**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-K**


**FOR
      ANNUAL AND TRANSITION REPORTS**


**PURSUANT
      TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





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, 2006




OR




o
            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





**Intelli-Check,
      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.)


246
                  Crossways Park West, Woodbury, New
                  York
              
              11797(address
                  of principal executive
                  offices)
              
              (Zip
                  Code)


Registrant’s
      telephone number, including area code:  (516)
      992-1900





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 o   
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 o   
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 x    
No
o
  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. o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange. (Check one):
  Large
        Accelerated Filer o Accelerated
        Filer o
        Non-Accelerated Filer x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes o   
No
x


State
      the
      aggregate market value of the voting and non-voting stock held by non-affiliates
      of the Issuer: $68,478,067 (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, 2006).




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
            
            12,243,778(Title
                of Class)
            
            (No.
                of Shares Outstanding at March 29,
                2007)





DOCUMENTS
      INCORPORATED BY REFERENCE: The following document (or parts thereof) are
      incorporated into the following parts of this Form 10-K: (1) Proxy Statement
      for
      2007 Annual Meeting of Stockholders-Part III, Item 11.









**TABLE
      OF CONTENTS**




**Part
                I**1.
            
            
            Business
            
            
            31A.
            
            
            Risk
                Factors
            
            
            121B.
            
            
            Unresolved
                Staff Comments
            
            
            152.
            
            
            Properties
            
            
            153.
            
            
            Legal
                Proceedings
            
            
            154.
            
            
            Submission
                of Matters to a Vote of Security Holders
            
            
            16**Part
                II**


5.
            
            
            Market
                for Common Equity, Related Stockholder Matters and Issuer Purchases
                of
                Equity Securities
            
            
            176.
            
            
            Selected
                Financial Data
            
            
            187.
            
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            
            187A.
            
            
            Quantitative
                and Qualitative Disclosures About Market Risks
            
            
            268.
            
            
            Financial
                Statements and Supplementary Data
            
            
            269.
            
            
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            
            269A.
            
            
            Controls
                and Procedures
            
            
            269B.
            
            
            Other
                Information
            
            
            26**Part
                III**


10.
            
            
            Directors
                and Executive Officers and Corporate Governance
            
            
            2711.
            
            
            Executive
                Compensation
            
            
            3012.
            
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            
            3013.
            
            
            Certain
                Relationships, Related Transactions and Director
                Independence
            
            
            3214.
            
            
            Principal
                Accountant, Fees and Services
            
            
            33**Part
                IV**


15.
            
            
            Exhibits
                and Financial Statement Schedules
            
            
            34




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. We have developed and are currently marketing
      an
      advanced document verification system as part of our identity management
      solutions to enable a user to detect altered and tampered identification cards.
      We are a Microsoft ® Certified Partner. Our technology addresses 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 utilize fraudulent identification cards as proof
                of
                identity;




§
            **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;
                and




§
            **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.




**Our
      Products and Services**




ID-Check®technology




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).




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, certain versions of Linux and it can easily be
      ported to other platforms as the need arises.




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.




3




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
      software solution that is designed to replicate the features of
      ID-Check ® for
      Windows based platforms and is a Microsoft ® Gold
      certified product. ID-Check ® PC is
      designed to read the smart chip contained in the CAC card.




ID-Traveler




ID-Traveler
      is a software solution that can electronically compare two forms of government
      issued IDs instantaneously and determine whether the common fields match (e.g.
      name, address, date of birth). Should the fields match, the information is
      highlighted in one color. If the fields do not produce a match, the information
      is highlighted in a different color. Two forms of identification that are
      frequently used include driver licenses, state issued ID cards, military IDs,
      passports, border crossing cards and visas. The program also has the ability
      to
      store the images of the documents provided for proof of ID and has the ID-Prove
      module embedded so that with Internet connectivity it can generate a series
      of
      questions to test one’s claimed identity.




ID-Prove




ID-Prove
      is a software solution that is intended to add additional layers to IDN’s
      identity management suite of products. ID-Prove, when prompted, will provide
      an
      end user a variable number of “out of wallet” questions about that individual.
      These questions seek to ensure that the individual in question is truly who
      they
      claim to be. Currently, the ID-Prove product is not sold separately, but is
      integrated into our ID-Traveler and ID-Check ® Portal
      products.




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.




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.




4




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.




**New
      Products and Services**




ID-Check ® Portal




The
      ID-Check ® Portal
      product is designed to support a variety of industries, including financial,
      retail and government in their “in-person” proofing process, by verifying the
      encoded format of government issued IDs as well as performing additional layers
      of security checks to assist in proving the claimed identity of the individual
      presenting such documents for identification purposes. The product has the
      capability of checking over 400 public data bases to match information such
      as
      the address, date of birth, telephone numbers and social security number against
      known information as well as the driver license number, where available. It
      has
      an option of providing a series of multiple choice questions, for the person
      being identified to answer, by utilizing the ID-Prove software solution. The
      questions are of such a nature that only the real person would know the proper
      response.





ID-Check ® Technology integrated with 3RD Ring’s Genuine Document System
      (GDS)





In
      December 2006, we entered into an agreement with 3RD Ring pursuant to which
      we
      agreed to integrate and jointly market our combined technologies. The combined
      system provides users with little or no document examination experience with
      a
      simple, secure and cost effective means of verifying the authenticity of
      government issued identification documents.  It is capable of verifying the
      encoded formats on U.S. and Canadian driver licenses, U.S. and provincial
      non-driver IDs, military IDs, U.S and international passports, and U.S Resident
      Alien cards.  Additionally, the system is capable of verifying the security
      and forensic features, including holograms and other optical variable
      characteristics, for these as well as other government issued documents such
      as
      U.S Social Security cards.  This powerful enhanced document verification
      system will be jointly marketed to government agencies, law enforcement agencies
      and the private sector.





Instant
      Credit Application Kiosk Software Applications





These
      are
      custom software applications that Intelli-Check has developed for a variety
      of
      major financial service companies.  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-Cap67 TM Handheld 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.




5




**Upgrade
      Capability**




Our
      software requires periodic updates as states and provinces adjust or modify
      the
      format of their electronically stored information. Jurisdictional updates can
      be
      distributed 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 Intelli-Check products for the first year after purchase. We sell
      upgrade packages for the period commencing after the first year of purchase.




**Background
      on Identification Documentation**




Driver
      license




The
      driver license is the most widely used form of government issued photo
      identification. 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. There are approximately 245 million driver licenses in circulation
      in the U.S. and Canada. Our technology can read the data on all currently
      encoded licenses, even those that do not comply with the AAMVA/ANSI/ISO
      standards, which we believe to be over 230 million of those issued at the
      current time. 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 three
      Canadian Provinces that have either not yet encoded their license or completed
      a
      rotation with encoding begin to encode and U.S. jurisdictions that have recently
      begun to encode complete their rotations.




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.




Scope
      of Authentication Capabilities




We
      believe that we are the only company that can machine read and verify the format
      contained on the machine readable zone on all of the North American encoded
      driver licenses and non-driver IDs issued by the U.S. states and Canadian
      Provinces.





**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, new 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.




6




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




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
      a
      patented software application 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.




**ID-Check** **®** **** **Solutions
      and Benefits**




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. Our ID-Check ® Portal
      product can verify the claimed identity of the individual in question as well. 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




7




§
            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 validation 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.




**Strategy**




Our
      objective is to be a leading provider of productivity enhancement and identity
      management solutions. These solutions include our identity verification
      technology systems and software in the work-flow, commercial fraud protection,
      access control and age verification markets. Key elements of our strategy are
      as
      follows:




Productivity
      Enhancement. Because
      of our recent successes in the retail vertical market and our entrance into
      the
      financial services vertical, 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.  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, EDS and the Anteon division of General Dynamics, integrators
      in the defense industry; Intermec, Metrologic and Motorola hardware
      manufacturers; and Digimarc and Viisage, now part of L1 Identity Solutions,
      Inc., producers of driver licenses for approximately 90% of the jurisdictions
      in
      North America. 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 by continuing to market and support our systems and software.
      Our
      sales and marketing departments are organized by target
      market rather than geographic area to
      provide focus and create experts in each area.




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
      and C-Link ® software products for Windows and Windows CE platforms and intend to similarly
      continue to license our 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. Effective March 12, 2006, we renewed the licensing agreement
      with CardCom for an additional five years. We also filed a patent infringement
      lawsuit against Tricom Card Technologies, Inc. in July 2003, which is currently
      being litigated.




**Our
      Revenue Sources**




We
      derive our revenue from the following sources:




8




§
            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; and




§
            Sale
                of software upgrades and extended maintenance
                programs




**Our
      Target Markets**




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, which can accurately
      read
      the electronically stored information. We target the markets that would most
      benefit from our systems and software.




In
      the past twelve months, we have marketed our products to opportunities where
      our ID-Check ®  technology
      can be used to enhance productivity. We have made significant progress in the
      marketplace for the retail issuance of instant credit. We believe there is
      a
      financial benefit and a compelling business model for customers in this
      marketplace to utilize our technology.




**Productivity
      Enhancement**


§
              
              Mass
                    merchandisers and retailers
              
              §
              
              Auto
                    dealerships and rental car agencies§
              
              Banks
                    and other financial institutions
              
              §
              
              Casino
                    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 market**


§
                  
                  Bars
                          and night clubs
                  
                  §
                  
                  Stadiums
                          and arenas§
                  
                  Convenience
                          stores
                  
                  §
                  
                  Casinos
                            and gaming establishments§
                  
                  Grocery
                            chains
                  
                  §
                  
                  Sellers
                              of sexually explicit material§
                  
                  Restaurants
                  
                  §
                  
                  Firearm
                            dealers
  9


**Representative
      Customers**





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
                  
                  §
                  
                  Toys
                            R Us§
                  
                  MGM
                            Grand
                  
                  §
                  
                  Foxwoods
                              Resorts and Casino§
                  
                  Caesar’s
                              Palace
                  
                  §
                  
                  Mohegan
                                Sun Resort Casino§
                  
                  Vanguard


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


§
                    
                    JFK
                                Airport in New York, O’Hare International Airport in Chicago and Reagan
                                National Airport in Washington DC
                    
                    §
                    
                    New
                                York, Vermont, Delaware and New Hampshire Department
                                of Motor
                                Vehicles§
                    
                    American
                                Stock Exchange
                    
                    §
                    
                    Port
                                  Authority of New York and New
                                  Jersey§
                    
                    Fort
                                  Sam Houston and 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:


§
                    
                    Integrated
                                Solutions International LLC
                    
                    §
                    
                    Drake
                                Petroleum§
                    
                    Sunoco
                    
                    §
                    
                    Houston’s
                                  Restaurants§
                    
                    Exxon/Mobil
                                  franchisees
                    
                    §
                    
                    Anton
                                    Airfoods,
                                    Inc.


**Marketing
      and Distribution**




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. During the second quarter of
      2006,
      we introduced our newly designed web site that is providing enhanced customer
      support and plan to introduce the ability to order our products online during
      2007.




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 markets.  We promote the advantages
      and ease of use of our products through:


§
                
                Endorsements
                              by nationally known public interest groups and trade
                              associations;
                
                §
                
                Paid
                              keyword searches;§
                
                Trade
                              publications;
                
                §
                
                Web
                                seminars, as well as our own
                                website;§
                
                Trade
                                shows;
                
                §
                
                Various
                                  conventions and industry specific
                                  seminars.
  10





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




We
      further intend to add qualified “value added” remarketers that are capable of
      reaching smaller customers. We believe this represents the most cost-effective
      way to reach numerous “mom and pop” establishments in North America involved in
      the sale of age restricted products. Furthermore, in order to broaden our sales
      “reach” into existing and new markets, we will continue to enter into selective
      agreements with proven application solution providers, system integrators,
      resellers and independent sales representatives. Basically, we reorganized
      our
      entire distribution network to provide us with greater
      effectiveness.




**Competition**




We
      compete in a market 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, Positive
      Access, 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.
      In addition, some of these other products cannot connect to a personal computer
      or use a printer.




