to Registrant’s
      Annual Report on Form 10-K filed March 30,
    2004.


(8)
              Incorporated
      by reference to Registrant’s
      Annual Report on Form 10-K filed March 30,
    2006.


(9)
              Incorporated
      by reference to Registrant’s Current Report on Form 8-K filed June 15,
      2007.


(10)
              Incorporated
      by reference to Registrant’s Current Report on Form 8-K filed November 21,
      2007.


(11)
              Incorporated
      by reference to Registrant’s Current Report on Form 8-K filed March 20,
      2008.


(12)
              Incorporated
      by reference to Registrant’s Current Report on Form 8-K filed September 1,
      2009.


(13)
              Incorporated
      by reference to Registrant’s Current Report on Form 8-K filed October 28,
      2009.


55




SIGNATURES




Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant had duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Date:
                  March
      11, 2010
                  INTELLICHECK
      MOBILISA, INC.By:/s/  Nelson LudlowDr.
      Nelson LudlowChief
      Executive Officer and Director




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
capacities and on the dates indicated.





INTELLICHECK
      MOBILISA, INC.Date:
                                        March
      11, 2010
                                        By:/s/  Nelson LudlowDr.
      Nelson LudlowChief
      Executive Officer and Director(Principal
      Executive Officer)Date:
                                        March
      11, 2010
                                        By: /s/  Peter J.
      MundyPeter
      J. MundyChief
      Financial Officer(Principal
      Financial and Accounting Officer)Date:
                                        March
      11, 2010
                                        By: /s/  John W.
      PaxtonJohn
      W. Paxton, Chairman and DirectorDate:
                                        March
      11, 2010
                                        By: /s/  Emil R.
      BedardLt.
      Gen. Emil R. Bedard, DirectorDate:
                                        March
      11, 2010
                                        By: /s/  Bonnie
      LudlowBonnie
      Ludlow, DirectorDate:
                                        March
      11, 2010
                                        By: /s/  Guy L.
    SmithGuy
      L. Smith, Director





EXHIBIT INDEX





Exhibit No.
                                  
                                  Description4.1
                                  
                                  Specimen Stock
  Certificate10.2
                                  
                                  Agreement of Lease between Mobilisa and Eagle
      Coast, LLC, dated as of August 1, 200710.3
                                  
                                  Agreement of Lease between the Company and King I,
      LLC, dated as of February 1,
      201021
                                  
                                  List of Subsidiaries23.1
                                  
                                  Consent of Amper, Politziner and Mattia,
      LLP31.1
                                  
                                  Certification of Chief Executive Officer pursuant
      to Section 302 of The Sarbanes-Oxley Act of 200231.2
                                  
                                  Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley
      Act of 200232
                                  
                                  Certification of Chief Executive Officer and Chief
      Financial pursuant to Section 906 of The Sarbanes-Oxley Act of
      2002





FINANCIAL
STATEMENTS
 
 INDEX
 
 PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  
                  F-1FINANCIAL
      STATEMENTS:Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                  
                  F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008
      and 2007
                  
                  F-3Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2007,
      2008 and 2009
                  
                  F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008
      and 2007
                  
                  F-5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  F-6 – F-24Schedule
      II – Valuation and Qualifying Accounts
                  
                  F-25
  
 
 Report of Independent
Registered Public Accounting Firm
 
 To the
Board of Directors and Stockholders of
 Intellicheck
Mobilisa, Inc.
 
 We have
audited the accompanying balance sheets of Intellicheck Mobilisa, Inc. (the
“Company”) as of December 31, 2009 and 2008, and the related statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2009.  These financial statements are
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Intellicheck Mobilisa, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United States of
America.
 
 We have
also audited the financial statement schedule listed in the index at item
15(a)(2), schedule II for each of the three years ended December 31,
2009.  In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
  /s/ Amper, Politziner & Mattia,
      LLP New York,
New York
 March 11,
2010
  F-1
  INTELLICHECK
MOBILISA, INC.
 
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2009 and 2008
 
 2009
                          
                          
                          2008(Revised)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                          
                          $
                          3,008,472
                          
                          
                          $
                          3,400,948Accounts
      receivable, net of allowance of $7,486 and $22,038for
      2009 and 2008, respectively
                          
                          
                          2,213,586
                          
                          
                          
                          1,533,434Inventory
                          
                          
                          43,706
                          
                          
                          
                          39,350Other
      current assets
                          
                          
                          257,531
                          
                          
                          
                          230,901Total
      current assets
                          
                          
                          5,523,295
                          
                          
                          
                          5,204,633PROPERTY
      AND EQUIPMENT, net
                          
                          
                          482,077
                          
                          
                          
                          464,790GOODWILL
                          
                          
                          12,258,661
                          
                          
                          
                          11,736,660INTANGIBLE
      ASSETS, net
                          
                          
                          7,445,234
                          
                          
                          
                          6,877,752OTHER  ASSETS
                          
                          
                          48,905
                          
                          
                          
                          51,395Total
      assets
                          
                          $
                          25,758,172
                          
                          
                          $
                          24,335,230LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                          
                          $
                          263,901
                          
                          
                          $
                          144,062Accrued
      expenses
                          
                          
                          704,659
                          
                          
                          
                          616,999Deferred
      revenue, current portion
                          
                          
                          1,911,022
                          
                          
                          
                          1,900,528Notes
      payable, current portion
                          
                          
                          386,667
                          
                          
                          
                          -Income
      taxes payable
                          
                          
                          -
                          
                          
                          
                          168,732Total
      current liabilities
                          
                          
                          3,266,249
                          
                          
                          
                          2,830,321OTHER
      LIABILITIESDeferred
      revenues, long-term portion
                          
                          
                          729,449
                          
                          
                          
                          724,234Notes
      payable, long-term portion
                          
                          
                          183,333
                          
                          
                          
                          -Total
      liabilities
                          
                          
                          4,179,031
                          
                          
                          
                          3,554,555COMMITMENTS
      AND CONTINGENCIES (Note 11)STOCKHOLDERS’
      EQUITY:Common
      stock – $.001 par value; 40,000,000 shares authorized; 26,224,560
      and25,335,175
      shares issued and outstanding as of 2009 and 2008,
      respectively
                          
                          
                          26,224
                          
                          
                          
                          25,335Additional
      paid-in capital
                          
                          
                          99,660,057
                          
                          
                          
                          98,336,965Accumulated
      deficit
                          
                          
                          (78,107,140
                          )
                          
                          
                          (77,581,625
                          )Total
      stockholders’ equity
                          
                          
                          21,579,141
                          
                          
                          
                          20,780,675Total
      liabilities and stockholders’ equity
                          
                          $
                          25,758,172
                          
                          
                          $
                          24,335,230
 
 The
accompanying notes are an integral part of these statements.
  F-2
  INTELLICHECK
MOBILISA, INC.
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
 
 2009
                              
                              
                              2008
                              
                              
                              2007(Revised)REVENUES
                              
                              $
                              12,414,579
                              
                              
                              $
                              10,016,806
                              
                              
                              $
                              3,511,908COST
      OF REVENUES
                              
                              
                              (4,329,349
                              )
                              
                              
                              (3,727,390
                              )
                              
                              
                              (1,390,941
                              )Gross
      profit
                              
                              
                              8,085,230
                              
                              
                              
                              6,289,416
                              
                              
                              
                              2,120,967OPERATING
      EXPENSESSelling
                              
                              
                              2,018,366
                              
                              
                              
                              1,574,355
                              
                              
                              
                              1,534,660General
      and administrative
                              
                              
                              3,873,348
                              
                              
                              
                              3,261,315
                              
                              
                              
                              2,333,154Research
      and development
                              
                              
                              2,710,078
                              
                              
                              
                              2,330,130
                              
                              
                              
                              1,088,004Goodwill
      and intangible assets impairment
                              
                              
                              -
                              
                              
                              
                              32,092,630
                              
                              
                              
                              -Total
      operating expenses
                              
                              
                              8,601,792
                              
                              
                              
                              39,258,430
                              
                              
                              
                              4,955,818Loss
      from operations
                              
                              
                              (516,562
                              )
                              
                              
                              (32,969,014
                              )
                              
                              
                              (2,834,851
                              )OTHER
      INCOME (EXPENSE)Interest
      income
                              
                              
                              2,443
                              
                              
                              
                              60,589
                              
                              
                              
                              161,633Interest
      expense
                              
                              
                              (10,000
                              )
                              
                              
                              -
                              
                              
                              
                              -Other
      expense
                              
                              
                              (1,396
                              )
                              
                              
                              (12,130
                              )
                              
                              
                              -(8,953
                              )
                              
                              
                              48,459
                              
                              
                              
                              161,633Net
      loss
                              
                              $
                              (525,515
                              )
                              
                              $
                              (32,920,555
                              )
                              
                              $
                              (2,673,218
                              )PER
      SHARE INFORMATION:Net
      loss per common share -Basic
      and diluted
                              
                              $
                              (0.02
                              )
                              
                              $
                              (1.47
                              )
                              
                              $
                              (0.22
                              )Weighted
      average common shares used in computingper
      share amounts -Basic
      and diluted
                              
                              
                              25,673,015
                              
                              
                              
                              22,453,635
                              
                              
                              
                              12,262,958
 
 The
accompanying notes are an integral part of these statements.
  F-3
  INTELLICHECK
MOBILISA, INC.
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
 
 AdditionalCommon
      Stock
                            
                            
                            Paid-in
                            
                            
                            AccumulatedShares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Deficit
                            
                            
                            Total(Revised)
                            
                            
                            (Revised)BALANCE,
      December 31, 2006
                            
                            
                            12,202,778
                            
                            
                            $
                            12,203
                            
                            
                            $
                            45,912,734
                            
                            
                            $
                            (41,987,852
                            )
                            
                            $
                            3,937,085Stock
      based compensation expense (employees and directors)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            397,927
                            
                            
                            
                            -
                            
                            
                            
                            397,927Exercise
      of stock options
                            
                            
                            42,950
                            
                            
                            
                            43
                            
                            
                            
                            145,916
                            
                            
                            
                            -
                            
                            
                            
                            145,959Exercise
      of warrants
                            
                            
                            16,000
                            
                            
                            
                            16
                            
                            
                            
                            86,384
                            
                            
                            
                            -
                            
                            
                            
                            86,400Issuance
      of stock as directors’ compensation
                            
                            
                            20,000
                            
                            
                            
                            20
                            
                            
                            
                            125,980
                            
                            
                            
                            -
                            
                            
                            
                            126,000Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (2,673,218
                            )
                            
                            
                            (2,673,218
                            )BALANCE,
      December 31, 2007
                            
                            
                            12,281,728
                            
                            
                            
                            12,282
                            
                            
                            
                            46,668,941
                            
                            
                            
                            (44,661,070
                            )
                            
                            
                            2,020,153Stock
      based compensation expense (employees and directors)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            322,272
                            
                            
                            
                            -
                            
                            
                            
                            322,272Issuance
      of stock for the acquisition of Mobilisa, Inc.
                            