We
      have experienced and expect to continue to experience increased competition
      in
      the age verification market, and have to date experienced limited competition
      from companies in the document verification market. 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. ****




**Manufacturing**




In
      January 2004, we entered into a two year product supply agreement for the
      purchase of input devices. Under the terms of this agreement, these devices,
      which are private labeled, are programmed to work in conjunction with our ID-Check ®  technology. On
      December 30, 2005, we entered into a two year product supply agreement with
      the
      same manufacturer and with similar terms and conditions as the prior agreement.
      On March 14, 2006, we signed a product supply agreement with another
      manufacturer for the purchase of alternate input devices that are also
      programmed to work in
      conjunction with our ID-Check ®  technology.
      The agreement, which was effective until December 31, 2006, was automatically
      renewed for another year pursuant to the terms of the Agreement.




**Intellectual
      Property**




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. At present, we have
      other patent applications pending in the U.S. Patent and Trademark Office.
      These
      patents cover commercially important aspects of our capabilities relating to
      the
      authentication of a document, such as a driver license, along with the
      verification of the age of an individual associated with that document. Upon
      our
      acquisition of the assets of IDentiScan, we also received equitable ownership
      and sole ownership rights to intellectual property, including other patents
      and
      patent applications relating to age verification technology. We currently hold
      five (5) U.S. patents, two (2) Canadian patents and one (1) United Kingdom
      patent.




We
      have also been granted 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.




11




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, 2006, total fees
      payable under this agreement amounted to approximately $440.




**Employees**




As
      of March 29, 2007, we had twenty-one (21) full-time employees. Four (4) are
      engaged in executive management, eight (8) in information technology, six (6)
      in
      sales and marketing and (3) three in administration. 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 $3,238,959 and $2,879,970 for the fiscal years ended
      December 31, 2005 and December 31, 2006, respectively and our accumulated
      deficit was $41,987,852 as of December 31, 2006. Since we expect to incur
      additional expenditures in line with the sales growth of our business, we cannot
      assure you that we will achieve operating profits in the near future.




**We
      may be unable to meet our future capital requirements.**




Our
      capital requirements have been and will continue to be significant. In the
      event
      that we do not generate meaningful revenue, we would need to raise additional
      capital. If we are unable to raise additional capital, we plan to implement
      cost
      saving measures to sustain business activities on a reduced level. Acquisition
      and development opportunities and other contingencies may arise, which could
      require us to raise additional capital. 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.




We
      currently do not have a credit facility or any commitments for additional
      financing. We cannot be certain that additional financing, should it be needed,
      will be available when and to the extent required. If adequate funds are not
      available on acceptable terms, we may be unable to fund our expansion, develop
      or enhance our products, or respond to competitive pressures. Such limitation
      could have a material adverse effect on our business, financial condition and
      results of operations.




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




Our
      market is characterized by frequent new product announcements and rapid
      advancements in hardware technology. Significant technological change could
      render our existing technology obsolete. If we are unable to successfully
      respond to these developments, or do not respond in a cost-effective way, our
      business, financial condition and results of operations will be materially
      adversely affected.




**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. We cannot assure you that each of these
      jurisdictions will continue to cooperate with us. 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.




12




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




Our
      proprietary software products are designed to read, verify and capture
      information from identification cards. Currently, those customers located in
      Nebraska, New Hampshire, North Carolina and Texas have some restrictions on
      what
      can be done with this information without customer consent. Because issues
      of
      personal privacy continue to be a major topic of public policy debate, it is
      possible that in the future additional customers in these and other
      jurisdictions may be restricted from 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 markets
      to
      become impractical and reduce our revenues and potential revenues.




**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 markets 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.




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




Demand
      and market 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. Our business may suffer if the market develops more slowly
      than anticipated and does not sustain market 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 market,
      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.




13




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 market
      acceptance, claims by customers against us, or could cause us to incur
      additional costs, any of which could adversely affect our business.




**Our
      failure to protect our proprietary technology may impair our competitive
      position.**




We
      continue to allocate significant resources to develop new and innovative
      technologies which we utilize in our products and systems. We consider such
      allocation to be fundamental to our continued success as such success depends,
      to a significant degree, upon our ability to provide products and systems that
      provide superior functionality and performance compared to those of our
      competitors. Accordingly, we must protect our technology from unauthorized
      use.
      This is done by processes aimed at identifying and seeking appropriate
      protection for newly developed intellectual property, i.e., patents, trade
      secrets, copyrights and trademarks, as well as policies aimed at identifying
      unauthorized use of such property in the marketplace. These processes
      include:




§
            contractual
                arrangements providing for non-disclosure of proprietary
                information;




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




§
            protecting
                our trade secrets;




§
            protecting
                our copyrights and trademarks by registration and other appropriate
                means,




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




§
            establishing
                practices for identifying unauthorized use of our intellectual
                property.




While
      we actively protect our intellectual property, it does not follow that others
      will not intentionally or innocently use such intellectual property.
      Accordingly, at times we may be required to bring legal proceedings to preclude
      such unauthorized use. We are mindful that such measures can be costly and
      time
      consuming and undertake such measures only as a last resort.




These
      policies and practices with respect to our intellectual property rights do
      not
      prevent our competitors from independently developing products similar or
      superior to our products and technologies. It merely protects our property
      rights created as a result of our allocating significant portions of our
      technical and monetary resources.




**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 which, 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.




14




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 29, 2007, the closing bid price of our common stock has varied
      from a high of $19.45 to a low of $2.10 per share, as reported on the American
      Stock Exchange. 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;




§
            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
      shareholders 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.




**Item
      1B.** **Unresolved
      Staff Comments**




Not
      applicable.





**Item
        2.** **Properties**




Our
      executive offices are currently located in Woodbury, New York, where we
      currently occupy approximately 7,100 square feet of leased space pursuant to
      an
      amended lease expiring on December 31, 2010. Payments under the lease were
      $243,577 for 2004, $243,731 for 2005, $204,217 for 2006 and will be $881,728
      for
      the remaining years of the lease. We believe that our office space is sufficient
      for current operations.




Additionally,
      our Chief Operating Officer leases office space in Massachusetts on a month
      to
      month basis. Payments under the lease were $7,608 for 2006.




**Item
        3.** **Legal
        Proceedings**





On
      August
      1, 2003, we filed a summons and complaint against Tricom Card Technologies,
      Inc.
      alleging infringement on our patent and seeking injunctive and monetary
      relief.  On October 23, 2003, we amended our complaint to include
      infringement on an additional patent.  On May 18, 2004, we filed a Second
      Amended Complaint alleging infringement and inducement to infringe against
      certain principals of Tricom in their personal capacities, as well as alleging
      in the alternative false advertising claims under the Lanham Act against all
      the
      defendants.  The principals moved to dismiss the claims against them, and
      Tricom moved to dismiss the false advertising claims, which motions have been
      administratively terminated by the Court.  On August 1, 2005, defendants
      filed an Answer and Affirmative Defenses to the Second Amended Complaint and
      Tricom filed a declaratory counterclaim.  On November 2, 2005, the Court
      allowed Tricom to plead two additional defenses and declaratory counterclaims
      in
      the case, and on January 3, 2006, the parties filed a Stipulation of Dismissal
      of the Estoppel and Unenforceability Counterclaims and Affirmative
      Defenses.  On February 28, 2006, the parties filed a Supplemental Proposed
      Joint Pretrial Order, and on March 1, 2006, the Court certified that fact
      discovery in this action was complete. On
      June 29, 2006, the Court held a pre-motion conference at our request to discuss
      our proposed motion to disqualify defendants' counsel for a conflict of
      interest.  Pursuant to the Court's order, we served moving papers upon
      defendants on July 14, 2006 and defendants served opposition to the motion
      on
      around July 28, 2006.  We served a reply to the opposition on August 11,
      2006 and filed the motion with the Court.  Also, on or about July 21, 2006,
      defendants filed with the Court a motion for claim construction together with
      our opposition to defendants' motion and defendants' reply to the
      opposition.  The Court has not scheduled a hearing date for either motion
      and there is no trial date pending.




15




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**




During
      the fourth quarter of our fiscal year ended December 31, 2006 there were no
      matters submitted to a vote of security holders.




16


**PART
      II**




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




(a)  Our
      common stock is traded on the American Stock Exchange under the symbol “IDN.”
The following table indicates high and low sales quotations for the periods
      indicated based upon information supplied by AMEX.





**Low**
            
            **High****2005**First
                Quarter
            
            $
            4.36
            
            $
            6.95Second
                Quarter
            
            $
            3.85
            
            $
            6.36Third
                Quarter
            
            $
            4.01
            
            $
            5.20Fourth
                Quarter
            
            $
            2.90
            
            $
            4.40**2006**First
                Quarter
            
            $
            3.77
            
            $
            7.30Second
                Quarter
            
            $
            4.41
            
            $
            6.60Third
                Quarter
            
            $
            4.80
            
            $
            6.23Fourth
                Quarter
            
            $
            5.40
            
            $
            7.49**2007**January
                1 - March 29, 2007*
            
            $
            5.75
            
            $
            7.85




*
      Portion
      of first fiscal quarter of 2007.




(b)  Number
      of Record Holders of Common Stock .
      The number of holders of record of our Common Stock on March 29, 2007 was 69,
      which does not include individual participants in security position
      listings.




(c)  Dividends .
      There were no cash dividends or other cash distributions made by us during
      the
      fiscal year ended December 31, 2006. 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
      9, 2005, we successfully completed our private placement of 1,250,000 shares
      of
      common stock and received net proceeds of approximately $4,440,000. In
      connection with the private placement, investors received five year warrants
      to
      purchase 500,000 shares of common stock at an exercise price of $5.40 per share.
      We purchased 110,000 of these warrants on December 13, 2005 for $25,000 and
      retired them, leaving 390,000 currently outstanding. Our placement agent
      received $350,000 and a warrant to purchase 125,000 shares of our common stock
      at a price of $5.40 per share which expires on August 8, 2010, as compensation
      for services rendered in the private placement. These shares were subsequently
      registered on a Registration Statement on Form S-3, which was declared effective
      as of October 7, 2005. Such securities were issued pursuant to the exemption
      from registration contained in Section 4(2) of the Securities Act as they were
      issued to accredited investors.





On
      September 21, 2005, we entered into a two (2) year agreement with a consulting
      firm to help with our public and investor relations activities. We agreed to
      pay
      $6,000 per month for the first 12 months of the agreement and $9,000 per month
      for the following 12 months. In addition, we issued a warrant granting the
      right
      to purchase 100,000 shares of our common stock at a purchase price of $4.62
      per
      share, which vested ratably over the twelve month period after signing. All
      warrants are currently vested. The fair value of this warrant amounted to
      $318,221 using the Black-Scholes valuation method and was recorded in Deferred
      Compensation during the third quarter of 2005. The contract was cancelable
      after
      the first year under certain terms and conditions. We renegotiated the terms
      of
      the Agreement at the end of the twelve month period and currently pay $6,000
      per
      month for the services. No underwriting discounts or commissions were paid
      with
      respect to such securities. Such securities were issued pursuant to the
      exemption from registration contained in Section 4(2) of the Securities Act
      as
      they were issued to accredited investors.




17




(e)  Repurchases
      of Equity Securities




In
      March 2001, our Board of Directors authorized, subject to certain business
      and
      market conditions, the purchase of up to $1,000,000 of our common stock. As
      of
      December 31, 2006, we cumulatively purchased 40,200 shares totaling
      approximately $222,000 and subsequently retired these shares. There were no
      shares purchased during 2006. We may purchase additional shares when warranted
      by certain conditions.




**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, 2006, are derived from the financial statements of
      Intelli-Check, Inc. The financial statements for the years ended December 31,
      2004, 2005 and 2006 were audited by Amper, Politziner & Mattia, P.C.
      independent registered certified public accountants. The selected financial
      data
      should be read in conjunction with the financial statements as of December
      31,
      2006 and 2005 and for each of the three years in the period ended December
      31,
      2006, the accompanying notes and the report of independent registered public
      accounting firms thereon, which are included elsewhere in this Form
      10-K.




**Years
                Ended December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**(In
                thousands)**Statement
                of Operations Data:**Revenue
            
            $
            1,139
            
            $
            1,236
            
            $
            1,119
            
            $
            2,384
            
            $
            3,162Loss
                from operations
            
            
            (5,936
            )
            
            (5,537
            )
            
            (7,017
            )
            
            (3,385
            )
            
            (3,103
            )Net
                Loss
            
            
            (5,550
            )
            
            (6,451
            )
            
            (6,923
            )
            
            (3,239
            )
            
            (2,880
            )Net
                loss per common share - basic and diluted
            
            
            (0.64
            )
            
            (0.74
            )
            
            (0.79
            )
            
            (0.31
            )
            
            (0.24
            )Common
                shares used in computing per share amounts - basic and
                diluted
            
            
            8,686
            
            
            9,218
            
            
            10,225
            
            
            11,201
            
            
            12,146




**As
                of December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**(In
                thousands)**Balance
                sheet data:**Cash
                and cash equivalents
            
            $
            1,911
            
            $
            3,307
            
            $
            1,750
            
            $
            528
            
            $
            527Working
                capital
            
            
            2,634
            
            
            8,350
            
            
            3,594
            
            
            5,289
            
            
            3,860Total
                assets
            
            
            5,415
            
            
            10,732
            
            
            5,615
            
            
            6,909
            
            
            5,656Total
                liabilities
            
            
            1,542
            
            
            1,956
            
            
            1,907
            
            
            1,519
            
            
            1,719Stockholders
                equity
            
            
            3,873
            
            
            6,901
            
            
            868
            
            
            5,390
            
            
            3,937




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


Overview





Intelli-Check
      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 markets.
      Additionally, it is currently being used to increase productivity by addressing
      inefficiencies and inaccuracies associated with manual data entry. The core
      of
      Intelli-Check’s product offerings is our proprietary software technology that
      verifies the authenticity of driver licenses, 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-issue 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 American
      Association of Motor Vehicle Administrators (AAMVA) since 1999 and have access
      to all the currently available encoded driver license formats.




18




Since
      the tragic events that occurred on September 11, 2001, and because of continuing
      terrorist threats worldwide since then, 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 should 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
      (FIPS 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. Since inception,
      we have incurred significant losses and negative cash flow from operating
      activities and, as of December 31, 2006, we had an accumulated deficit of
      approximately $42 million. We will continue to fund operating and capital
      expenditures from proceeds that we received
      from sales of our equity securities .
      In view of the rapidly 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.





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 and SMART
      chips, which enables us to target three distinct markets. Our original target market 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 markets, we have sold our products to some of the largest companies
      in
      the gaming industry, significant retailers, several large financial service
      companies, Certegy, now part of Fidelity National, one of the largest providers
      of check authorization services in the United States, a state port authority,
      military establishments, airports, nuclear power plants and high profile
      buildings. Our technology is currently being tested by several Fortune 50
      Companies. We have entered into strategic alliances with VeriFone, the largest
      provider of credit card terminals in the U.S., the two largest providers of
      driver licenses in North America to assist with their compliance with the
      provisions of the Real ID Act (which is intended to set standards for the
      issuance of driver licenses and identification cards), several biometric
      companies, Northrop Grumman, EDS and General Dynamics (formerly Anteon),
      integrators in the defense industry, and Intermec Technologies, Motorola and
      Metrologic, 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. The passage of the Real ID ACT together with the regulations
      arising from HSPD-12, which sets the policy for a common identification standard
      for federal employees and contractors, have additionally created opportunities
      for our verification technology in the governmental market 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 utilize our patented software
      technology. Our products include ID-Check ® Portal, ID-Check ® POS, ID-Check ® BHO, ID-Traveler and the ID-Prove software solution. ID-Check ® Portal utilizes our ID-Check ®  technology
      together with ID-Prove to provide an additional layer of security to prove
      an
      individual’s claimed identity. 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. ID-Traveler electronically verifies and matches two
      forms
      of government issued IDs instantaneously while the embedded ID-Prove software
      solution provides “out of wallet” questions to assist in proving a user’s
      claimed identity. 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.




19




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 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
      inventory reserves, deferred tax valuation allowances and doubtful accounts
      and
      allowances. 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, valuation of inventory, stock based compensation,
      deferred taxes and commitments and contingencies. These policies and our
      procedures related to these policies are described in detail below.





Revenue
      Recognition and Deferred Revenue




We
      sell our products directly through our sales force and through distributors.
      Revenue from direct sales of our product is recognized  when
      shipped to the customer and title has passed. Our products require continuing service
      or
      post contract customer support and performance by us; 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 year. Currently,
      with respect to sales of certain of our products, we do not have enough
      experience to identify the fair value of each element and the full amount of
      the
      revenue and related gross margin is deferred and recognized ratably over the
      one-year period in which the future service, support and performance are
      provided.





In
      addition, we recognize sales from licensing of our patented software to
      customers. Our licensed software requires continuing service or post contract
      customer support and performance by us; 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
      year.





The
      Company receives royalties from the licensing of its technology, which are
      recognized as revenues in the period they are earned.





Stock-Based
      Compensation





On
      January 1, 2006, we adopted SFAS No. 123(R). We adopted SFAS No. 123(R) using
      a
      modified prospective application, as permitted under SFAS No. 123(R).
      Accordingly, prior period amounts have not been restated. Under this
      application, we are required to record compensation expense for all awards
      granted after the date of adoption and for the unvested portion of previously
      granted awards that remain outstanding at the date of adoption. SFAS No. 123(R)
      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.





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,
      2006, due to the uncertainty of the realizability of those assets.




20




Commitments
      and Contingencies





We
      are
      currently involved in certain legal proceedings as discussed in Item 3, above.
      Other than as described 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, 2006 TO THE YEAR ENDED DECEMBER 31,
      2005**




REVENUE . Revenues
      increased by 32.7%, or $778,322, from $2,383,532 for the year ended December
      31,
      2005 to $3,161,854 for the year ended December 31, 2006. Revenues for the period
      ended December 31, 2006 consisted of revenues from distributors of $1,058,426,
      revenues from direct sales to customers of $2,074,925 and royalty payments
      of
      $28,503. Sales bookings, which represents shipments of products and contracted
      services, and which include revenues that are deferred in accordance with
      generally accepted accounting principles, increased by 36% from $2.5 million
      for
      the year ended December 31, 2005 to $3.4 million for the year ended December
      30,
      2006. Revenues and sales bookings increases are due to Intelli-Check’s ongoing
      success in penetrating certain key markets. We remain optimistic that sales
      opportunities should continue to increase as a result of our recent successes
      in
      the retail market, continued sales to new customers, the positive results of
      certain of our recent marketing and governmental tests and our introduction
      of
      additional products in 2005 and 2006, as well as legislative efforts to improve
      identity management and security and to control sales of age-restricted
      products. However, 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 at this
      time
      in which period the opportunities currently in the pipeline will develop into
      sales or if they will develop at all. As of December 31, 2006 we have a backlog,
      which represents non-cancelable sales orders for products and services not
      yet
      shipped or performed, as the case may be, of approximately $1,052,000, an
      increase of 96.2% as compared to our backlog of approximately $536,000 at
      December 31, 2005.





GROSS
      PROFIT . Gross
      profits increased by $485,596 or 29.6% from $1,638,917 for the year ended
      December 31, 2005 to $2,124,513 for the year ended December 31, 2006. Our gross
      profit, as a percentage of revenues, decreased 1.6% to 67.2% in the year ended
      December 31, 2006 compared to the 68.8% reported for the year ended December
      31,
      2005 due to a higher percentage of bundled sales which include hardware and
      software in 2006.





OPERATING
      EXPENSES . Operating
      expenses, which consist of selling, general and administrative and research
      and
      development expenses, increased 4% from $5,023,724 for the year ended December
      31 ,
      2005 to
      $5,227,357 for the year ended December
      31 ,
      2006.
      Selling expenses, which consist primarily of salaries and related costs for
      marketing, increased 24.4% from $1,257,810 for the year ended December
      31 ,
      2005 to
      $1,564,843 for the year ended December
      31 ,
      2006,
      primarily due to an increase in salaries, commissions, advertising and website
      costs of approximately $153,000 and an increase in non-cash expenses from the
      granting of stock options totaling approximately $148,000. General and
      administrative expenses, which consist primarily of salaries and related costs
      for general corporate functions, including executive, accounting, facilities
      and
      fees for legal and professional services, decreased 5.6% from $2,824,384 for
      the
      year ended December
      31 ,
      2005 to
      $2,664,950 for the year ended December
      31 ,
      2006,
      primarily as a result of a decrease in expenses relating to investor relations
      fees of approximately $71,000, a decrease in legal fees of approximately
      $242,000, primarily relating to decreased activity on our patent infringement
      litigation, a decrease in accounting fees of approximately $35,000, a decrease
      of certain non-recurring costs relating to equity raising activities totaling
      approximately $180,000, and a decrease in rent expense of approximately $40,000
      due to the reduction in rented space, which were partially offset by increases
      in employee costs and related expenses and travel of approximately $75,000,
      an
      increase in non-cash expenses from the granting of stock options totaling
      approximately $372,000 and an increase in board of directors fees and expenses
      of approximately $30,000. Research and development expenses, which consist
      primarily of salaries and related costs for the development of our products,
      increased 6% from $941,530 for the year ended December
      31 ,
      2005 to
      $997,564 for the year ended December
      31 ,
      2006,
      primarily as a result of increases in employee salaries and related expenses
      of
      approximately $65,000 and an increase in non-cash expenses from the granting
      of
      stock options totaling approximately $8,000, which were partially offset by
      a
      decrease in consulting expenses for product development of approximately
      $26,000. We believe that we will require additional investments in development
      and operating infrastructure as the Company continues to grow. Therefore, we
      expect that expenses will continue to incrementally increase in line with
      increases in the growth of the business, since we may increase expenditures
      for
      hiring of additional sales and support personnel, advertising, brand promotion
      and other marketing activities. Research and development expenses may also
      increase as we integrate additional products and technologies with our patented
      ID-Check technology.




21




INTEREST
      INCOME . Interest
      income increased from $145,848 for the year ended December
      31 ,
      2005 to
      $222,874 for the year ended December
      31 ,
      2006,
      which is a result of an increase in our cash and cash equivalents, marketable
      securities and short term investments available for investment from the
      completion of our private placement in August 2005, as well as higher interest
      rates received on investments during 2006.





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





NET
      LOSS.  As
      a
      result of the factors noted above, our net loss decreased 11% from $3,238,959
      for the year ended December 31, 2005, which included $431,336 of non-cash
      expenses, to $2,879,970 for the year ended December 31, 2006, which included
      $939,555 of non-cash expenses.




**COMPARISON
      OF THE YEAR ENDED DECEMBER 31, 2005 TO THE YEAR ENDED DECEMBER 31,
      2004.**




REVENUE .
      Revenue increased $1,264,183 or 113% from $1,119,349 for the year ended December
      31, 2004 to $2,383,532 for the year ended December 31, 2005. Revenues for the
      period ended December 31, 2005 consisted of revenue from distributors of
      $573,920, revenues from direct sales to customers of $1,751,132 and royalty
      income of $58,480. Sales
      bookings, which represent shipments of products and contracted services, which
      include revenues that are deferred in accordance with generally accepted
      accounting principles, increased by $1.4 million from the year ended December
      31, 2004 to $2.5 million for the year ended December 31, 2005.  Revenues
      and sales bookings increases are due to Intelli-Check’s continuing success in
      penetrating certain key target markets. We are optimistic that sales
      opportunities should continue to increase as a result of our recent success
      in
      the retail market, the positive results of certain of our recent marketing
      tests
      and agreements and our introduction of additional products in 2004 and 2005,
      as
      well as legislative efforts to improve identity management and security and
      control sales of age restricted products. However, 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 at this time, in which period the opportunities currently
      in the pipeline will develop into sales. As of December 31, 2005 we have a
      backlog, which represent products and services of non cancelable sales orders
      not yet shipped, of approximately $536,000.




GROSS
      PROFIT .
      Gross profits, excluding an inventory write down of $357,332 for 2004, would
      have increased by $913,152 or 126% from $725,765 for the year ended December
      31,
      2004 to $1,638,917 for the year ended December 31, 2005. Our gross profit
      excluding the inventory write downs for 2004 as a percentage of revenues would
      have increased to 68.8% in the year ended December 31, 2005 from 64.8% for
      the
      year ended December 31, 2004. Our gross profit percentage was positively
      impacted by an increase in revenues from licensing our patented technology
      at
      higher gross margins than our bundled hardware and software
      products.