                            
                            12,281,650
                            
                            
                            
                            12,282
                            
                            
                            
                            50,951,604
                            
                            
                            
                            -
                            
                            
                            
                            50,963,886Exercise
      of stock options
                            
                            
                            673,826
                            
                            
                            
                            673
                            
                            
                            
                            320,242
                            
                            
                            
                            -
                            
                            
                            
                            320,915Issuance
      of stock as directors’ compensation
                            
                            
                            97,971
                            
                            
                            
                            98
                            
                            
                            
                            73,906
                            
                            
                            
                            -
                            
                            
                            
                            74,004Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (32,920,555
                            )
                            
                            
                            (32,920,555
                            )BALANCE,
      December 31, 2008
                            
                            
                            25,335,175
                            
                            
                            
                            25,335
                            
                            
                            
                            98,336,965
                            
                            
                            
                            (77,581,625
                            )
                            
                            
                            20,780,675Stock
      based compensation expense (employees and directors)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            317,412
                            
                            
                            
                            -
                            
                            
                            
                            317,412Issuance
      of stock for the acquisition of PositiveAccess
      Corporation
                            
                            
                            608,520
                            
                            
                            
                            608
                            
                            
                            
                            749,393
                            
                            
                            
                            -
                            
                            
                            
                            750,001Exercise
      of stock options and warrants
                            
                            
                            141,073
                            
                            
                            
                            141
                            
                            
                            
                            54,109
                            
                            
                            
                            -
                            
                            
                            
                            54,250Issuance
      of restricted stock as consultant’scompensation
                            
                            
                            104,170
                            
                            
                            
                            104
                            
                            
                            
                            147,713
                            
                            
                            
                            -
                            
                            
                            
                            147,817Issuance
      of stock as directors’ compensation
                            
                            
                            35,622
                            
                            
                            
                            36
                            
                            
                            
                            54,465
                            
                            
                            
                            -
                            
                            
                            
                            54,501Net
      loss
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (525,515
                            )
                            
                            
                            (525,515
                            )BALANCE,
      December 31, 2009
                            
                            
                            26,224,560
                            
                            
                            $
                            26,224
                            
                            
                            $
                            99,660,057
                            
                            
                            $
                            (78,107,140
                            )
                            
                            $
                            21,579,141
 
 The
accompanying notes are an integral part of these statements.
  F-4
  INTELLICHECK
MOBILISA, INC.
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
  2009
                      
                      
                      2008
                      
                      
                      2007(Revised)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                      
                      $
                      (525,515
                      )
                      
                      $
                      (32,920,555
                      )
                      
                      $
                      (2,673,218
                      )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                      
                      
                      978,055
                      
                      
                      
                      1,414,429
                      
                      
                      
                      38,336Non
      cash stock based compensation expense
                      
                      
                      519,730
                      
                      
                      
                      396,276
                      
                      
                      
                      523,927Provision
      for doubtful accounts
                      
                      
                      (14,552
                      )
                      
                      
                      68,800
                      
                      
                      
                      -Goodwill
      and intangible assets impairment charge
                      
                      
                      -
                      
                      
                      
                      32,092,630
                      
                      
                      
                      -Amortization
      of debt discount
                      
                      
                      10,000
                      
                      
                      
                      -
                      
                      
                      
                      -Loss
      on sale of property and equipment
                      
                      
                      1,396
                      
                      
                      
                      12,130
                      
                      
                      
                      -Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                      
                      
                      (623,509
                      )
                      
                      
                      937,248
                      
                      
                      
                      (484,756
                      )(Increase)
      decrease in inventory
                      
                      
                      (4,106
                      )
                      
                      
                      85,928
                      
                      
                      
                      57,139Decrease
      (increase) in other current assets
                      
                      
                      90,556
                      
                      
                      
                      342,637
                      
                      
                      
                      (36,190
                      )Decrease
      (increase) in other assets
                      
                      
                      2,490
                      
                      
                      
                      (148,135
                      )
                      
                      
                      -Increase
      (decrease) in accounts payable and accrued expenses
                      
                      
                      187,887
                      
                      
                      
                      (503,990
                      )
                      
                      
                      150,615(Decrease)
      increase in deferred revenue
                      
                      
                      (133,886
                      )
                      
                      
                      (495,883
                      )
                      
                      
                      241,503Decrease
      in other current liabilities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (75,000
                      )Decrease
      in income taxes payable
                      
                      
                      (168,732
                      )
                      
                      
                      (476,394
                      )
                      
                      
                      -Increase
      in other liabilities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      18,206Net
      cash provided by (used in) operating activities
                      
                      
                      319,814
                      
                      
                      
                      805,121
                      
                      
                      
                      (2,239,438
                      )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                      
                      
                      (168,621
                      )
                      
                      
                      (111,707
                      )
                      
                      
                      (27,988
                      )Proceeds
      from sale of property and equipment
                      
                      
                      400
                      
                      
                      
                      7,800
                      
                      
                      
                      -Investment
      in marketable securities and short-term investments
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (3,237,000
                      )Sales
      of marketable securities and short-term investments
                      
                      
                      -
                      
                      
                      
                      1,650,000
                      
                      
                      
                      5,346,133Deferred
      acquisition costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (208,000
                      )Cash
      paid for Positive Access Corporation acquisition
                      
                      
                      (638,000
                      )
                      
                      
                      -
                      
                      
                      
                      -Cash
      of Positive Access Corporation at date of acquisition
                      
                      
                      39,681
                      
                      
                      
                      -
                      
                      
                      
                      -Cash
      of Mobilisa, Inc., at date of acquisition
                      
                      
                      -
                      
                      
                      
                      335,836
                      
                      
                      
                      -Net
      cash (used in) provided by investing activities
                      
                      
                      (766,540
                      )
                      
                      
                      1,881,929
                      
                      
                      
                      1,873,145CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from issuance of common stock from exercise of stock
      optionsand
      warrants
                      
                      
                      54,250
                      
                      
                      
                      320,915
                      
                      
                      
                      232,359Net
      cash provided by financing activities
                      
                      
                      54,250
                      
                      
                      
                      320,915
                      
                      
                      
                      232,359Net
      (decrease) increase in cash and cash equivalents
                      
                      
                      (392,476
                      )
                      
                      
                      3,007,965
                      
                      
                      
                      (133,934
                      )CASH
      AND CASH EQUIVALENTS, beginning of year
                      
                      
                      3,400,948
                      
                      
                      
                      392,983
                      
                      
                      
                      526,917CASH
      AND CASH EQUIVALENTS, end of year
                      
                      $
                      3,008,472
                      
                      
                      $
                      3,400,948
                      
                      
                      $
                      392,983SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:On
      March 14, 2008, the Company acquired all the common stock of Mobilisa,
      Inc. by issuing common stock and options in the amount of
      $50,963,886.On
      August 31, 2009, the Company acquired all the common stock of Positive
      Access Corporation by issuing common stock in valued at $750,001 and notes
      payable of $560,000, net of deferred debt discount.SUPPLEMENTAL
      CASH FLOW INFORMATIONIncome
      taxes paid
                      
                      $
                      145,354
                      
                      
                      $
                      476,394
                      
                      
                      $
                      -
  The
accompanying notes are an integral part of these statements.
  F-5
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 1.  NATURE OF
BUSINESS
 
 Business
 
 Intellicheck
Mobilisa, Inc. (the “Company” or “Intellicheck”) is a leading technology company
in developing and marketing wireless technology and identity systems for various
applications including: mobile and handheld wireless devices for the government,
military and commercial markets. Products include the Defense ID systems, an
advanced ID card access-control product that is currently protecting over 50
military and federal locations and ID-Check a technology that instantly reads,
analyzes, and verifies encoded data in magnetic stripes and barcodes on
government-issue IDs from approximately 60 jurisdictions in the U.S. and Canada
to determine if the content and format are valid.  Wireless products
include Wireless Over Water (WOW), Floating Area Network (FAN), AIRchitect and
Wireless Buoys.  Creating improved communications across water,
wireless solutions have capabilities for security, environmental protection and
mobile networking.
 
 Principles of
Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Mobilisa, Inc. (“Mobilisa”) and Positive Access
Corporation (“Positive Access”).  The acquisition of Mobilisa was
completed on March 14, 2008, and therefore Mobilisa’s results of operations are
included in the financial statements beginning March 15, 2008.  The
acquisition of Positive Access was completed on August 31, 2009, and therefore
Positive Access’s results of operations are included in the financial statements
from September 1, 2009.  All intercompany balances and transactions
have been eliminated upon consolidation.
 
 Reclassifications
and Prior Period Adjustments
 
 An amount
of $1,039,638 relating to the amortization of intangible assets has been
reclassified from operating expenses to cost of revenues in the statement of
operations in 2008 to conform to the current period presentation.
 
 In
September 2009, the Company discovered an accounting error related to the
interpretation of and recording of the fixed fee under its government cost plus
fixed fee contracts in the Mobilisa subsidiary, which impacted reported
operating results for the year ended December 31, 2008 and first two
quarters of 2009. Management evaluated the impact that these errors would have
had on the financial statements and determined that these errors would not have
been material to the financial statements from a quantitative or qualitative
perspective for those periods.  However, the cumulative amount of the
adjustment required to correct these errors was deemed to be material to the
results for 2009. These errors were corrected as of September 30, 2009 and the
required adjustments were made to the reported results for the comparative
quarter and nine months ended September 30, 2008.  In addition,
the previously published balance sheet at December 31, 2008 was adjusted,
decreasing accumulated deficit by $141,149.  The consolidated balance
sheet, statement of operations and statement of cash flows have been labled as
“Revised” where applicable.  The Company will also revise its
published financials in future filings, including its Quarterly Reports on Form
10-Q for the periods ending March 31, 2010 and June 30, 2010, as
applicable.
 