OPERATING
      EXPENSES .
      Operating expenses, which consist of selling, general and administrative and
      research and development expenses, decreased 32.0% from $7,385,394 for the
      year
      ended December 31, 2004 to $5,023,724 for the year ended December 31, 2005.
      Selling expenses, which consist primarily of salaries and related costs for
      marketing, increased 6.9% from $1,176,911 for the year ended December 31, 2004
      to $1,257,810 for the year ended December 31, 2005 primarily
      due to an increase in salaries, commissions and employee costs of approximately
      $39,000, increased travel and convention expenses of approximately $69,000
      and a
      net increase of non-recurring expenses of $19,000 from the hiring of
      professional consultants to promote our products, which was partially offset
      by
      a decrease in advertising and marketing expenses of approximately
      $45,000. General and administrative expenses, which consist primarily of salaries and
      related costs for general corporate functions, including executive, accounting,
      facilities and fees for legal and professional services, decreased 43.9% from
      $5,032,207 for the year ended December 31, 2004 to $2,824,384 for the year
      ended
      December 31, 2005, primarily
      as a result of a decrease in non-cash expenses primarily related to the
      extension of stock options totaling $1,480,000, a decrease in legal fees of
      approximately $803,000 relating to decreased activity on our patent infringement
      litigation, a decrease in employee costs and related expenses of approximately
      $14,000, a decrease in insurance costs of approximately $20,000, a decrease
      of
      bad debt expense of approximately $20,000 and a decrease in depreciation and
      amortization expense of approximately $61,000 as a result of certain assets
      becoming fully depreciated which were partially offset by expensing certain
      non-recurring costs relating to equity raising activities totaling approximately
      $180,000 .
      Research and development expenses, which consist primarily of salaries and
      related costs for the development of our products, decreased 20.0% from
      $1,176,276 for the year ended December 31, 2004 to $941,530 for the year ended
      December 31, 2005 primarily
      as a result of decreases in salaries and related expenses of approximately
      $230,000 and decreases in internal development costs of approximately $26,000,
      which were partially offset by an increase in consulting expenses for product
      development of approximately $26,000 .
      We believe that we will require additional investments in development and
      operating infrastructure as the Company grows. Therefore, we expect that
      expenses will continue to incrementally increase in line with increases in
      the
      growth of the business as we may increase expenditures for advertising, brand
      promotion, public relations and other marketing activities. Research and
      development expenses may also increase as we c omplete
      and introduce additional products based upon our patented ID-Check
      technology.




22




INTEREST
      INCOME .
      Interest income increased from $94,030 for the year ended December 31, 2004
      to
      $145,848 for the year ended December 31, 2005, which
      is
      a result of an increase in our cash and cash equivalents, marketable securities
      and short term investments available for investment from the completion of
      our
      private placement, as well as higher interest rates from investments, during
      2005 .




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




NET
      LOSS. As a result of the factors noted above, our net loss decreased 53% from
      $6,922,931 for the year ended December 31, 2004, which included $2,231,544
      of
      non-cash expenses to $3,238,959 for the year ended December 31, 2005, which
      included $431,336 of non-cash expenses.





Liquidity
      and Capital Resources





To
      date,
      we have 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. During 2004, we received net
      proceeds of $427,929 from the exercise of 142,700 stock options. On August
      9,
      2005, we successfully completed a private placement of 1,250,000 shares of
      common stock and received net proceeds of approximately $4,440,000. During
      2006,
      we received $524,575 from the exercise of 135,450 stock options. We used the
      net
      proceeds of those financings for the primary purpose of funding working capital
      and general corporate purposes as well as for the purchase of hardware
      terminals.




Cash
      used
      in operating activities for the year ended December 31, 2006 of $2,006,175
      was
      primarily attributable to the net loss of $2,879,970, an increase in accounts
      receivable of $183,434 and a decrease in accounts payable and accrued expenses
      of $228,170, which was primarily offset by an increase of deferred revenue
      of
      $342,408, a non-cash stock based compensation expense resulting primarily from
      the granting and vesting of stock options of $826,356, and amortization of
      deferred compensation of $129,756. Cash used in operating activities for the
      year ended December 31, 2005 of $3,143,805 was primarily attributable to the
      net
      loss of $3,238,959, a decrease in accounts payable and accrued expenses of
      $511,505 resulting from payment and reduction of our legal fees and an increase
      in other current assets of $139,729, which was primarily offset by recognition
      of non-cash stock based compensation expense resulting from the extension and
      exercise of stock options of $228,450, amortization of deferred compensation
      of
      $143,758 and an increase in deferred revenue of $184,300. Cash provided by
      investing activities for the year ended December 31, 2006 of $1,480,267 resulted
      primarily from the net redemption of marketable securities and short term
      investments of $1,504,175. Cash used in investing activities for the year ended
      December 31, 2005 of $1,181,420 resulted primarily from the net increase in
      investments in marketable securities and short term investments of $1,171,324.
      Cash provided by financing activities was $524,575 for the year ended December
      31, 2006, resulted from the proceeds received from the issuance of common stock
      from the exercise of stock options. Cash provided by financing activities was
      $4,486,178 for the year ended December 31, 2005 and was primarily related to
      proceeds of $168,900 from the issuance of common stock from the exercise of
      stock options and from proceeds of our private offering of $4,439,593, which
      was
      partially offset by the payment of dividends to preferred stock holders of
      $97,315.




23




As
      of
      December 31, 2006, warrants to purchase 938,636 shares of the Company’s common
      stock at an average exercise price of $6.11 were outstanding.





On
      August
      9, 2005, we successfully completed our secondary offering of 1,250,000 shares
      of
      common stock at $4.00 per share and received net proceeds of approximately
      $4,440,000. In connection with the offering, investors received five year
      warrants to purchase 500,000 shares of common stock at an exercise price of
      $5.40 per share. In addition, we granted to our placement agent a warrant to
      purchase 125,000 shares of our common stock at a price of $5.40 per share which
      expires on August 8, 2010. During December 2005, we purchased and retired
      110,000 of the five year warrants originally issued in connection with the
      offering for $25,000.


On
      March 27, 2003, pursuant to a Securities Purchase Agreement, we sold 30,000
      shares of our Series A 8% Convertible Redeemable Preferred Stock, par value
      $.01
      per share, for $3,000,000 before expenses to Gryphon Master Fund, L.P. Each
      share of Preferred Stock entitled the holder to receive dividends of 8% per
      annum and was convertible into 15.1515 shares of our common stock for a total
      of
      454,545 shares of common stock. On
      February 25, 2005, Gryphon Master Fund, L.P. converted their Preferred Stock
      into 454,545 shares of our common stock at a conversion price of $6.60 per
      share. A final dividend payment of $97,315 was paid in 2005 for the period
      up to
      the date of conversion. As a result of this conversion, the period we used
      in
      estimating the accretion of all of the costs associated with the issuance of
      the
      Preferred Stock changed from five (5) years to 1.9166 years. Accordingly, the
      accretion was increased in the first quarter of 2005 by $119,956 and amounted
      to
      $160,722 for the quarter ended March 31, 2005. Additionally, as a result of
      this
      conversion, we retired the 30,000 shares of preferred stock, issued 454,545
      shares of our common stock and recorded $3,000,000 as an increase to equity.
      Gryphon Master Fund was also issued five year warrants to purchase 113,636
      shares of common stock at an exercise price of $6.78, which will expire on
      October 3, 2008.





In
      March
      2001, we declared a dividend distribution of one non-transferable right to
      purchase one share of our common stock for every 10 outstanding shares of common
      stock continuously held from the record date to the date of exercise, as well
      as
      common stock underlying vested stock options and warrants, held of record on
      March 30, 2001, at an exercise price of $8.50. The
      rights were due to expire on October 4, 2002, which was one year after the
      effective date of the registration statement related to the shares of common
      stock underlying the rights. We first extended the expiration date until April
      4, 2003; then we extended the rights until December 31, 2003; we further
      extended the expiration date to June 30, 2004; we then again extended the
      expiration date to June 30, 2005; and subsequently extended the expiration
      date
      to June 30, 2006. The Rights were further extended until June
      30,
      2007. We
      have the right to redeem the outstanding rights for $.01 per right under certain
      conditions, which were not met as of March 29, 2007. We reserved 970,076 shares
      of common stock for future issuance under this rights offering. Cumulatively,
      as
      of December 31, 2006, we received $2,482,009 before expenses from the exercise
      of 292,001 of these rights.




In
      March 2001, our Board of Directors authorized, subject to certain business
      and
      market conditions, the purchase of up to $1,000,000 of our common stock. As
      of
      December 31, 2006, we cumulatively purchased 40,200 shares totaling
      approximately $222,000 and subsequently retired these shares. None of these
      shares were purchased during 2006. We may purchase additional shares when
      warranted by certain conditions.




During
      2006, the Company’s cash expense burn rate was approximately $125,000 per month
      after contribution from margin on revenue and proceeds received from the
      exercise of options and warrants and we expect that it will remain stable at
      approximately $120,000 per month after contribution from margin on revenue
      but
      before any proceeds received from the exercise of options and warrants. This
      takes into account the projected increases in costs due to the expected growth
      of our business during 2007. We currently anticipate that our available cash
      in
      hand and marketable securities and cash resources from expected revenues from
      the sale of the units in inventory and the licensing of our technology will
      be
      sufficient to meet our anticipated working capital and capital expenditure
      requirements for at least the next twelve months. These requirements are
      expected to include the purchase of inventory, product development, sales and
      marketing, working capital requirements and other general corporate purposes.
      We
      may need to raise additional funds, however, to respond to business
      contingencies which may include the need to fund more rapid expansion, fund
      additional marketing expenditures, develop new markets for our ID-Check ®  technology,
      enhance our operating infrastructure, respond to competitive pressures, or
      acquire complementary businesses or necessary technologies.




24




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.





Net
      Operating Loss Carry Forwards




As
      of
      December 31, 2006, the Company had net operating loss carry forwards (NOL’s) for
      federal income tax purposes of approximately $33.2 million. There can be no
      assurance that the Company will realize the benefit of the NOL’s. The federal
      NOL’s are available to offset future taxable income which expires beginning in
      the year 2013 if not utilized. Under Section 382 of the Internal Revenue Code,
      these NOL’s may be limited in the event of an ownership change.





**Contractual
      Obligations**





Below
      is
      a table, which presents our contractual obligations and commitments at December
      31, 2006:





**Payments
      Due by Period**





**Total**
            
            **Less
                than One Year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **After
                5 years**Operating
                Leases
            
            $
            881,728
            
            $
            210,644
            
            $
            440,708
            
            $
            230,376
            
            
            -Consulting
                Contracts
            
            
            84,000
            
            
            84,000
            
            
            -
            
            
            -
            
            
            -Purchase
                Commitment
            
            
            176,695
            
            
            176,695
            
            
            -
            
            
            -
            
            
            -Total
                Contractual Cash Obligation
            
            $
            1,142,423
            
            $
            471,339
            
            $
            440,708
            
            $
            230,376
            
            $
            -





**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.





**Non-GAAP
      Financial Measures**





This
      10-K
      contains disclosure of our "sales bookings" and “backlog” for certain periods,
      which may be deemed to be a non-GAAP financial measure within the meaning of
      Regulation G promulgated by the Securities and Exchange Commission. We believe
      that discussion of our sales bookings provides investors with additional
      information regarding revenues it has received in respect of products and
      services that have been shipped to a customer, but which are required to be
      deferred for a period of less than one year under applicable principles of
      GAAP.
      The disclosure of "sales bookings” and “backlog” may not be comparable to
      similarly titled measures reported by other companies. "Sales bookings" and
      “backlog,” while providing useful information, should not be considered in
      isolation or as an alternative to other financial measures determined in
      accordance with GAAP.




25




**Item
      7A. Quantitative and Qualitative Disclosures About Market
      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 two financial institutions. The marketable securities
      consist primarily of short term investment grade corporate and government bonds
      and Certificate of Deposits. 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, 2006.





**Item
      9A. Controls and Procedures**





Internal
      Controls




We
      maintain disclosure controls and procedures (as defined in Exchange Act Rules
      13a-15(e) and 15d-15(e)) that are designed (i) to collect the information we
      are
      required to disclose in the reports we file with the SEC, and (ii) to process,
      summarize and disclose this information within the time periods specified in
      the
      rules of the SEC. Under the supervision and with the participation of our
      management, including our Chief Executive Officer and Acting Chief Financial
      Officer, we have evaluated the effectiveness of the design and operation of
      our
      disclosure controls and procedures. Such evaluation was conducted as of the
      end
      of the period covered by this report. Based on such evaluation, our Chief
      Executive and Acting Chief Financial Officer has concluded that these procedures
      are effective.




Additionally,
      there were no changes in our internal controls over financial reporting that
      materially affected or are reasonably likely to materially affect these controls
      subsequent to the end of the period covered by this report. We have not
      identified any significant deficiencies or material weaknesses in our internal
      controls, and therefore no corrective actions were taken.




Compliance
      with Section 404 of the Sarbanes-Oxley Act of 2002




If
      we
      meet the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the
      Act), which will be determined as of June 30, 2007, beginning with our Annual
      Report on Form 10-K for the fiscal year ending December 31, 2007, we will be
      required to furnish a report by our management on our internal control over
      financial reporting. This report will contain, among other matters, an
      assessment of the effectiveness of our internal control over financial reporting
      as of the end of our fiscal year, including a statement as to whether or not
      our
      internal control over financial reporting is effective. This assessment must
      include disclosure of any material weaknesses in our internal control over
      financial reporting identified by management. If we identify one or more
      material weaknesses in our internal control over financial reporting, we will
      be
      unable to assert that our internal control over financial reporting is
      effective. This report will also contain a statement that our independent
      registered public accountants have issued an attestation report on management’s
      assessment of such internal controls and conclusion on the operating
      effectiveness of those controls.




Management
      acknowledges its responsibility for internal controls over financial reporting
      and seeks to continually improve those controls. In order to achieve compliance
      with Section 404 of the Act within the prescribed period, we are currently
      performing the system and process documentation and evaluation needed to comply
      with Section 404, which is both costly and challenging. We believe our process,
      which began in 2005 and continues to date for documenting, evaluating and
      monitoring our internal control over financial reporting is consistent with
      the
      objectives of Section 404 of the Act.




**Item
      9B. Other Information**




None.




26




**PART
      III**




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




As
      of March 29, 2007, the Company's directors and executive officers were as
      follows:




**Name**
            
            **Position
                With the Company**
              **And
                Principal Occupation**
            
            **Held
                Office Since**Frank
                Mandelbaum
            
            Chairman,
                Chief Executive Officer and Director
            
            1996Russell
                T. Embry
            
            Senior
                Vice President and Chief Technology Officer
            
            2001Todd
                Liebman
            
            Senior
                Vice President Marketing and Chief Operating Officer
            
            2004Peter
                J. Mundy
            
            Vice
                President, Chief Financial Officer, Treasurer and
                Secretary
            
            2007Ashok
                Rao
            
            Vice
                Chairman, Director
            
            2004Jeffrey
                Levy
            
            Director
            
            1999John
                E. (Jay) Maxwell
            
            Director
            
            2005Arthur
                L. Money
            
            Director
            
            2003Guy
                L. Smith
            
            Director
            
            2005Edwin
                Winiarz
            
            Director
            
            1999




**Frank
      Mandelbaum** ,
      age 73, has served as our Chairman of the Board and Chief Executive Officer
      since July 1, 1996. He also served as Chief Financial Officer until September
      1999. From January 1995 through May 1997, Mr. Mandelbaum served as a consultant
      providing strategic and financial advice to Pharmerica, Inc. (formerly Capstone
      Pharmacy Services, Inc.), a publicly held company. Prior to January 1995, Mr.
      Mandelbaum was Chairman of the Board, Chief Executive Officer and Chief
      Financial Officer of Pharmerica, Inc. From July 1994 through December 1995,
      Mr.
      Mandelbaum served as Director and Chairman of the Audit and Compensation
      Committees of Medical Technology Systems, Inc., also a publicly held company.
      From November 1991 through January 1995, Mr. Mandelbaum served as Director
      of
      the Council of Nursing Home Suppliers, a Washington, D.C. based lobbying
      organization. From 1974 to date, Mr. Mandelbaum has been Chairman of the Board
      and President of J.R.D. Sales, Inc., a privately held financial consulting
      company. As required by his employment agreement, Mr. Mandelbaum devotes
      substantially all his business time and attention to our business.




**Russell
      T. Embry,** age
      43, was elected Senior Vice President and Chief Technology Officer in July
      2001
      and was 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.





**Todd
      Liebman** ,
      age 33,
      joined Intelli-Check, Inc. in December 2004 as its Senior Vice President of
      Marketing and Operations. In November 2006, Mr. Liebman was given the additional
      responsibility of Chief Operating Officer. Prior to joining Intelli-Check,
      Mr.
      Liebman served as President of Quick Kiosk, a Kinetics Company, LLC (QK), a
      self-service solution provider focused on the quick serve restaurant market
      industry from October 2000 to December 2004.  In September 2004, Mr.
      Liebman completed the sale of QK to NCR Corporation (NYSE:NCR). Prior to
      founding QK, Mr. Liebman served as Director of Business Development of Trex
      Communications Corporation (TrexCom), a telecommunications start-up focused
      on
      satellite communications systems and multi-media interactive response systems,
      which was sold to L-3 Communications, Inc. in February 2000. TrexCom grew from
      a
      start-up in 1997 to $50 million in revenues and profitability in less than
      two
      years.  Prior to joining Trex Communications, Mr. Liebman was Associate
      Director, Business Development for Thermo Electron Corporation (NYSE:TMO),
      a $4
      billion conglomerate and parent company of Trex Communications.  From 1996
      to 1997, he worked as a Management Consultant at EMI Strategic Marketing, a
      strategic consulting firm.  Mr. Liebman received his Bachelor's of Science
      in Management from Tulane University's A.B. Freeman School of Business. 
Mr. Liebman has also participated in an Executive Education program at the
      University of Pennsylvania's Wharton School of Business.




27




**Peter
      J. Mundy** ,
      age 50,
      joined Intelli-Check, Inc. on March 26, 2007 as its Vice President of
      Finance,  Chief Financial Officer, Secretary and Treasurer.  Prior to
      joining Intelli-Check, 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 is a certified public
      accountant.





**Ashok
      Rao,** age 57, was appointed a director in December 2004 and Vice Chairman in January
      2005. Mr. Rao is currently an angel investor in numerous high-tech start-ups
      as
      well as the producer of motion pictures. Mr. Rao was CEO of Prime Wave
      Communications, a broadband wireless access technology subsidiary of L3 from
      2000 to 2003. Previously, he was the founder and chief executive officer of
      TrexCom. He was instrumental in the sale of TrexCom to L3 in 2000. Mr. Rao
      holds
      a bachelor’s degree in mechanical engineering from the Indian Institute of
      Technology, New Delhi, a master’s degree in systems engineering from Marquette
      University, and a diploma in Financial Management from the London School of
      Economics. Mr. Rao is also a trustee of numerous charitable
      organizations.




**Jeffrey
      Levy** ,
      age 64, was elected a director in December 1999. He has been, since January
      1997, President and Chief Executive Officer of LeaseLinc, Inc., a third-party
      equipment leasing company and lease brokerage company. Prior to 1997, Mr. Levy
      served as President and Chief Executive Officer of American Land Cycle, Inc.
      and
      Goose Creek Land Cycle, LLC, arboreal waste recycling companies. During that
      time he also served as Chief Operating Officer of ICC Technologies, Inc. and
      AWK
      Consulting Engineers, Inc. Mr. Levy has had a distinguished career as a member
      of the United States Air Force from which he retired as a colonel in 1988.
      He
      serves as a board member of the Northern Virginia Chapter of Mothers Against
      Drunk Driving, the Washington Regional Alcohol Program, the Zero Tolerance
      Coalition and the National Drunk and Drugged Driving Prevention Month Coalition
      and is a member of the Virginia Attorney General's Task Force on Drinking by
      College Students and MADD's National Commission on Underage Drinking. Mr. Levy
      holds a BS in International Relations from the United States Air Force Academy,
      a graduate degree in Economics from the University of Stockholm and an MBA
      from
      Marymount University.





**John
      E. (Jay) Maxwell** ,
      age 53, was appointed a director in September 2005. Mr.
      Maxwell retired as the Senior Vice President of Technology and the Chief
      Information Officer (CIO) of the American Association of Motor Vehicle
      Administrators (AAMVA) in August 2005. He was responsible for all of the
      information systems developed, implemented and operated by AAMVA. At AAMVA,
      Mr.
      Maxwell had the responsibility to direct AAMVA’s development of Driver License
      and ID Card Specifications intended to fight driver license and ID fraud and
      abuse. Prior to that, from 1997 to May 2002, he was the President and Chief
      Operating Officer of AAMVAnet, Inc., a subsidiary of AAMVA. Before joining
      AAMVA
      in July 1989, Mr. Maxwell spent 11 years with the U.S. Department of
      Transportation, working for the Federal Highway Administration and the National
      Highway Traffic Safety Administration developing information systems to improve
      highway safety.




28




**Arthur
      L. Money** ,
      age 67, was elected a director in February 2003. Mr. Money was confirmed by
      the
      Senate and served as the Assistant Secretary of Defense for Command, Control,
      Communications and Intelligence from 1999 to 2001 and was also the Chief
      Information Officer for the Department of Defense from 1998 until 2001. Prior
      to
      that he served as the Senior Civilian Official, Office of the Assistant
      Secretary of Defense, from 1998 to 1999 and was earlier confirmed by the Senate
      as Assistant Secretary of the Air Force for Research, Development and
      Acquisition and served as Chief Information Officer, from 1996 to 1998. Mr.
      Money currently serves as a member of the advisory board of several corporations
      including the Boeing Company (NYSE: BA). He also serves on the Board of
      Directors of numerous companies including Silicon Graphics, Inc. (NYSE: SGI)
      and
      CACI International (NYSE: CAI) and has been recognized for his vision,
      leadership and commitment to excellence in systems and process re-engineering.
      Mr. Money, who holds a Master of Science Degree in Mechanical Engineering from
      the University of Santa Clara (Calif.) and a Bachelor of Science Degree in
      Mechanical Engineering from San Jose (Calif.) State University also currently
      serves on several U.S. Government Boards and Panels such as NIMA Advisory Board,
      Defense Science Board, US Air Force AC2ISR Center Advisory Board and the US
      Navy
“DSAP” Special Advisory Panel. Prior to his government service, he had a
      distinguished business career having served as President of ESL Inc., a
      subsidiary of TRW, Inc., from 1990 to 1994 prior to its consolidation with
      its
      Avionics and Surveillance Group when he became Vice President and Deputy General
      Manager of the Group.




**Guy
      L. Smith,** age
      58, **** was
      elected a director 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 - 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 - 1996, which focused on reputation and crisis
      management. He was Chief Operating Officer of Hill & Knowlton International
      Public Relations, from 1992 - 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 - 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, DC. Mr.
      Smith also serves as an Honorary Battalion Chief of the Fire Department of
      New
      York.




**Edwin
      Winiarz** ,
      age 49, has been a director since August 1999. Currently, Mr. Winiarz is the
      Chief Financial Officer of Alliance Building Services, a privately
      held building services company. He was Senior Executive Vice President,
      Treasurer, Secretary and Chief Financial Officer of Intelli-Check, Inc. from
      September 7, 1999 through January 21, 2007. From July 1994 until August 1999,
      Mr. Winiarz was Treasurer and Chief Financial Officer of Triangle Service Inc.,
      a privately held national service company. From November 1990 through July
      1994,
      Mr. Winiarz served as Vice President Finance/Controller of Pharmerica, Inc.
      (formerly Capstone Pharmacy Services, Inc.). From March 1986 until November
      1990, Mr. Winiarz was a manager with the accounting firm of Laventhal &
Horwath. Mr. Winiarz is a certified public accountant and holds an MBA in
      management information systems from Pace University.




**Audit
      Committee of the Board of Directors**




The
      board of directors has established a separately designated, stand-alone Audit
      Committee established in accordance with Section 3(a)(58)(A) of the Exchange
      Act, which is currently comprised of Mr. Rao, chairman, Mr. Smith and Mr.
      Maxwell. They are all considered “independent” under Section 121(A) of the
      listing standards of the American Stock Exchange. 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.