 The
following table summarizes the impact of these accounting errors on our
previously published financial statements by caption for each of the comparable
periods presented in this Annual Report on Form 10-K.
 
 STATEMENTS
OF OPERATIONS:
 Year Ended December 31, 2008Original
                                                    
                                                    Amount
                                                    
                                                    Prior Period
                                                    
                                                    
                                                    RevisedPresentation
                                                    
                                                    Reclassified
                                                    
                                                    Adjustments
                                                    
                                                    
                                                    PresentationRevenues
                                                    $
                                                    9,954,686
                                                    
                                                    $
                                                    —
                                                    
                                                    $
                                                    62,120
                                                    
                                                    
                                                    $
                                                    10,016,806Cost
      of revenues
                                                    
                                                    2,687,752
                                                    
                                                    
                                                    1,039,638
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    3,727,390Gross
      profit
                                                    
                                                    7,266,934
                                                    
                                                    
                                                    1,039,638
                                                    
                                                    
                                                    62,120
                                                    
                                                    
                                                    
                                                    6,289,416Operating
      expenses
                                                    
                                                    40,377,097
                                                    
                                                    
                                                    (1,039,638
                                                    )
                                                    
                                                    (79,029
                                                    )
                                                    
                                                    
                                                    39,258,430Loss
      from operations
                                                    
                                                    (33,110,163
                                                    )
                                                    
                                                    —
                                                    
                                                    
                                                    141,149
                                                    
                                                    
                                                    
                                                    (32,969,014
                                                    )Other
      income (expense)
                                                    
                                                    48,459
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    48,459Net
      income (loss)
                                                    $
                                                    (33,061,704
                                                    )
                                                    $
                                                    —
                                                    
                                                    $
                                                    141,149
                                                    
                                                    
                                                    $
                                                    (32,920,555
                                                    )Loss
      per share:Basic
      and diluted
                                                    $
                                                    (1.47
                                                    )
                                                    $
                                                    0.00
                                                    
                                                    $
                                                    0.00
                                                    
                                                    
                                                    $
                                                    (1.47
                                                    )
  F-6
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 BALANCE
SHEET:
 As
      of December 31, 2008Original
                                
                                
                                Prior
      Period
                                
                                
                                RevisedCaption
                                
                                Presentation
                                
                                
                                Adjustments
                                
                                
                                PresentationAccounts
      receivable
                                
                                $
                                1,392,285
                                
                                
                                $
                                141,149
                                
                                
                                $
                                1,533,434Accumulated
      deficit
                                
                                $
                                (77,722,774
                                )
                                
                                $
                                141,149
                                
                                
                                $
                                (77,581,625
                                )
 
 STATEMENT
OF CASH FLOWS:
 For
      the Year Ended December 31, 2008Original
                          
                          
                          Prior
      Period
                          
                          
                          RevisedCaption
                          
                          Presentation
                          
                          
                          Adjustments
                          
                          
                          PresentationNet
      loss
                          
                          $
                          (33,061,704
                          )
                          
                          $
                          141,149
                          
                          
                          $
                          (32,920,055
                          )Goodwill
      and intangible asset impairment charge
                          
                          $
                          32,171,659
                          
                          
                          $
                          (79,029
                          )
                          
                          $
                          32,092,630Accounts
      receivable
                          
                          $
                          999,368
                          
                          
                          $
                          (62,120
                          )
                          
                          $
                          937,248Net
      cash provided by operating activities
                          
                          $
                          805,121
                          
                          
                          $
                          -
                          
                          
                          $
                          805,121
 
 2.  SIGNIFICANT ACCOUNTING
POLICIES
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include cash and highly liquid investments with original
maturities of three months or less when purchased.  As of December 31,
2009 and 2008, cash equivalents included money market funds (with maturities at
date of purchase of three months or less) of $1,316,793 and $2,217,641,
respectively.
 
 Marketable
Securities
 
 The
Company classifies its investments in marketable securities as
available-for-sale securities and accounts for them in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” (“SFAS No. 115”)
(ASC Topic 320-10). Under SFAS No. 115, securities purchased to be
held for indefinite periods of time and not intended at the time of purchase to
be held until maturity are classified as available-for-sale
securities.  The Company continually evaluates whether any marketable
investments have been impaired and, if so, whether such impairment is temporary
or other than temporary.  All of the Company’s marketable securities
have maturities of less than one year with a weighted average interest rate of
..01%.  The carrying value of the marketable securities as of December
31, 2009 and 2008 approximated their fair market value.  Marketable
Securities and Short Term Investments are invested in money market funds and
bank certificates of deposit.  Realized gains and losses
on available-for-sale securities are calculated using the specific
identification method.  During the year ended December 31, 2009
and 2008, realized gains and losses on available-for-sale securities were
insignificant.At December 31, 2009 all marketable securities
had maturity dates of less than three months and were classified as cash
equivalents.
 
 Allowance for Doubtful
Accounts
 
 The
Company records its allowance for doubtful accounts based upon its assessment of
various factors.  The Company considers historical experience, the age
of the accounts receivable balances, credit quality of the Company’s customers,
current economic conditions and other factors that may affect customers’ ability
to pay.
 
 Inventory
 
 Inventory
is stated at the lower of cost or market and cost is determined using the
first-in, first-out method.  Inventory is primarily comprised of
finished goods.
  F-7
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Long-Lived Assets and
Impairment of Long-Lived Assets
 
 The
Company’s long-lived assets include property and equipment, goodwill and
intangible assets.
 
 The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be
fully recoverable in accordance with SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets” and SFAS 142, “Goodwill and other Intangible
Assets”  (ASC Topic 360).  To determine recoverability of
its long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets.  Impairment is measured at fair
value.  The Company recognized impairment on long-lived assets during
the year ended December 31, 2008.  See Note 4.  No
impairments were recognized during the years ended December 31, 2009 and
2007.
 
 Property and
Equipment
 
 Property
and equipment are recorded at cost and are depreciated over their estimated
useful lives ranging from two to ten-years using the straight-line
method.  Leasehold improvements are amortized utilizing the
straight-line method over the lesser of the term of the lease or estimated
useful life of the asset.
 
 Goodwill
 
 Goodwill
represents the excess of acquisition cost over the fair value of net assets
acquired in business combinations.  Pursuant to SFAS No. 142,
“Goodwill and Other Intangible Assets” (ASC Topic 350), the Company tests
goodwill for impairment on an annual basis, or between annual tests, in certain
circumstances, such as the incurrence of operating losses or a significant
decline in earnings associated with the asset. The Company evaluates goodwill
for impairment using the two-step process as prescribed in
SFAS No. 142. The first step is to compare the fair value of the
reporting unit to the carrying amount of the reporting unit. If the carrying
amount exceeds the fair value, a second step must be followed to calculate
impairment. The Company performs the initial step by comparing the carrying
value to the estimated fair value of the reporting units, which is determined by
considering future discounted cash flows, market transactions and multiples,
among other factors.  Based upon these tests, the Company determined
the fair value of the Mobilisa reporting unit was less than its carrying amount
resulting in a goodwill impairment at December 31, 2008, the date of the
goodwill impairment test.  See Note 4.  No impairments
were recognized during the years ended December 31, 2009 and 2007.
 
 Intangible
Assets
 
 Acquired
intangible assets include trade names, patents, developed technology and backlog
described more fully in Note 4. The Company uses the straight line method to
amortize these assets over their estimated useful lives. The Company reviews its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be fully recoverable
in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets” (ASC Topic 360).  To determine recoverability of
its long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets.  Impairment is measured at fair
value.  See Note 4 for impairment recognized in 2008.
 
 Costs of Computer Software
Developed or Obtained for Internal Use
 
 The
Company accounts for certain software costs under Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use” (“SOP 98-1”), which provides guidance for determining whether
computer software is internal-use software and guidance on accounting for the
proceeds of computer software originally developed or obtained for internal use
and then subsequently sold to the public.  It also provides guidance
on capitalization of the costs incurred for computer software developed or
obtained for internal use.
 
 Capitalized Software
Development Costs
 
 Costs
incurred internally in creating a computer software product shall be charged to
expense when incurred as research and development until technological
feasibility has been established for the product.  Software production
costs for computer software that is to be used as an integral part of a product
or process shall not be capitalized until both (a) technological feasibility has
been established for the software and (b) all research and development
activities for the other components of the product or process have been
completed.  The Company has not capitalized any software costs for the
years ended December 31, 2009, 2008 and 2007.
  F-8
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Deferred Acquisition
Costs
 
 In 2007,
the Company deferred certain legal and proxy related charges related to the
business combination with Mobilisa, Inc. (See Note 3).  These costs
were capitalized as part of the purchase price when the transaction was
completed in 2008.
 
 Revenue
Recognition
 
 Revenue
is generally recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed and determinable, collectability is
probable, and there is no future Company involvement or
commitment.  The Company sells its commercial products directly
through its sales force and through distributors.  Revenue from
directsales of
products is recognized when shipped to the customer and title has passed. The
Company’s products require continuing service or post contract customer support
and performance; accordingly, a portion of the revenue pertaining to the service
and support is deferred based on its fair value and recognized ratably over the
period in which the future service, support and performance are provided, which
is generally one to three years.
 
 The
Company recognizes revenues from licensing of its patented software to
customers. The Company’s licensed software requires continuing service or post
contract customer support and performance; accordingly, a portion of the revenue
is deferred based on its fair value and recognized ratably over the period in
which the future service, support and performance are provided, which is
generally one to three years.  Royalties from the licensing of the
Company’s technology are recognized as revenues in the period they are
earned.   For the years ended December 31, 2009, 2008 and 2007,
the Company received $8,003, $8,962 and $21,878 respectively, in royalty
fees.
 
 Revenue
from research and development contracts are generally with government agencies
under long-term cost-plus fixed-fee contracts, where revenue is based on time
and material costs incurred.  Revenue from these arrangements is
recognized as time is spent on the contract and materials are
purchased.  Research and development costs are expensed as
incurred.
 
 The
Company also performs consulting work for other companies.  These
services are billed based on time and materials.  Revenue from these
arrangements is also recognized as time is spent on the contract and materials
are purchased.
 
 Subscriptions
to database information can be purchased for month-to-month, one, two, and three
year periods.  Revenue from subscriptions are deferred and recognized
over the contractual period, which is typically three years.
 
 The
Company offers enhanced extended warranties for its sales of hardware and
software at a set price.  The revenue from these sales are deferred
and recognized on a straight-line basis over the contractual period, which is
typically three years.
 
 Revenue
arrangements were allocated to the separate units of accounting based on their
relative fair values and revenue is recognized in accordance with its policy as
stated above.
 
 Research and Development
Costs
 
 Research
and development costs are charged to expense as incurred.
 
 Shipping
Costs
 
 The
Company’s shipping and handling costs are included in cost of sales for all
periods presented.
  F-9
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Income
Taxes
 
 The
Company accounts for income taxes under SFAS No. 109, “Accounting for Income
Taxes” (ASC Topic 740).  Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss
carryforwards.  Deferred tax assets and liabilities are measured using
expected tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled.  The Company has recorded a
full valuation allowance for its net deferred tax assets as of December 31, 2009
and 2008, due to the uncertainty of the realizability of those
assets.
 
 Fair Value of Financial
Instruments
 
 The
Company adheres to the provisions of SFAS No. 107, “Disclosures about Fair Value
of Financial Instruments” (ASC Topic 820).  This pronouncement
requires that the Company calculate the fair value of financial instruments and
include this additional information in the notes to financial statements when
the fair value is different than the book value of those financial
instruments.  The Company’s financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
notes payable.  At December 31, 2009 and 2008, the carrying value of
the Company’s financial instruments approximated fair value, due to their
short-term nature. The carrying value of the long-term portion of the notes
payable approximates fair value based on market interest rates
applied.
 
 Business Concentrations and
Credit Risk
 
 Financial
instruments, which subject the Company to concentrations of credit risk, consist
primarily of cash, cash equivalents and marketable securities.  The
Company maintains cash between three financial institutions.  The
marketable securities consist of money market funds and bank certificates of
deposit.  The Company performs periodic evaluations of the relative
credit standing of these institutions.
 
 The
Company’s sales to date have been limited due to the refocus of its marketing
efforts and introduction of new products to a number of clients which are
concentrated in the United States of America and the long sales cycle to
government entities.  The Company performs ongoing credit evaluations,
generally does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information.
 
 During
the year ended December 31, 2009, the Company made sales to two customers that
accounted for approximately 44% of total revenues.  These revenues
result from a research contract with the U.S. government and sales to a large
telecommunications company.  These customers represented 26% of total
accounts receivable at December 31, 2009.  During the year ended
December 31, 2008, the Company made sales to one customer that accounted for
approximately 30% of total revenues.
 
 As of
December 31, 2009, the Company had three suppliers for the production of its
input devices.  The Company has modified its software to operate in
windows based systems and can integrate with different hardware platforms that
are readily available in the marketplace.  The Company does not
maintain a manufacturing facility of its own and is not dependent on maintaining
its production relationships due to the flexibility of its software to run on
multiple existing platforms.
 
 Net Loss and Net Loss Per
Share
 
 The
Company computes net loss per common share in accordance with SFAS No. 128,
“Earnings Per Share” (ASC Topic 260).  Under the provisions of SFAS
No. 128, basic net loss per common share (“Basic EPS”) is computed by dividing
net loss by the weighted average number of common shares
outstanding.  Diluted net loss per common share (“Diluted EPS”) is
computed by dividing net loss by the weighted average number of common shares
and dilutive common share equivalents then outstanding.  SFAS No. 128
requires the presentation of both Basic EPS and Diluted EPS on the face of the
statements of operations.
  F-10
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Diluted
EPS for the years ended December 31, 2009, 2008 and 2007, does not include the
impact of stock options and warrants then outstanding, as the effect of their
inclusion would be antidilutive.
 
 The
following table summarizes the equivalent number of common shares assuming the
related securities that were outstanding as of December 31, 2009, 2008 and 2007
had been converted:
 
 2009
                  
                  
                  2008
                  
                  
                  2007Stock
      options
                  
                  
                  2,632,117
                  
                  
                  
                  2,897,801
                  
                  
                  
                  1,460,217Warrants
                  
                  
                  599,000
                  
                  
                  
                  765,551
                  
                  
                  
                  922,636Total
                  
                  
                  3,231,117
                  
                  
                  
                  3,663,352
                  
                  
                  
                  2,382,853
 
 Stock-Based
Compensation
 
 The
Company accounts for the issuance of equity awards to employees in accordance
with SFAS No. 123(R) (ASC Topic 715 and 505), which requires that the cost
resulting from all share based payment transactions be recognized in the
financial statements.  This pronouncement establishes fair value as
the measurement objective in accounting for share based payment arrangements and
requires all companies to apply a fair value based measurement method in
accounting for all share based payment transactions with
employees.   Period compensation costs are included in selling,
general and administrative and research and development expenses.
 
 The
Company recognizes compensation expense related to stock option grants on a
straight-line basis over the vesting period.
 
 Options
granted to consultants and other non-employees are accounted for in accordance
with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
(ASC Topic 505-50).  Accordingly, such options are recorded at fair value
at the date of grant and subsequently adjusted to fair value at the end of
each reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period.
 
 Comprehensive
Loss
 
 The
Company’s comprehensive net loss is equal to its net loss for the years ended
December 31, 2009, 2008 and 2007.
 
 Segment
Information
 
 The
Company adheres to the provisions of SFAS No. 131, “Disclosures about Segments
of an Enterprise and Related Information.”  This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial
statements issued to shareholders.  Management has determined that it
only has one reporting segment.
 
 Use of
Estimates
 
 The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the Company’s financial statements and accompanying
notes.  Significant estimates and assumptions that affect amounts
reported in the financial statements include impairment of goodwill and
intangible assets, deferred tax valuation allowances, allowances for doubtful
accounts and the fair value of options granted under the Company’s stock-based
compensation plans.  Due to the inherent uncertainties involved in
making estimates, actual results reported in future periods may be different
from those estimates.
 
 Recently Issued Accounting
Pronouncements
 
 Except as
discussed below, the Company does not expect the impact of the future adoption
of recently issued accounting pronouncements to have a material impact on the
Company’s financial statements.
  F-11
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.
 
 Following
the Codification, the Board will not issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.
 
 The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification was effective for our third-quarter
2009 financial statements and the principal impact on our financial statements
is limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification.
 
 In April
2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (ASC Topic 320-10-65).
This update provides guidance for allocation of charges for other-than-temporary
impairments between earnings and other comprehensive income. It also revises
subsequent accounting for other-than-temporary impairments and expands required
disclosure. The update was effective for interim and annual periods ending after
June 15, 2009. The adoption of FAS 115-2 and FAS 124-2 did not have a material
impact on the results of operations and financial condition.
 
 In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (ASC Topic 810-10). This updated guidance requires a qualitative
approach to identifying a controlling financial interest in a variable interest
entity (VIE), and requires ongoing assessment of whether an entity is a VIE and
whether an interest in a VIE makes the holder the primary beneficiary of the
VIE. This guidance became effective for the Company on January 1, 2010 and
is not expected to have a material impact on the Company’s consolidated
financial statements.
 
 In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable
Revenue Arrangements.” This ASU establishes the accounting and reporting
guidance for arrangements including multiple revenue-generating activities. This
ASU provides amendments to the criteria for separating deliverables, measuring
and allocating arrangement consideration to one or more units of accounting. The
amendments in this ASU also establish a selling price hierarchy for determining
the selling price of a deliverable. Significantly enhanced disclosures are also
required to provide information about a vendor’s multiple-deliverable revenue
arrangements, including information about the nature and terms, significant
deliverables, and its performance within arrangements. The amendments also
require providing information about the significant judgments made and changes
to those judgments and about how the application of the relative selling-price
method affects the timing or amount of revenue recognition. The amendments in
this ASU are effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15,
2010. Early application is permitted. The Company is currently evaluating this
new ASU.
 
 In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements.” This ASU changes the accounting
model for revenue arrangements that include both tangible products and software
elements that are “essential to the functionality,” and scopes these products
out of current software revenue guidance. The new guidance will include factors
to help companies determine what software elements are considered “essential to
the functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating this new
ASU.
  F-12
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 3.  ACQUISITIONS
 
 Acquisition of Positive
Access Corporation
 
 On August
31, 2009, the Company acquired 100% of the common stock of Positive Access
Corporation, the leading competitor to Intellicheck Mobilisa for developing
drivers’ license reading software. The acquisition of Positive Access will
increase the Company’s market presence in the commercial markets. The terms
include cash payments of $1,225,000, payable $625,000 at August 31, 2009,
$400,000 at August 31, 2010 and $200,000 at August 31, 2011.  The
notes payable have been recorded in the financial statements net of deferred
debt discount of $40,000.  In addition, the Company issued 608,520
shares of common stock fair valued at $750,001, plus direct issue costs of
$13,000.  The recorded fair value of the stock is based on the closing
stock price on August 31, 2009, net of a discount of 15%, since the stock was
unregistered and is subject to restrictions on its sale.  Acquisition
related costs of approximately $37,000 were expensed in connection with this
transaction.  The transaction was accounted for using the purchase
method of accounting.   The results of Positive Access
Corporation’s operations have been included in the accompanying consolidated
financial statements from September 1, 2009. Pro forma supplemental financial
information was not included as the impact of the acquisition was not material
to the operations of the Company.
 
 The total
preliminary purchase price was allocated to the estimated fair value of the
assets acquired and liabilities assumed based on third party valuations and
managements estimates.  The fair value of identified intangible assets
and goodwill are considered provisional pending completion of the final
valuation.  None of the goodwill or the assigned values to intangible
assets are deductible for income tax purposes.
 