29




The
      Board of Directors has determined that we have at least one audit committee
      financial expert serving on our audit committee. Mr. Rao, who holds a diploma
      in
      Financial Management from the London School of Economics, is an “audit committee
      financial expert” and is an independent member of the board of directors.




**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. During the review of Forms 4, it was
      determined that Mr. Mandelbaum failed to file a timely report concerning the
      exercise of 25,000 stock options on January 3, 2006; however, such failure
      was
      remedied by the reporting of this transaction on February 1, 2006. All other
      transactions were reported
      in a timely f ashion .




**Code
      of Ethics**





On
      March 22, 2004, we adopted 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 this 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.





**Item
      11. Executive Compensation**





The
      information required by this item is incorporated by reference to, and will
      be
      contained in, our definitive proxy statement, which we anticipate will be filed
      no later than April 30, 2007, and thus we have omitted this information in
      accordance with General Instruction G(3) to Form 10-K.




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




The
      following table sets forth, as of March
      29,
      2007, certain
      information regarding beneficial ownership of Intelli-Check’s common stock by
      each person who is known by us to beneficially own more than 5% of our common
      stock. The table also identifies the stock ownership of each of our directors,
      each of our officers, and all directors and officers as a group. Except as
      otherwise indicated, the stockholders listed in the table have sole voting
      and
      investment powers with respect to the shares indicated.




Unless
      otherwise indicated, the address for each of the named individuals is c/o
      Intelli-Check, Inc., 246 Crossways Park West, Woodbury, NY 11797-2015.




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.




30




The
      applicable percentage of ownership is based on 12,243,778 shares outstanding
      as
      of March 29, 2007.





**Name**
            
            **Shares
                Beneficially Owned**
            
            **Percent**Frank
                Mandelbaum (1)
            
            
            1,516,880
            
            
            11.52Edwin
                Winiarz (2)
            
            
            225,000
            
            
            1.80Todd
                Liebman (3)
            
            
            250,000
            
            
            2.00Russell
                T. Embry (4)
            
            
            40,000
            
            
            *Jeffrey
                Levy (5)
            
            
            100,750
            
            
            *Arthur
                L. Money (6)
            
            
            148,262
            
            
            1.20John
                E. Maxwell (7)
            
            
            49,350
            
            
            *Guy
                L. Smith (8)
            
            
            82,807
            
            
            *Ashok
                Rao (9)
            
            
            150,122
            
            
            1.21Todd
                Cohen (10)
            
            
            628,850
            
            
            5.13All
                Executive Officers & Directors as a group (9 persons)
                (11)
            
            
            2,563,171
            
            
            18.04




*
      Indicates beneficial ownership of less than one percent of the total outstanding
      common stock.





(1)  Includes 921,599 shares
      issuable upon exercise of stock options and rights exercisable within 60 days.
      Does not include 5,500
      shares and 530 rights held
      by Mr. Mandelbaum’s wife, for which Mr. Mandelbaum disclaims beneficial
      ownership




(2)  Includes
      225,000 shares issuable upon exercise of stock options exercisable within 60
      days.




(3)  Includes
      250,000 shares issuable upon exercise of stock options exercisable within 60
      days.




(4)  Includes
      40,000 shares issuable upon exercise of stock options exercisable within 60
      days.




(5)  Includes
      98,350 shares issuable upon exercise of stock options exercisable within 60
      days.




(6)  Includes
      146,800 shares issuable upon exercise of stock options exercisable within 60
      days.




(7)  Includes
      49,350 shares issuable upon exercise of stock options exercisable within 60
      days.




(8)  Includes
      81,850 shares issuable upon exercise of stock options exercisable within 60
      days.




(9)  Includes
      148,500 shares issuable upon exercise of stock options exercisable within 60
      days.




(10)
      Includes 44,950 rights and 4,000 warrants which are exercisable within 60 days.
      The address is PO Box 20054, Huntington Station, NY 11746.




(11)  Includes
      1,961,449 shares issuable upon exercise of stock options and rights exercisable
      within 60 days.




31




**Equity
      Compensation Plan Information**





**Plan
                Category**
            
            **Number
                of Securities**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding
                options, warrants and rights**
            
            **Weighted
                average**
              **exercise
                price of outstanding**
              **options,
                warrants**
              **and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                a)**(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            1,715,630
            
            $
            5.91
            
            
            797,811Equity
                compensation plans not approved by security holders
            
            
            754,425
            
            $
            6.59
            
            
            NoneTotal
            
            
            2,470,055
            
            $
            6.55
            
            
            797,811





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.  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 vesting schedule of the options varies, with
      some vesting immediately and some vesting upon the completion of certain
      performance objectives.  The non-plan options currently outstanding have
      been granted to nine (9) persons.  These options have a weighted average
      exercise price per share equal to $6.55 and options to purchase 776,925 shares
      of common stock are currently exercisable.




**Item
        13.** **Certain
        Relationships** **,
        Related Transactions and Director Independence**




On
      January 1, 2005, we renewed our agreement with Alexandros Partners LLC to act
      as
      consultants in advising us in financial and investor relation matters. A
      principal of Alexandros Partners LLC was a member of our Board of Directors.
      We
      paid a consulting fee of $50,000 in 12 equal monthly installments. The agreement
      terminated on December 31, 2005. This transaction was approved by all of the
      independent directors of our Board of Directors.





In
      2006
      the Company did not have any Transactions with Related Persons under Item 404(a)
      of Regulation S-K. The Governance Committee reviews annual cumulative ordinary
      course of business transactions with firms associated with directors and
      nominees for director. The Company’s management also monitors such transactions
      on an ongoing basis. Executive officers and directors are governed by the
      Company’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
      shareholders. No such waivers were granted nor applied for in 2006. The
      Company’s Corporate Governance Guidelines require that all directors recuse
      themselves from any discussion or decision affecting their personal, business
      or
      professional interests.





The
      Board
      of Directors has determined that Messrs.  Levy,  Maxwell, 
Money,  Rao 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. Money, chairperson, Mr. Levy and Mr. Maxwell, 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. Levy, chairperson, Mr. Money 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.




32




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. Rao,  chairperson,  Mr. Maxwell 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.




**Item
        14.** **Principal
        Accountant Fees and Services**




Until
      April 21, 2004, our principal independent auditor was Grant Thornton LLP.
      Thereafter, our principal independent auditor was Amper, Politziner &
Mattia, P.C. The services of each were provided in the following categories
      and
      amount:





AUDIT
      FEES





The
      aggregate fees billed by Amper, Politziner and Mattia, P.C. for professional
      services rendered for the audit of the Company’s annual financial statements for
      the fiscal years ended December 31, 2005 and 2006 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 $86,625 and $94,500, respectively.





AUDIT
      RELATED FEES





Other
      than the fees described under the caption “Audit Fees” above, Amper, Politziner
      and Mattia, P.C. did not bill any fees for services rendered to us during fiscal year
      200 5
      or
      2006 for assurance and related services in connection with the audit or review of
      our
      financial statements.




TAX
      FEES





Amper,
      Politziner and Mattia, P.C. billed us for tax related services for fiscal 2005
      totaling $4,000, and
      will perform
      tax related services for us for fiscal 2006, which we estimate to be approximately $5,000.




ALL
      OTHER FEES





We
      were billed $18,725 by Grant Thornton LLP for fees relating to our private
      placement completed in 2005.





The
      aggregate fees billed by Amper, Politziner and Mattia, P.C. for professional
      services rendered in connection with our private placement completed August
      9,
      2005 and the filing of our Registration Statement on Form S-3 amounted to
      $24,000.





No
      other fees were billed by our auditors for 2006.





PRE-APPROVAL
      OF SERVICES




The
      Audit Committee pre-approves all services, including both audit and non-audit
      services, provided by our independent accountants. 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.





33




**PART
      IV**




**Item
        15.** **Exhibits
        and********Financial
        Statement Schedules**




(a)(1)
            Financial
                Statements




Balance
      Sheets as of December 31, 2005 and 2006


Statements
      of Operations for the years ended December 31, 2004, 2005 and 2006


Statements
      of Stockholders’ Equity for the years ended December 31, 2004, 2005 and
      2006


Statements
      of Cash Flows for the years ended December 31, 2004, 2005 and 2006




(2)
            Schedule
                II - Valuation and Qualifying
                Accounts





34




(b)  Exhibits





Exhibit
                No.
            
            Description1
            
            Form
                of Underwriting Agreement (1)3.1
            
            Certificate
                of Incorporation of the Company (1)3.2
            
            By-laws
                of the Company (1)3.3
            
            Certificate
                of Designation of Preferred Stock of Intelli-Check, Inc.
                (7)4.1
            
            Specimen
                Stock Certificate (2)4.2
            
            Form
                of Underwriters' Warrant Agreement (1)4.3
            
            Warrant
                to Gryphon Master Fund LLP (7)4.4
            
            Form
                of Underwriters Warrant Agreement including form of Warrant
                Certificate(8)4.5
            
            Warrant
                to JMP Securities, LLC10.1
            
            1998
                Stock Option Plan (1) *10.5
            
            Agreement
                of Lease between the Company and Industrial and Research Associates,
                dated
                as of October 15, 2000 (5)10.6
            
            1999
                Stock Option Plan (1) *10.10
            
            Agreement
                between the Company and Kevin Messina, individually and d/b/a K.M.
                Software Development, dated as of May 3, 1999 (1) *10.11
            
            Memorandum
                of Understanding between AAMVAnet, Inc. and Intelli -Check, Inc.
                effective
                November 15, 2000 (5)10.12
            
            2001
                Stock Option Plan (4)10.15
            
            Memorandum
                of Understanding between AAMVAnet, Inc. and Intelli-Check, Inc. effective
                January 29, 2002 (5)10.16
            
            Securities
                Purchase Agreement between Intelli-Check, Inc. and Gryphon Master
                Fund
                dated March 27, 2003. (7)10.17
            
            Registration
                Rights Agreement between Intelli-Check, Inc. and Gryphon Master Fund
                dated
                March 27, 2003. (7)10.18
            
            Employment
                Agreement between Frank Mandelbaum and the Company, dated as of December
                15, 2004* (6)10.19
            
            Employment
                Agreement between Edwin Winiarz and the Company, dated as of December
                15,
                2004* (6)10.20
            
            Understanding
                of Employment between Frank Mandelbaum and the Company, dated as
                of
                January 1, 2006 (9) *10.21
            
            Understanding
                of Employment between Edwin Winiarz and the Company, dated as of
                November
                10, 2006 (10) *14.1
            
            Code
                of Business Conduct and Ethics (7)21
            
            List
                of Subsidiaries (1)23.1**
            
            Consent
                of Amper, Politziner and Mattia, P.C.31.1**
            
            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







*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) filed September
      24, 1999.


(2)  Incorporated
      by reference to Amendment No. 1 to the Registration Statement filed November
      1,
      1999.


(3)  Incorporated
      by reference to Amendment No. 2 to the Registration Statement filed November
      15,
      1999.


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


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


(6)  Incorporated
      by reference from the Registrant’s Current Report on Form 8-K filed on December
      16, 2004.


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


(8)  Incorporated
      by reference to Registration Statement on Form S-2 (File No. 333-108043) filed September
      30, 2003.


(9)  Incorporated
        by reference to Registrant’s Annual Report on Form 10-K filed March 30,
        2006 .
 (10)  Incorporated
        by reference to Registrant’s Quarterly Report on Form 10-Q filed November 14,
        2006 .


35




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.




INTELLI-CHECK,
                INC.Date: March
              29, 2007
            By:
            /s/ Frank
              MandelbaumFrank Mandelbaum
              Chairman, Chief Executive Officer, Acting Chief
              Financial
                  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.