 Purchase
Price Allocation
 
 The
preliminary calculation of purchase price and goodwill and other intangible
assets as of August 31, 2009 was as follows:
 
 Cash
                
                $
                625,000Fair
      value of Intellicheck common stock issued to Positive Access
      shareholders
                
                
                750,001Fair
      value of notes issued, net of deferred debt discount
                
                
                560,000Direct
      issue costs
                
                
                13,000Total
      purchase price
                
                $
                1,948,001
 
 Purchase
price allocated to:
 Tangible
      assets acquired less liabilities assumed
                
                $
                33,000Identifiable
      intangible assets
                
                
                1,393,000Goodwill
                
                
                522,001Tangible
      assets acquired and liabilities assumed
                
                $
                1,948,001
 
 Acquisition of Mobilisa,
Inc.
 
 On
November 20, 2007, Intelli-Check and Mobilisa, Inc., a private company that is a
leader in identity systems and mobile and wireless technologies, entered into a
merger agreement pursuant to which a wholly-owned subsidiary of Intelli-Check
would merge with and into Mobilisa, resulting in Mobilisa becoming a
wholly-owned subsidiary. At a special meeting of stockholders held on March 14,
2008, the Company’s stockholders voted to approve the merger, as well as to
amend Intelli-Check’s certificate of incorporation to change the name of the
Company to Intelli-Check – Mobilisa, Inc., increase the authorized shares of
common stock and to increase the number of shares issuable under our 2006 Equity
Incentive Plan by 3,000,000.  The headquarters of Intelli-Check was
moved to Mobilisa’s offices in Port Townsend, Washington.  The
transaction was accounted for using the purchase method of
accounting.
 
 The
unaudited pro forma condensed statements of operations are presented below as if
the acquisition had been completed as of January 1, 2007 (in thousands, except
per share data).
  F-13
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 2008
                    
                    
                    2007(Revised)
                    
                    
                    (Revised)Revenues
                    
                    $
                    11,064
                    
                    
                    $
                    10,196Net
      loss
                    
                    $
                    (33,867
                    )
                    
                    $
                    (2,940
                    )Net
      loss per share
                    
                    $
                    (1.37
                    )
                    
                    $
                    (0.12
                    )
 
 The
purchase price allocation included within these consolidated financial
statements is based upon an estimated purchase price of approximately
$51.3 million, consisting of an exchange ratio of 1.091 shares of
Intelli-Check common stock for each share of Mobilisa common stock, stock
options, warrants and transaction costs.  On March 14, 2008, the
Company issued 12,281,650 common shares to Mobilisa stockholders.  Under
the purchase method of accounting and the guidance of EITF 99-12
“Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination,” the fair value of the
equity consideration was determined using an average of Intelli-Check’s closing
share prices beginning two days before and ending two days after November 21,
2007, the date on which the Merger Agreement was announced, or $3.54 per
share.
  Outstanding
options to purchase Mobilisa common stock were assumed by Intelli-Check and
converted into options to purchase Intelli-Check common stock, based on a
formula in the merger agreement. No cash consideration was paid for stock
options. For purpose of the valuation, the fair value of the assumed options was
estimated using the Black Scholes model. The vested portion of this fair value
is included in the purchase price.  The valuation assumptions used
were: expected dividend yield 0%, expected volatility 63%, expected life 2.5
years and risk free interest rate 1.65%.
  Purchase
Price Allocation
  The
allocation of the purchase price to Mobilisa’s tangible and identifiable
intangible assets acquired and liabilities assumed was based on their estimated
fair values.
 
 The
calculation of purchase price and goodwill and other intangible assets as of
March 14, 2008 was estimated as follows:
 
 Fair
      value of Intelli-Check common stock issued to Mobilisa
      shareholders
                      
                      $
                      43,477,040Fair
      value of Intelli-Check common vested stock awards to be issued as
      consideration forreplacement
      of outstanding Mobilisa vested stock awards
                      
                      
                      7,486,846Transaction
      costs
                      
                      
                      357,575Total
      purchase price
                      
                      $
                      51,321,461
 
 Purchase
price allocated to:
 Tangible
      assets acquired less liabilities assumed
                  
                  $
                  (523,067
                  )Identifiable
      intangible assets
                  
                  
                  14,440,000Deferred
      tax adjustments
                  
                  
                  (210,708
                  )Goodwill
                  
                  
                  37,615,236Tangible
      assets acquired and liabilities assumed
                  
                  $
                  51,321,461
  Intelli-Check
estimated the fair value of tangible assets acquired and liabilities assumed.
These estimates were based on a valuation dated as of March 14, 2008, the date
of the acquisition.  At December 31, 2008, the Company finalized its
allocation of the purchase price of Mobilisa.
 
 As a
component of the acquisition, the Company acquired software maintenance and
database subscription obligations and the associated deferred revenue. In
accordance with EITF Issue No 01-3 “Accounting in a Business Combinations for
Deferred Revenue of an Acquiree,” the Company determined there was a legal
performance obligation.  The deferred revenue was measured at fair
value and is recognized over the remaining contractual period, generally from
one to three years.
  F-14
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 4.  GOODWILL AND INTANGIBLE
ASSETS AND IMPAIRMENT
 
 Goodwill
 
 The
changes in the carrying amount of goodwill for the year ended December 31, 2009
were as follows:
 
 Balance
      at January 1, 2009
                  
                  $
                  11,736,660Acquisition
      of Positive Access Corporation
                  
                  
                  522,001Balance
      at December 31, 2009
                  
                  $
                  12,258,661
 
 Identifiable intangible
assets
  The
changes in the carrying amount of intangible assets for the year ended December
31, 2009 were as follows:
 
 Balance
      at January 1, 2009
                  
                  $
                  6,877,752Acquisition
      of Positive Access Corporation
                  
                  
                  1,393,000Amortization
      expense
                  
                  
                  (825,518
                  )Balance
      at December 31, 2009
                  
                  $
                  7,445,234
 
 The
Company has recorded the fair value of the acquired identifiable intangible
assets, which are subject to amortization, using the income approach. The
following table sets forth the components of these intangible assets as of
December 31, 2009 and 2008:
 
 As of December 31, 2009Estimated
                          
                          Adjusted
                          
                          
                          
                          
                          
                          NetUseful
                          
                          Carrying
                          
                          
                          Accumulated
                          
                          
                          as
      ofAmortized
      Intangible Assets
                          
                          Life
                          
                          Amount
                          
                          
                          Amortization
                          
                          
                          12/31/2009Trade
      name
                          
                          20
      years
                          
                          $
                          704,458
                          
                          
                          $
                          (88,584
                          )
                          
                          $
                          615,874Patents
      and copyrights
                          
                          17
      years
                          
                          
                          1,135,342
                          
                          
                          
                          (231,273
                          )
                          
                          
                          904,069Non-compete
      agreements
                          
                          5
      years
                          
                          
                          310,000
                          
                          
                          
                          (20,667
                          )
                          
                          
                          289,333Developed
      technology
                          
                          7
      years
                          
                          
                          3,941,310
                          
                          
                          
                          (1,122,740
                          )
                          
                          
                          2,818,570Backlog
                          
                          3
      years
                          
                          
                          303,400
                          
                          
                          
                          (303,400
                          )
                          
                          
                          -Non-contractual
      customer relationships
                          
                          15
      years
                          
                          
                          3,268,568
                          
                          
                          
                          (451,180
                          )
                          
                          
                          2,817,388$
                          9,663,078
                          
                          
                          $
                          (2,217,844
                          )
                          
                          $
                          7,445,234
 
 As of December 31, 2008Adjusted
                    
                    
                    
                    
                    
                    NetCarrying
                    
                    
                    Accumulated
                    
                    
                    as
      ofAmortized
      Intangible Assets
                    
                    Amount
                    
                    
                    Amortization
                    
                    
                    12/31/2008Trade
      name
                    
                    $
                    651,458
                    
                    
                    $
                    (51,458
                    )
                    
                    $
                    600,000Patents
      and copyrights
                    
                    
                    885,342
                    
                    
                    
                    (177,590
                    )
                    
                    
                    707,752Non-compete
      agreements
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Developed
      technology
                    
                    
                    3,901,310
                    
                    
                    
                    (581,310
                    )
                    
                    
                    3,320,000Backlog
                    
                    
                    303,400
                    
                    
                    
                    (303,400
                    )
                    
                    
                    -Non-contractual
      customer relationships
                    
                    
                    2,528,568
                    
                    
                    
                    (278,568
                    )
                    
                    
                    2,250,000$
                    8,270,078
                    
                    
                    $
                    (1,392,326
                    )
                    
                    $
                    6,877,752
  In 2008,
the Company recorded an impairment of $6,293,083 for intangible assets and an
impairment of $25,799,547 for goodwill related to the Mobilisa acquisition (see
Note 3).
  F-15
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 The
Company expects that amortization expense for the next five succeeding years
will be as follows:
 
 2010
                  
                  $
                  951,0992011
                  
                  
                  943,5562012
                  
                  
                  919,0012013
                  
                  
                  907,2232014
                  
                  
                  416,656
 
 These
amounts are subject to change based upon the review of recoverability and useful
lives that are performed at least annually.
 
 Amortization
expense for years ended December 31, 2009, 2008 and 2007 were $825,517,
$1,293,126 and $6,209, respectively.
 
 Goodwill and Intangible
Asset Impairment
 
 At
December 31, 2009, the Company had goodwill of $12,258,661, which
represented the aggregate of the excess purchase price for the acquired
businesses of Mobilisa and Positive Access over the fair value of the net assets
acquired.
  The
Company performs a goodwill impairment test annually in the fourth quarter or
more frequently if events or circumstances indicate that an impairment loss may
have been incurred.  The Company evaluates goodwill for impairment
using the two-step process as prescribed in SFAS No. 142. The first
step is to compare the fair value of the reporting unit to the carrying amount
of the reporting unit. If the carrying amount exceeds the fair value, a second
step must be followed to calculate impairment.  Based on this review,
as of December 31, 2009, the Company determined that there was no goodwill
impairment.
 
 As of
December 31, 2008, as a result of equity market conditions and the resulting
decrease in current market multiples and the Company's stock price, the Company
compared the carrying amounts of its Mobilisa reporting unit to its estimated
fair value, and determined that the carrying amount exceeded its estimated fair
value.  The Company calculated the impairment loss by deriving the
implied fair value of the goodwill after allocating the estimated fair value of
the Mobilisa reporting unit to tangible and intangible assets.  The
goodwill impairment charge was primarily driven by the deteriorating economic
conditions that manifested themselves in the fourth quarter of 2008,
particularly as they impacted the Government ID and Wireless businesses. The
test determined that there was an impairment related to the carrying value of
goodwill and the Company recorded an impairment charge of $25,799,547 in the
fourth quarter of 2008.
 
 The
impairment test requires that the Company estimate and compare the fair value of
its reporting units to their carrying value, including
goodwill.  Reporting units are determined in accordance with the
guidance in SFAS 142, “Goodwill and Other Intangible Assets,” and generally are
at a level below the reportable segment.  Fair value is determined
primarily using the discounted cash flow method, although market transactions
and multiples are also considered. Such analysis requires the use of certain
future market assumptions and discount factors, which are subjective in nature.
Estimated values can be affected by many factors beyond the company’s control
such as business and economic trends, government regulation, and technological
changes.  Estimates of fair values were primarily based on the
discounted cash flows based on the Company’s latest plans and projections. The
use of the discounted cash flow method requires significant judgments and
assumptions of future events many of which are outside the control of the
Company, including estimates of future growth rates, income tax rates, and
discount rates, among others. In addition, the use of market transactions and
multiples requires significant judgment as to whether observed data is
comparable to the reporting units being evaluated and how much weight should be
given to such data in the valuation. Management believes that the assumptions
used to determine fair value are appropriate and reasonable. However, changes in
circumstances or conditions affecting these assumptions could have a significant
impact on the fair value determination.
  The
Company considered whether long-lived assets were also impaired. As required by
SFAS No. 144, the Company compared the carrying amounts of the
identified asset groups (including goodwill as required by
SFAS No. 144) to the undiscounted cash flow of the asset groups
and determined that as of December 31, 2008, the Company’s intangible assets
related to the Mobilisa acquisition were also impaired by
$6,293,083.  As of December 31, 2009, the Company determined that
there was no further impairment of intangible assets.
  F-16
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
  5.  PROPERTY AND
EQUIPMENT
 
 Property
and equipment are comprised of the following as of December 31, 2009 and
2008:
 
 2009
                          
                          
                          2008Computer
      equipment
                          
                          $
                          1,043,861
                          
                          
                          $
                          952,478Furniture
      and fixtures
                          
                          
                          173,553
                          
                          
                          
                          169,428Leasehold
      improvements
                          
                          
                          217,709
                          
                          
                          
                          203,343Office
      equipment
                          
                          
                          182,209
                          
                          
                          
                          122,860Vehicles
                          
                          
                          147,310
                          
                          
                          
                          147,3101,764,642
                          
                          
                          
                          1,595,419Less
      - Accumulated depreciation and amortization
                          
                          
                          1,282,565
                          
                          
                          
                          1,130,629$
                          482,077
                          
                          
                          $
                          464,790
 
 Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 amounted to
$152,538, $121,303 and $32,127, respectively.
 
 6.  CREDIT
FACILITY
 
 The
Company’s Mobilisa subsidiary has a $250,000 revolving line of credit with Bank
of America which renews annually.  Interest is payable monthly at the
bank’s prime rate (3.25% at December 31, 2009), plus 1% per annum. The facility
is secured by the assets of Mobilisa and is guaranteed by two directors of the
Company, who are also members of management.  There were no borrowings
under this facility as of December 31, 2009.
 
 7.  ACCRUED
EXPENSES
 
 Accrued
expenses are comprised of the following as of December 31, 2009 and
2008:
 
 2009
                        
                        
                        2008Professional
      fees
                        
                        $
                        181,055
                        
                        
                        $
                        125,499Payroll
      and related
                        
                        
                        482,579
                        
                        
                        
                        432,177Other
                        
                        
                        41,025
                        
                        
                        
                        59,323$
                        704,659
                        
                        
                        $
                        616,999
 
 8.  INCOME
TAXES
 
 Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (ASC Topic 740-10), which clarifies the accounting
and disclosure for uncertainty in income taxes. The adoption of this
interpretation did not have a material impact on our financial statements. 
As of December 31, 2009, the Company has no material uncertain tax
position.
 
 As a
result of continuing losses for tax purposes, the Company has historically not
paid income taxes and has recorded a full valuation allowance against our net
deferred tax asset. Therefore, no liability has been recorded for unrecognized
tax benefits prior to adoption of FIN 48 and there was no adjustment from the
implementation. There continues to be no liability related to unrecognized tax
benefits at December 31, 2009.  Interest and penalties related to
unrecognized tax benefits are recorded in income tax expense. There was no
accrued interest related to unrecognized tax benefits at December 31,
2009.  The tax years 2006-2009 remain open to examination by the major
taxing jurisdictions to which the Company is subject.
 
 Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets for federal and state income taxes as of December
31, 2009 and 2008 are as follows:
  F-17
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 2009
                    
                    
                    2008Deferred
      tax assets:Net
      operating loss carryforwards
                    
                    $
                    14,889,000
                    
                    
                    $
                    14,637,000Deferred
      revenue
                    
                    
                    -
                    
                    
                    
                    430,000Reserves
                    
                    
                    33,000
                    
                    
                    
                    39,000Research
      & development tax credits
                    
                    
                    78,000
                    
                    
                    
                    78,000Total
      deferred tax assets
                    
                    
                    15,000,000
                    
                    
                    
                    15,184,000Deferred
      tax liabilities:Intangible
      assets
                    
                    
                    (2,809,000
                    )
                    
                    
                    (2,521,000
                    )Depreciation
                    
                    
                    (87,000
                    )
                    
                    
                    (80,000
                    )Total
      deferred tax liabilities
                    
                    
                    (2,896,000
                    )
                    
                    
                    (2,601,000
                    )Net
      deferred tax assets
                    
                    
                    12,104,000
                    
                    
                    
                    12,583,000Less:
      Valuation allowance
                    
                    
                    (12,104,000
                    )
                    
                    
                    (12,583,000
                    )Deferred
      tax assets, net of allowance
                    
                    $
                    -
                    
                    
                    $
                    -
 
 Realization
of deferred tax assets is dependent upon future earnings, if any.  The
Company has recorded a full valuation allowance against its deferred tax assets
since management believes that it is more likely than not that these assets will
not be realized.
 
 As of
December 31, 2009 the Company had net operating loss carryforwards (NOL’s) for
federal and New York State income tax purposes of approximately $37.2
million.  There can be no assurance that the Company will realize the
benefit of the NOL’s.  The federal and state NOL’s are available to
offset future taxable income and expire from 2018 through 2028 if not
utilized.  Under Section 382 of the Internal Revenue Code, these NOL’s
may be limited due to ownership changes.
 
 The
effective tax rate for the years ended December 31, 2009, 2008 and 2007 is
different from the tax benefit that would result from applying the statutory tax
rates primarily due to the recognition of valuation allowances.
 
 At
December 31, 2008, income taxes payable of $168,732 represents Mobilisa’s prior
tax liability.  During 2009, the Company paid $145,354 in settlement
of this liability.
 
 9. NOTES
PAYABLE
 
 In
connection with the Positive Access acquisition, the Company issued notes to the
principals totaling $600,000, payable $400,000 at August 31, 2010 and $200,000
at August 31, 2011.  The notes payable were initially recorded in the
financial statements net of deferred debt discount of $40,000.  The
deferred debt discount is being amortized on a straight line basis, which
approximated the effective interest method.  Total interest expense of
$10,000 was recorded in the year ended December 31, 2009.
 
 The notes
are shown net of the deferred debt discount at December 31, 2009 as
follows:
 
 DeferredGross
                    
                    
                    Debt Discount
                    
                    
                    NetNotes
      payable – current portion
                    
                    $
                    400,000
                    
                    
                    $
                    (
      13,333
                    )
                    
                    $
                    386,667Notes
      payable – long-term portion
                    
                    
                    200,000
                    
                    
                    
                    (16,667
                    )
                    
                    
                    183,333Total
                    
                    $
                    600,000
                    
                    
                    $
                    (30,000
                    )
                    
                    $
                    570,000
 
 10. STOCKHOLDERS’
EQUITY
 
 Series A Convertible
Preferred Stock
 
 In
January 1997, the Board of Directors authorized the creation of a class of
Series A Convertible Preferred Stock with a par value of $.01.  The
Series A Convertible Preferred Stock is convertible into an equal number of
common shares at the holder’s option, subject to adjustment for
anti-dilution.  The holders of Series A Convertible Preferred Stock
are entitled to receive dividends as and if declared by the Board of
Directors.  In the event of liquidation or dissolution of the Company,
the holders of Series A Convertible Preferred Stock are entitled to receive all
accrued dividends, if applicable, plus the liquidation price of $1.00 per
share.  As of December 31, 2009 and 2008, there were no outstanding
shares of Series A Convertible Preferred Stock.
  F-18
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Stock Options and Stock
Based Compensation
 
 In order
to retain and attract qualified personnel necessary for the success of the
Company, the Company adopted several Stock Option Plans from 1998 through 2004
(and an amendment to the 2004 plan in 2006 pursuant to which the plan was
renamed the “2006 Equity Incentive Plan” and amended to provide for the issuance
of other types of equity incentives such as restricted stock grants)
(collectively, the “Plans”) covering up to 6,250,000 of the Company’s common
shares, pursuant to which officers, directors, key employees and consultants to
the Company are eligible to receive incentive stock options and nonqualified
stock options. The Compensation Committee of the Board of Directors administers
these Plans and determines the terms and conditions of options granted,
including the exercise price.  These Plans generally provide that all
stock options will expire within ten years of the date of
grant.  Incentive stock options granted under these Plans must be
granted at an exercise price that is not less than the fair market value per
share at the date of the grant and the exercise price must not be less than 110%
of the fair market value per share at the date of the grant for grants to
persons owning more than 10% of the voting stock of the
Company.  These Plans also entitle non-employee directors to receive
grants of non-qualified stock options as approved by the Board of
Directors.
 