INTELLI-CHECK,
                    INC.Date: March
                29, 2007
              By:
              /s/
                Frank MandelbaumFrank
                    Mandelbaum
                  Chairman,
                    Chief Executive Officer, Acting Chief Financial Officer and
                    Director
 Date: March
                  29, 2007
                By:
                /s/ Ashok
                  RaoAshok
                          Rao, Vice Chairman and
                          Director
 Date: March
                      29, 2007
                    By:
                    /s/ Jeffrey
                      LevyJeffrey
                          Levy, Director
 Date: March
                          29, 2007
                        By:
                        /s/ John
                          E.
                          MaxwellJohn
                                E. Maxwell, Director
 Date: March
                              29, 2007
                            By:
                            /s/ Arthur
                              L.
                              MoneyArthur
                                    L. Money, Director
 Date: March
                                  29, 2007
                                By:
                                /s/ Guy
                                  L.
                                  SmithGuy
                                          L. Smith,
                                          Director
 Date: March
                                      29, 2007
                                    By:
                                    /s/ Edwin
                                      WiniarzEdwin
                                              Winiarz, Director





**EXHIBIT
      INDEX**





Exhibit
                No.
            
            Description23.1
            
            Consent
                of Amper, Politziner and Mattia, P.C.31.1
            
            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










**INDEX**
  PageREPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              F-1FINANCIAL
                  STATEMENTS:Balance
                  Sheets as of December 31, 2005 and 2006
              F-2Statements
                  of Operations for the Years Ended December 31, 2004, 2005 and
                  2006
              F-3Statements
                  of Stockholders’ Equity for the Years Ended December 31, 2004, 2005 and
                  2006
              F-4Statements
                  of Cash Flows for the Years Ended December 31, 2004, 2005 and
                  2006
              F-5NOTES
                  TO FINANCIAL STATEMENTS
              F-6
                  - F-20Schedule
                  II - Valuation and Qualifying Accounts
              F-21
 
 
 
 **Report
        of Independent Registered Public Accounting Firm**
  
 To
        the
        Board of Directors and Stockholders of
 Intelli-Check,
        Inc.
 
 
 We
        have
        audited the accompanying balance sheets of Intelli-Check, Inc. (the “Company”)
        as of December 31, 2006 and 2005, and the related statements of operations,
        stockholders’ equity, and cash flows for each of the years in the three year
        period ended December 31, 2006. 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 audit 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
        appropri-ate 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 Intelli-Check, Inc. as of December
        31, 2006 and 2005, and the results of its operations and its cash flows for
        each
        of the three years in the period ended December 31, 2006 in conformity with
        accounting principles generally accepted in the United States of America.
 
 As
        discussed in Note 2 to the financial statements, effective January 1, 2006,
        the
        Company adopted Statement of Financial Accounting Standards No. 123 (revised
        2004), “Share-Based Payment.”
 
 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, 2006.
        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, P.C.New York, New York
                March 27, 2007
  F-1
  **INTELLI-CHECK,
        INC.**
 
 BALANCE
        SHEETS
 DECEMBER
        31, 2005 and 2006
  ASSETS2005
              
              2006CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              528,250
              
              $
              526,917Marketable
                  securities and short-term investments
              
              
              5,263,308
              
              
              3,759,133Accounts
                  receivable, net of allowance of $28,467 and $10,000for
                  2005 and 2006, respectively
              
              
              408,542
              
              
              591,976Inventory
              
              
              125,981
              
              
              115,193Other
                  current assets
              
              
              419,279
              
              
              512,112Total
                  current assets
              
              
              6,745,360
              
              
              5,505,331PROPERTY
                  AND EQUIPMENT, net (Note 3)
              
              
              92,246
              
              
              85,603PATENT
                  COSTS, net (Note 4)
              
              
              36,379
              
              
              30,170OTHER
                  ASSETS
              
              
              34,916
              
              
              34,916Total
                  assets
              
              $
              6,908,901
              
              $
              5,656,020LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              371,521
              
              $
              155,066Accrued
                  expenses (Note 5)
              
              
              389,742
              
              
              378,028Deferred
                  revenue
              
              
              694,958
              
              
              1,037,366Other
                  current liabilities
              
              
              -
              
              
              75,000Total
                  current liabilities
              
              
              1,456,221
              
              
              1,645,460OTHER
                  LIABILITIES
              
              
              62,995
              
              
              73,475Total
                  liabilities
              
              
              1,519,216
              
              
              1,718,935COMMITMENTS
                  AND CONTINGENCIES (Note 9)STOCKHOLDERS’
                  EQUITY:Common
                  stock - $.001 par value; 20,000,000 shares authorized; 12,058,240
                  and12,202,778
                  shares issued and outstanding as of 2005 and 2006,
                  respectively
              
              
              12,058
              
              
              12,203Deferred
                  compensation
              
              
              (263,460
              )
              
              -Additional
                  paid-in capital
              
              
              44,748,969
              
              
              45,912,734Accumulated
                  deficit
              
              
              (39,107,882
              )
              
              (41,987,852
              )Total
                  stockholders’ equity
              
              
              5,389,685
              
              
              3,937,085Total
                  liabilities and stockholders’ equity
              
              $
              6,908,901
              
              $
              5,656,020
 
 The
        accompanying notes are an integral part of these statements.
 
 F-2
  **INTELLI-CHECK,
        INC.**
 
 STATEMENTS
        OF OPERATIONS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 
 2004
              
              2005
              
              2006REVENUES
              
              $
              1,119,349
              
              $
              2,383,532
              
              $
              3,161,854COST
                  OF REVENUES
              
              
              (393,584
              )
              
              (744,615
              )
              
              (1,037,341
              )INVENTORY
                  WRITEDOWN (Note 2)
              
              
              (357,332
              )
              
              -
              
              
              -Gross
                  profit
              
              
              368,433
              
              
              1,638,917
              
              
              2,124,513OPERATING
                  EXPENSESSelling
              
              
              1,176,911
              
              
              1,257,810
              
              
              1,564,843General
                  and administrative
              
              
              5,032,207
              
              
              2,824,384
              
              
              2,664,950Research
                  and development
              
              
              1,176,276
              
              
              941,530
              
              
              997,564Total
                  operating expenses
              
              
              7,385,394
              
              
              5,023,724
              
              
              5,227,357Loss
                  from operations
              
              
              (7,016,961
              )
              
              (3,384,807
              )
              
              (3,102,844
              )OTHER
                  INCOME:Interest
                  income
              
              
              94,030
              
              
              145,848
              
              
              222,87494,030
              
              
              145,848
              
              
              222,874Net
                  loss
              
              
              (6,922,931
              )
              
              (3,238,959
              )
              
              (2,879,970
              )Accretion
                  of convertible redeemable preferred stock costs
              
              
              (964,338
              )
              
              (160,722
              )
              
              -Dividend
                  on convertible redeemable preferred stock
              
              
              (240,000
              )
              
              (36,822
              )
              
              -Net
                  loss attributable to common stockholders
              
              $
              (8,127,269
              )
              $
              (3,436,503
              )
              $
              (2,879,970
              )PER
                  SHARE INFORMATION:Net
                  loss per common share -Basic
                  and diluted
              
              $
              (0.79
              )
              $
              (0.31
              )
              $
              (0.24
              )Weighted
                  average common shares used in computingper
                  share amounts -Basic
                  and diluted
              
              
              10,224,730
              
              
              11,201,404
              
              
              12,145,866
 
 The
        accompanying notes are an integral part of these statements.
 
 F-3
  **INTELLI-CHECK,
        INC.**
 
 STATEMENTS
        OF STOCKHOLDERS’ EQUITY
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 
 AdditionalCommon
                  Stock
              
              Paid-in
              
              Deferred
              
              AccumulatedShares
              
              Amount
              
              Capital
              
              Compensation
              
              Deficit
              
              TotalBALANCE,
                  December 31, 2003
              
              
              10,154,918
              
              $
              10,154
              
              $
              34,287,631
              
              $
              (377,967
              )
              $
              (27,019,110
              )
              $
              6,900,708Effect
                  on extension of expiring options
              
              
              -
              
              
              -
              
              
              1,347,000
              
              
              -
              
              
              -
              
              
              1,347,000Issuance
                  of common stock for the exercise of stock options
              
              
              142,700
              
              
              143
              
              
              427,836
              
              
              -
              
              
              -
              
              
              427,979Issuance
                  of common stock under employment agreement
              
              
              1,500
              
              
              2
              
              
              6,373
              
              
              -
              
              
              -
              
              
              6,375Effect
                  on extension of expiring rights dividend
              
              
              -
              
              
              -
              
              
              525,000
              
              
              -
              
              
              (525,000
              )
              
              -Purchase
                  and retirement of common stock
              
              
              (20,200
              )
              
              (20
              )
              
              (98,731
              )
              
              -
              
              
              -
              
              
              (98,751
              )Issuance
                  of common stock for services rendered
              
              
              11,500
              
              
              11
              
              
              48,864
              
              
              -
              
              
              -
              
              
              48,875Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              363,407
              
              
              -
              
              
              363,407Dividend
                  on convertible redeemable preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (240,000
              )
              
              (240,000
              )Recognition
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              542,648
              
              
              (542,648
              )
              
              -
              
              
              -Accretion
                  of convertible redeemable preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (964,338
              )
              
              (964,338
              )Valuation
                  adjustment of deferred compensation
              
              
              -
              
              
              -
              
              
              (430,739
              )
              
              430,739
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,922,931
              )
              
              (6,922,931
              )BALANCE,
                  December 31, 2004
              
              
              10,290,418
              
              
              10,290
              
              
              36,655,882
              
              
              (126,469
              )
              
              (35,671,379
              )
              
              868,324Effect
                  on extension of expiring options
              
              
              -
              
              
              -
              
              
              184,200
              
              
              -
              
              
              -
              
              
              184,200Exercise
                  of stock options
              
              
              54,000
              
              
              54
              
              
              168,846
              
              
              -
              
              
              -
              
              
              168,900Issuance
                    of common stock in connection withsecondaryoffering
              
              
              1,250,000
              
              
              1,250
              
              
              4,438,343
              
              
              -
              
              
              -
              
              
              4,439,593Conversion
                  of Convertible Redeemable Preferred Stock
              
              
              454,545
              
              
              455
              
              
              2,999,545
              
              
              -
              
              
              -
              
              
              3,000,000Issuance
                  of stock from cashless exercise of stock options
              
              
              9,277
              
              
              9
              
              
              44,241
              
              
              -
              
              
              -
              
              
              44,250Purchase
                  and retirement of outstanding warrants
              
              
              -
              
              
              -
              
              
              (25,000
              )
              
              -
              
              
              -
              
              
              (25,000
              )Issuance
                  of stock options for services rendered
              
              
              -
              
              
              -
              
              
              2,163
              
              
              -
              
              
              -
              
              
              2,163Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              143,758
              
              
              -
              
              
              143,758Dividend
                  on convertible redeemable preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (36,822
              )
              
              (36,822
              )Recognition
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              402,995
              
              
              (402,995
              )
              
              -
              
              
              -Accretion
                  of convertible redeemable preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (160,722
              )
              
              (160,722
              )Valuation
                  adjustment of deferred compensation
              
              
              -
              
              
              -
              
              
              (122,246
              )
              
              122,246
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,238,959
              )
              
              (3,238,959
              )BALANCE,
                  December 31, 2005
              
              
              12,058,240
              
              
              12,058
              
              
              44,748,969
              
              
              (263,460
              )
              
              (39,107,882
              )
              
              5,389,685Surrender
                    of stock options previously granted and recordedas
                    deferred compensation
              
              
              -
              
              
              -
              
              
              (82,812
              )
              
              82,812
              
              
              -
              
              
              -Stock
                  based compensation expense (employees and directors)
              
              
              -
              
              
              -
              
              
              590,031
              
              
              -
              
              
              -
              
              
              590,031Stock
                  based compensation expense (consultants)
              
              
              -
              
              
              -
              
              
              185,969
              
              
              -
              
              
              -
              
              
              185,969Exercise
                  of stock options
              
              
              135,450
              
              
              136
              
              
              524,439
              
              
              -
              
              
              -
              
              
              524,575Issuance
                    of common stock from cashless exercise of stock options
              
              
              6,204
              
              
              6
              
              
              (6
              )
              
              -
              
              
              -
              
              
              -Issuance
                  of stock as director’s compensation
              
              
              2,884
              
              
              3
              
              
              16,003
              
              
              -
              
              
              -
              
              
              16,006Extension
                  of options
              
              
              -
              
              
              -
              
              
              34,350
              
              
              -
              
              
              -
              
              
              34,350Recovery
                    of amortization of deferred compensation on surrender
                    of stock options
              
              
              -
              
              
              -
              
              
              (53,317
              )
              
              -
              
              
              -
              
              
              (53,317
              )Warrants
                  issued to consultants for services rendered
              
              
              -
              
              
              -
              
              
              129,756
              
              
              -
              
              
              -
              
              
              129,756Reclassification
                    of deferred stock compensation upon adoption
                    of SFAS 123(R)
              
              
              -
              
              
              -
              
              
              (180,648
              )
              
              180,648
              
              
              -
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,879,970
              )
              
              (2,879,970
              )BALANCE,
                  December 31, 2006
              
              
              12,202,778
              
              $
              12,203
              
              $
              45,912,734
              
              $
              -
              
              $
              (41,987,852
              )
              $
              3,937,085
 
 The
        accompanying notes are an integral part of these statements.
 