 Stock
option activity under the 1998, 1999, 2001, 2003 and 2006 Stock Option Plans
during the periods indicated below is as follows:
 Number of
                      Shares
                      Subject to
                      Issuance
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Term
                    
                    Aggregate
                      Intrinsic
                      ValueOutstanding
      at December 31, 2006
                    
                    
                    2,470,055
                    
                    
                    $
                    6.55
                    
                    3.66 yearsGranted
                    
                    
                    186,362
                    
                    
                    
                    5.60Forfeited
      or expired
                    
                    
                    (1,153,250
                    )
                    
                    
                    7.87Exercised
                    
                    
                    (42,950
                    )
                    
                    
                    3.40Outstanding
      at December 31, 2007
                    
                    
                    1,460,217
                    
                    
                    
                    5.47
                    
                    3.20
      yearsGranted
                    
                    
                    574,719
                    
                    
                    
                    2.30Replacement
      options granted to Mobilisa employees
                    
                    
                    2,363,381
                    
                    
                    
                    0.50Forfeited
      or expired
                    
                    
                    (826,690
                    )
                    
                    
                    5.17Exercised
                    
                    
                    (673,826
                    )
                    
                    
                    0.48Outstanding
      at December 31, 2008
                    
                    
                    2,897,801
                    
                    
                    
                    2.03
                    
                    4.05
      yearsGranted
                    
                    
                    167,136
                    
                    
                    
                    1.33Forfeited
      or expired
                    
                    
                    (358,298
                    )
                    
                    
                    4.67Exercised
                    
                    
                    (74,522
                    )
                    
                    
                    0.44
                    
                    
                    
                    $
                    84,258Outstanding
      at December 31, 2009
                    
                    
                    2,632,117
                    
                    
                    $
                    1.72
                    
                    3.50
      years
                    
                    $
                    6,168,094Exercisable
      at December 31, 2009
                    
                    
                    2,338,075
                    
                    
                    $
                    1.66
                    
                    3.44
      years
                    
                    $
                    5,682,240
 
 Included
in the above schedule are 25,000 non-plan options, all of which are fully
vested.
 
 The
assumptions used for the specified reporting periods and resulting estimates of
weighted average fair value per share of options granted during those periods
were as follows:
  F-19
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Years
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Risk-free
      interest rate
                  
                  
                  2.2
                  %
                  
                  
                  3.3
                  %
                  
                  
                  4.6
                  %Expected
      dividend yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      lives
                  
                  4.6
      years
                  
                  
                  4.9
      years
                  
                  
                  4.6
      yearsExpected
      volatility
                  
                  
                  58
                  %
                  
                  
                  60
                  %
                  
                  
                  59
                  %Forfeiture
      rate
                  
                  
                  5
                  %
                  
                  
                  5
                  %
                  
                  
                  5
                  %
 
 Expected
volatility was calculated using the historical volatility of the Company’s stock
price over the last five years.  The expected term of the options is
estimated based on the Company’s historical exercise rate and forfeiture rates
are estimated based on employment termination experience.  The risk
free interest rate is based on U.S. Treasury yields for securities in effect at
the time of grants with terms approximating the term of the
grants.  The assumptions used in the Black-Scholes option valuation
model are highly subjective, and can materially affect the resulting
valuation.
 
 The
following is a summary of stock options as of December 31, 2009:
 
 Options Outstanding
                                                    
                                                    Options ExercisableRange of  Exercise Prices
                                                    
                                                    Number of
                                                      Options
                                                    
                                                    Weighted-
                                                      average
                                                      Remaining Life
                                                    
                                                    Weighted-
                                                      average
                                                      Exercise
                                                      Price
                                                    
                                                    Number of
                                                      Options
                                                    
                                                    Weighted-
                                                      average
                                                      Exercise
                                                      Price$0.23
      to $2.00
                                                    
                                                    1,849,679
                                                    
                                                    3.34
                                                    
                                                    
                                                    $
                                                    0.68
                                                    
                                                    
                                                    
                                                    1,758,158
                                                    
                                                    $
                                                    0.63$2.01
      to $4.00
                                                    
                                                    386,446
                                                    
                                                    3.80
                                                    
                                                    
                                                    
                                                    2.50
                                                    
                                                    
                                                    
                                                    183,925
                                                    
                                                    
                                                    2.64$4.01
      to $6.00
                                                    
                                                    289,630
                                                    
                                                    4.53
                                                    
                                                    
                                                    
                                                    5.38
                                                    
                                                    
                                                    
                                                    289,630
                                                    
                                                    
                                                    5.38$6.01
      to $9.80
                                                    
                                                    106,362
                                                    
                                                    2.30
                                                    
                                                    
                                                    
                                                    6.99
                                                    
                                                    
                                                    
                                                    106,362
                                                    
                                                    
                                                    6.992,632,117
                                                    
                                                    3.50
                                                    years
                                                    
                                                    $
                                                    1.72
                                                    
                                                    
                                                    
                                                    2,338,075
                                                    
                                                    $
                                                    1.66
 
 The
weighted-average fair value of the options granted during the years ended
December 31, 2009, 2008 and 2007 is $0.76, $1.20 and $2.85,
respectively.
 
 As of
December 31, 2009, the Company had 1,653,101 options available for future grant
under the existing Stock Option and Equity Incentive Plans.
 
 Subject
to a consulting agreement described below with an investor relations firm, the
Company issued 10,417 restricted shares of its common stock per month commencing
March 16, 2009.  During the year ended December 31, 2009, the Company
recorded the fair value of $147,817 for these shares in general and
administrative expenses.
 
 As of
December 31, 2009, there was $312,163 of total unrecognized compensation cost,
net of estimated forfeitures, related to all unvested stock options and
restricted stock, which is expected to be recognized over a weighted average
period of approximately 2.9 years.
 
 Stock
based compensation expense for the years ended December 31, 2009, 2008 and 2007
is as follows:
 
 Years
      Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Compensation
      cost recognized:Stock
      options
                    
                    $
                    218,007
                    
                    
                    $
                    322,272
                    
                    
                    $
                    397,927Restricted
      stock
                    
                    
                    153,906
                    
                    
                    
                    74,004
                    
                    
                    
                    126,000$
                    371,913
                    
                    
                    $
                    396,276
                    
                    
                    $
                    523,927
  F-20
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Stock
based compensation in included in operating expenses as follows:
 
 Years
      Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Selling
                  
                  $
                  23,279
                  
                  
                  $
                  40,761
                  
                  
                  $
                  178,342General
      and administrative
                  
                  
                  299,807
                  
                  
                  
                  326,171
                  
                  
                  
                  290,277Research
      and development
                  
                  
                  48,827
                  
                  
                  
                  29,344
                  
                  
                  
                  55,308$
                  371,913
                  
                  
                  $
                  396,276
                  
                  
                  $
                  523,927
 
 The
Company did not capitalize any share-based compensation cost in 2009, 2008 and
2007.
 
 The
Company has a net operating loss carry-forward as of December 31, 2009, and
no excess tax benefits for the tax deductions related to share based awards were
recognized in the statements of operations. Additionally, no incremental tax
benefits were recognized from stock options exercised in 2009 that would have
resulted in a reclassification to reduce net cash provided by operating
activities with an offsetting increase in net cash provided by financing
activities.
 
 During
2008, the Company’s Board of Directors extended the expiration date of 150,000
stock options for the Company’s directors who resigned from the Board for an
additional nine months.  As a result, in accordance with SFAS 123R,
the Company recorded the fair value of the extension of $52,314 as a non cash
expense in the year ended December 31, 2008.
 
 All stock
options have been issued with an exercise price that is equal or above the fair
market value of the Company’s Common Stock on the date of grant.
 
 Warrants
 
 All
warrants have been issued with an exercise price that is equal to or above the
fair market value of the Company’s common stock on the date of
grant.  As of December 31, 2009, the Company had warrants outstanding
for 599,000 shares of common stock at a weighted average exercise price of
$5.27, which will expire between August 9, 2010 and August 21,
2011.  During the years ended December 31, 2009 and 2007 warrants for
66,551 and 16,000 common shares were exercised at average exercise prices of
$0.32 and $5.40 per share with intrinsic values of $48,899 and $30,560,
respectively.  No warrants were exercised in 2008.
 
 11.  COMMITMENTS AND
CONTINGENCIES
 
 Operating
Leases
 
 The
Company has entered into various leases for office space, office equipment and
storage space expiring through July 2017.  Future minimum lease
payments under these lease agreements are as follows:
 
 Year Ending December 31:2010
                    
                    $
                    425,2962011
                    
                    
                    198,3352012
                    
                    
                    202,0532013
                    
                    
                    205,8382014
                    
                    
                    209,758Thereafter
                    
                    
                    204,722$
                    1,446,002
 
 Rent
expense for the years ended December 31, 2009, 2008 and 2007 amounted to
$515,546, $441,003 and $217,792, respectively.
  F-21
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Royalty and License
Agreements
 
 The
Company entered into an agreement with a former officer of the Company during
1996 to license certain software.  The agreement stipulated, among
other provisions, that the officer would receive royalties equal to a percentage
of the Company’s gross sales.  This agreement was terminated in May
1999 and was superseded by a new agreement which calls for payment of royalties
of .005% on gross sales from $2,000,000 to $52,000,000 and .0025% on gross sales
in excess of $52,000,000 pertaining to those patents on which Mr. Messina was
identified as an inventor.  As of December 31, 2009, total fees
payable under this agreement amounted to $1,019.
 
 On
February 19, 2003, the Company filed a summons and complaint upon CardCom
Technology, Inc. alleging infringement on its patent.  During
September 2003, as a result of a settlement of a patent infringement suit, the
Company granted CardCom Technology, Inc. a royalty license to use certain of the
Company’s patents in connection with the manufacture, use and sale of CardCom’s
age verification products in the United States and Canada.  It also
provides that CardCom will pay royalties of approximately 10% on its net
sales.  For the years ended December 31, 2009, 2008 and 2007, the
Company received $8,003, $8,962 and $21,878, respectively, in royalty fees
pursuant to this agreement.  Effective March 12, 2006, the Company
renewed the licensing agreement with CardCom for an additional five
years.
 
 Employment
Agreements
 
 On March
14, 2008, the Company entered into an employment agreement with Dr. Ludlow,
pursuant to which Dr. Ludlow was appointed the Company’s Chief Executive
Officer.   Dr. Ludlow currently receives a salary of $226,600 per
year, was granted options to purchase 25,000 shares of the Company’s common
stock on March 20, 2008 that are immediately exercisable at a price per share
equal to 110% of the fair market value of the Company’s common stock on the date
of grant, and an annual bonus based on reasonable objectives established by the
Company’s Board of Directors.  In the first quarter of 2008, the
Company recorded $66,120 of stock-based compensation related to these
options.  Dr. Ludlow will be entitled to receive benefits in
accordance with the Company’s existing benefit policies and will be reimbursed
for Company expenses in accordance with the Company’s expense reimbursement
policies.  The employment agreement has a term of two
years.  Dr. Ludlow may terminate the agreement at any time on 60 days
prior written notice to the Company.  In addition, the Company or Dr.
Ludlow may terminate the employment agreement immediately for cause, as
described in the employment agreement.  If the Company terminates the
agreement without cause, Dr. Ludlow will be entitled to severance equal to one
year of his base salary, in addition to salary already earned.  If Dr.
Ludlow terminates the agreement for cause, Dr. Ludlow will be entitled to
receive a payment equal to $50,000, in addition to salary already
earned.
 
 Consulting
Agreements
 
 In March
2009, the Company entered into an agreement with an investor relations
firm.  The engagement period is for twelve months commencing March 16,
2009.  The agreement shall be automatically renewed for successive
twelve month periods unless either party gives written notice no later than 30
days prior to the expiration period.  In exchange for its services,
the Company will pay the firm $13,500 per month for the first 24 months of the
agreement.  Afterwards, the fee may be subject to change by mutual
agreement of the parties.
 
 In
addition to the cash fees described above, each month for the first 24 months of
the agreement, the Company shall deliver to the investor relations firm 10,417
shares of restricted stock.  The stock will be restricted from sale
for a period of two years from the date of grant.
 
 In August
2009, the Company entered into consulting agreements with two previous
principals of Positive Access.  In exchange for their services related
to the transitioning of operations of Positive Access with Intellicheck
Mobilisa, the Company will pay each of the principals $8,333 per month for a
period of twelve months commencing September 1, 2009.
  F-22
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Legal
Proceedings
 
 In
December 2009, the Company was named a defendant in a lawsuit filed by Eid
Passport Inc. The Complaint filed and served by Eid Passport asserts claims for
monopolization and attempted monopolization under federal and Oregon antitrust
laws, as well as an Oregon state law claim for intentional interference with
contract, business relationships and/or prospective advantage.  In
connection with these claims, Eid Passport alleges that Intellicheck Mobilisa
engaged in unlawful exclusionary and predatory conduct in competing with Eid
Passport and others in the sale/licensing of drivers license reading technology
and products. In January, 2010, the Company moved to dismiss all antitrust
claims and moved to compel arbitration of the intentional interference claim. On
February 26, 2010, before the Company's motions were heard by the Court, Eid
Passport filed an Amended Complaint. The amended complaint reasserts the same
antitrust claims, withdraws the claim for intentional interference, and makes an
additional claim for false advertising.  The Company is vigorously
defending against the lawsuit.
 
 On
April 28, 2009, the Company and TriCom Card Technologies, Inc. ended long-term
patent dispute litigation by entering into a patent settlement agreement and a
license agreement.  Intellicheck Mobilisa sued TriCom in 2003 for
infringement of two patents relating to machine reading of identification cards,
including driver licenses.  Pursuant to the settlement agreement, TriCom
acknowledged the validity of Intellicheck Mobilisa’s patents, and that sales of
TriCom’s age verification products are subject to the terms of a license
agreement entered contemporaneously with the settlement agreement, the terms of
which are confidential.  The impact of this settlement did not have a
material impact on the financial statements.
 
 We are
not aware of any infringement by our products or technology on the proprietary
rights of others.
 Other
than as set forth above, we are not currently involved in any legal or
regulatory proceeding, or arbitration, the outcome of which is expected to have
a material adverse effect on our business.
  12.   RELATED PARTY
TRANSACTIONS
 
 Mobilisa
leases office space from a company (“Lessor Company”) that is wholly-owned by
two directors, who are members of management.  For the year ended
December 31, 2009 total rent payments for this office space were
$74,976.  For the period beginning March 15, 2008 through December 31,
2009, total rental payments for this office space were $59,357.  The
Company entered into a 10-year lease for the office space ending in
2017.  The annual rent for this facility is currently $74,976 and is
subject to annual increases based on the increase in the CPI index plus
1%.
 
 The
Lessor Company's entire operations consist of the leased property and related
bank debt.  The Company is a guarantor of the loans for the leased
property.  As of December 31, 2009, the Company's maximum
exposure to loss is $404,000.
 
 Under
FASB Interpretation ("FIN") No. 46 (revised December 2003) "Consolidation of Variable Interest
Entities – an Interpretation of ARB No. 51," companies are required to
consolidate a related variable interest entity ("VIE") when the reporting
company is the "primary beneficiary" of that entity and holds a variable
interest in the VIE.  The determination of whether a reporting company
is the primary beneficiary of a VIE ultimately turns on whether the reporting
entity will absorb a majority of the VIE's anticipated losses or receive a
majority of the VIE's anticipated gains.
 
 The
Company analyzed its transactions with and relationship to the Lessor Company
and concluded that it had an implicit variable interest in the Lessor
Company.  However, the primary beneficiary, based on an assessment of
what entity absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, is the common owners.  Accordingly, the Company is
not required to consolidate the operations of the Lessor Company.
 
 In
addition, the Company’s Mobilisa subsidiary has a $250,000 revolving credit line
with a bank that is guaranteed by two directors of the Company who are also
members of management.
  F-23
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 13.  QUARTERLY FINANCIAL DATA
(UNAUDITED)
 
 The
following table sets forth unaudited financial data for each of Intelli-Check’s
last eight fiscal quarters.
 
 Year Ended December 31, 2009
                        
                        
                        Year Ended December 31, 2008First
                          Quarter
                        
                        
                        Second
                          Quarter
                        
                        
                        Third
                          Quarter
                        
                        
                        Fourth
                          Quarter
                        
                        
                        First
                          Quarter
                        
                        
                        Second
                          Quarter
                        
                        
                        Third
                          Quarter
                        
                        
                        Fourth
                          Quarter(Revised)
                        
                        
                        (Revised)
                        
                        
                        
                        
                        
                        
                        
                        
                        (Revised)
                        
                        
                        (Revised)
                        
                        
                        (Revised)
                        
                        
                        (Revised)(Dollars in thousands)Income
      Statement Data:Revenues
                        
                        $
                        2,143
                        
                        
                        $
                        3,940
                        
                        
                        $
                        3,755
                        
                        
                        $
                        2,577
                        
                        
                        $
                        1,157
                        
                        
                        $
                        2,731
                        
                        
                        $
                        3,554
                        
                        
                        $
                        2,575Gross
      profit
                        
                        
                        1,418
                        
                        
                        
                        2,627
                        
                        
                        
                        2,396
                        
                        
                        
                        1,644
                        
                        
                        
                        767
                        
                        
                        
                        1,733
                        
                        
                        
                        2,252
                        
                        
                        
                        1,538Income
      (loss) fromoperations
                        
                        
                        (538
                        )
                        
                        
                        474
                        
                        
                        
                        109
                        
                        
                        
                        (562
                        )
                        
                        
                        (479
                        )
                        
                        
                        (202
                        )
                        
                        
                        167
                        
                        
                        
                        (32,456
                        )Net
      income (loss)
                        
                        
                        (535
                        )
                        
                        
                        473
                        
                        
                        
                        110
                        
                        
                        
                        (574
                        )
                        
                        
                        (448
                        )
                        
                        
                        (191
                        )
                        
                        
                        167
                        
                        
                        
                        (32,448
                        )Net
      income (loss) percommon
      share:Basic
      and diluted
                        
                        
                        (0.02
                        )
                        
                        
                        0.02
                        
                        
                        
                        0.00
                        
                        
                        
                        (0.02
                        )
                        
                        
                        (0.03
                        )
                        
                        
                        (0.01
                        )
                        
                        
                        0.01
                        
                        
                        
                        (1.29
                        )
 
 Certain
quarters marked as “revised” include corrections due to the accounting error
described more fully in Note 1 to our consolidated financial
statements.
 
 The
fourth quarter of 2008 includes impairments on intangible assets and goodwill of
$6,293,083 and $25,799,547, respectively.  See Note 4 to our
consolidated financial statements.
 
 Historically,
we have experienced lower sales volume in the first quarter of the
year.  Due to rounding, quarterly net income (loss) per share may not
add up to the total loss per share for the year.
  F-24
  INTELLICHECK
MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
 
 Schedule
II – Valuation and Qualifying Accounts
 
 Year
Ended December 31, 2009, 2008 and 2007
 
 Balance at
                      
                      
                      
                      
                      
                      Net Deductions
                      
                      
                      Balance atYear ended December 31, 2009
                      
                      Beginning of Period
                      
                      
                      Additions
                      
                      
                      and Other
                      
                      
                      End of PeriodDoubtful
      accounts and allowances
                      
                      $
                      22,038
                      
                      
                      $
                      7,329
                      
                      
                      $
                      (21,881
                      )
                      
                      $
                      7,486Deferred
      tax assets valuation allowance
                      
                      $
                      12,583,000
                      
                      
                      
                      
                      
                      
                      $
                      (479,000
                      )
                      
                      $
                      12,104,000
 
 Balance at
                      
                      
                      
                      
                      
                      Net Deductions
                      
                      
                      Balance atYear ended December 31, 2008
                      
                      Beginning of Period
                      
                      
                      Additions
                      
                      
                      and Other
                      
                      
                      End of PeriodDoubtful
      accounts and allowances
                      
                      $
                      10,000
                      
                      
                      $
                      68,800
                      
                      
                      $
                      (56,762
                      )
                      
                      $
                      22,038Deferred
      tax assets valuation allowance
                      
                      $
                      14,552,000
                      
                      
                      
                      
                      
                      
                      $
                      (1,969,000
                      )
                      
                      $
                      12,583,000
 
 Balance at
                      
                      
                      
                      
                      
                      Net Deductions
                      
                      
                      Balance atYear ended December 31, 2007
                      
                      Beginning of Period
                      
                      
                      Additions
                      
                      
                      and Other
                      
                      
                      End of PeriodDoubtful
      accounts and allowances
                      
                      $
                      10,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      10,000Deferred
      tax assets valuation allowance
                      
                      $
                      13,614,000
                      
                      
                      $
                      938,000
                      
                      
                      
                      -
                      
                      
                      $
                      14,552,000
  F-25