 F-4
  **INTELLI-CHECK,
        INC.**
 
 STATEMENTS
        OF CASH FLOWS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
  2004
              
              2005
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (6,922,931
              )
              $
              (3,238,959
              )
              $
              (2,879,970
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities-Depreciation
                  and amortization
              
              
              111,743
              
              
              52,265
              
              
              36,760Non
                  cash stock based compensation expense
              
              
              1,350,187
              
              
              228,450
              
              
              826,356Issuance
                  of common stock for services rendered
              
              
              48,875
              
              
              -Issuance
                  of stock options for services rendered
              
              
              -
              
              
              2,163Recovery
                  of amortization of deferred compensation
              
              
              
              
              
              
              
              
              (53,317
              )Amortization
                  of deferred compensation
              
              
              363,407
              
              
              143,758
              
              
              129,756Loss
                  on sale of property and equipment
              
              
              -
              
              
              4,700Writedown
                  of inventory
              
              
              357,332
              
              
              -
              
              
              -Changes
                  in assets and liabilities:Decrease
                  in certificates of deposit, restricted
              
              
              1,283,118
              
              
              -
              
              
              -(Increase)
                  decrease in accounts receivable, net
              
              
              (288,946
              )
              
              45,570
              
              
              (183,434
              )(Increase)
                  decrease in inventory
              
              
              (14,786
              )
              
              85,182
              
              
              10,788(Increase)
                  in other current assets
              
              
              (62,163
              )
              
              (139,729
              )
              
              (92,832
              )(Increase)
                  in other assets
              
              
              (34,916
              )
              
              -
              
              
              -Increase
                  (decrease) in accounts payable andaccrued
                  expenses
              
              
              667,084
              
              
              (511,505
              )
              
              (228,170
              )Increase
                  in deferred revenue
              
              
              290,050
              
              
              184,300
              
              
              342,408Increase
                  in other current liabilities
              
              
              -
              
              
              -
              
              
              75,000(Decrease)
                  in litigation settlement payable
              
              
              (921,700
              )
              
              -
              
              
              -Increase
                  in other liabilities
              
              
              -
              
              
              -
              
              
              10,480Net
                  cash used in operating activities
              
              
              (3,773,646
              )
              
              (3,143,805
              )
              
              (2,006,175
              )CASH
                  FLOWS FROM INVESTINGACTIVITIES:Purchases
                  of property and equipment
              
              
              (22,441
              )
              
              (12,096
              )
              
              (23,908
              )Proceeds
                  from sale of property and equipment
              
              
              -
              
              
              2,000Investment
                  in marketable securities and short-term investments
              
              
              (11,677,991
              )
              
              (8,037,905
              )
              
              (6,384,957
              )Sales
                  of marketable securities and short-term investments
              
              
              12,442,395
              
              
              6,866,581
              
              
              7,889,132Net
                  cash provided by (used in) investing activities
              
              
              741,963
              
              
              (1,181,420
              )
              
              1,480,267CASH
                  FLOWS FROM FINANCING ACTIVITIES:Net
                  proceeds from issuance of common stock
              
              
              431,167
              
              
              168,900
              
              
              524,575Net
                  proceeds from issuance of common stock from secondary
                  offering
              
              
              -
              
              
              4,439,593
              
              
              -Payment
                  of dividend to preferred stockholders
              
              
              (240,000
              )
              
              (97,315
              )
              
              -Repayment
                  of capital lease obligations
              
              
              (427
              )
              
              -
              
              
              -Purchase
                  of outstanding warrants
              
              
              -
              
              
              (25,000
              )
              
              -Treasury
                  stock purchased
              
              
              (98,751
              )
              
              -
              
              
              -Net
                  cash provided by financing activities
              
              
              91,989
              
              
              4,486,178
              
              
              524,575Net
                  (decrease) increase in cash and cash equivalents
              
              
              (2,939,694
              )
              
              160,953
              
              
              (1,333
              )CASH
                  AND CASH EQUIVALENTS, beginning of year
              
              
              3,306,991
              
              
              367,297
              
              
              528,250CASH
                  AND CASH EQUIVALENTS, end of year
              
              $
              367,297
              
              $
              528,250
              
              $
              526,917SUPPLEMENTAL
                  DISCLOSURE OF NONCASH FINANCING ACTIVITIES:Stock
                  options issued for services rendered
              
              $
              542,648
              
              $
              402,995
              
              $
              -Conversion
                  of convertible redeemable preferred stock into Common
                  Stock
              
              $
              -
              
              $
              3,000,000
              
              $
              -Accretion
                  of convertible redeemable preferred stock cost
              
              $
              964,338
              
              $
              160,722
              
              $
              -
  The
        accompanying notes are an integral part of these statements.
  F-5
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 
 1.  NATURE
        OF BUSINESS AND LIQUIDITY
 
 Business
 
 Intelli-Check
        (“the Company” or “we”) 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 markets. Additionally, it is currently being used to
        increase productivity by addressing inefficiencies and inaccuracies associated
        with manual data entry. The core of Intelli-Check’s product offerings is our
        proprietary software technology that verifies the authenticity of driver
        licenses, 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-issue IDs from over 60 jurisdictions
        in the U.S. and Canada by determining if the format conforms to the known
        jurisdictional format. We have served as the national testing laboratory
        for the
        American Association of Motor Vehicle Administrators (AAMVA) since 1999 and
        have
        received encoding formats from all of the issuing jurisdictions in North
        America.
 
 We
        also
        introduced three products, ID-TravelerTM, ID-ProveTM and ID-Check ® Portal,
        which provide "in-person proofing" to meet the credentialing requirements
        of
        Presidential Directive HSPD-12, a policy for a Common Identification Standard
        for Federal Employees and Contractors and help in Patriot Act compliance.
        All of
        our new innovations and product roll-outs are designed to be capable of being
        used with our data capture devices which are compact, and contain either
        one or
        both of two-dimensional bar code and magnetic stripe readers, which enables
        the
        new software technology applications to be used on a variety of commercially
        available data processing devices, including PDAs, tablets, laptops, desktops
        and point-of-sale computers.
 
 Liquidity
 
 Since
        inception, the Company has incurred significant losses and negative cash
        flow
        from operating activities, and as of December 31, 2006 we had an accumulated
        deficit of $41,987,852. The Company anticipates that its current available
        cash
        on hand and marketable securities and cash resources from expected revenues
        from
        the sale of our products and the licensing of its technology will be sufficient
        to meet its anticipated working capital and capital expenditure requirements
        for
        at least the next twelve months. These requirements are expected to include
        the
        purchase of inventory, product development, sales and marketing expenses,
        working capital requirements and other general corporate purposes. The Company
        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 markets for its ID-Check ® technology, enhance its operating infrastructure, respond to competitive
        pressures, or acquire complementary businesses or necessary technologies.
 
 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, 2005
        and
        2006, cash equivalents included money market funds, commercial paper and
        other
        liquid short-term debt instruments (with maturities at date of purchase of
        three
        months or less) of $467,991 and $155,851, respectively.
 
 Marketable
        Securities
 
 The
        Company has classified its marketable securities as held-to-maturity as the
        Company has the intent and ability to hold these securities to maturity.
        The
        securities are carried at amortized cost using the specific identification
        method. Interest income is recorded using an effective interest rate, with
        the
        associated premium or discount amortized to interest income. All of the
        Company’s marketable securities have maturities of less than one year with a
        weighted average interest rate of 4.04%. The carrying value of the marketable
        securities as of December 31, 2005 and 2006 approximated the fair market
        value.
  F-6
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 Doubtful
        Accounts and Allowances
 
 The
        Company records its doubtful accounts and allowances 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.
 
 Long-Lived
        Assets and Impairment of Long-Lived Assets
 
 The
        Company’s long-lived assets include property and equipment and
        patents.
 
 Under
        the
        provision of SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-lived Assets” which supersedes SFAS No. 121, “Accounting for the Impairment
        or Disposal of Long-lived Assets to be Disposed Of,” SFAS No. 144 requires that
        identifiable intangible assets that are not deemed to have indefinite lives
        will
        be reviewed for impairment whenever events or changes in circumstances indicate
        that the carrying amounts of the assets may be impaired. Furthermore, these
        assets are evaluated for continuing value and proper useful lives by comparison
        to undiscounted expected future cash flow projections. We did not recognize
        an
        impairment on our long-lived assets during the years ended December 31, 2006,
        2005 or 2004.
 
 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 basis.
        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.
 
 Intangible
        Assets
 
 Patent
        costs, primarily consisting of legal costs and allocated costs are being
        amortized over a period of 17 years using the straight-line method.
 
 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
 
 SFAS
        No.
        86, “Accounting for the Costs of Computer Software to Be Sold, Leased or
        Otherwise Marketed,” specifies that 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, 2004, 2005 and 2006.
 
 Revenue
        Recognition
 
 The
        Company sells its products directly through its sales force and through
        distributors. Revenue from direct **** sales
        of its product 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 by the Company;
        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
        year. Currently, with respect to sales of certain of the Company’s products, the
        Company does not have enough experience to identify the fair value of each
        element, therefore, the full amount of the revenue and related gross margin
        is
        deferred and recognized ratably over the one-year period in which the future
        service, support and performance are provided.
  F-7
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
  In
        addition, 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 by the Company; 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 year.
 
 The
        Company receives royalties from the licensing of its technology, which are
        recognized as revenues in the period they are earned. For the years ended
        December 31, 2004, 2005 and 2006, the Company received $67,113, $58,480 and
        $28,503, respectively, in
        royalty fees.
 
 Under
        the
        provisions of EITF 00-21, “Revenue Arrangements with Multiple Deliverables,”
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.
 
 Income
        Taxes
 
 The
        Company accounts for income taxes under SFAS No. 109, “Accounting for 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 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, 2005 and 2006, 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.” 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, certificate of
        deposits, marketable securities, accounts receivable and accounts payable.
        At
        December 31, 2005 and 2006, the carrying value of the Company’s financial
        instruments approximated fair value, due to their short-term nature.
 
 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 two financial institutions. The marketable securities
        consist of short term investment grade corporate bonds. 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.
  F-8
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 During
        the years ended December 31, 2005 and 2006, the Company made sales to three
        and
        two customers that accounted for approximately 57.3% and 31.3% of total
        revenues, respectively.
 
 As
        of
        December 31, 2006, the Company had two 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 Attributable to Common Shareholders
 
 The
        Company computes net loss per common share in accordance with SFAS No. 128,
        “Earnings Per Share.” 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.
 
 Diluted
        EPS for the years ended December 31, 2004, 2005 and 2006, 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, 2004, 2005 and
        2006
        had been converted:
 
 2004
              
              2005
              
              2006Stock
                  options
              
              
              2,777,474
              
              
              2,764,955
              
              
              2,470,055Convertible
                  redeemable preferred stock
              
              
              454,545
              
              
              -
              
              
              -Warrants
              
              
              323,636
              
              
              938,636
              
              
              938,636Total
              
              
              3,555,655
              
              
              3,703,591
              
              
              3,408,691
 
 Stock-Based
        Compensation
 
 The
        Company has stockholder approved stock incentive plans for employees, directors,
        officers and consultants. Prior to January 1, 2006, the Company accounted
        for
        the employee, director and officer plans using the intrinsic value method
        under
        the recognition and measurement provisions of Accounting Principles Board
        (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related
        interpretations, as permitted by Statement of Financial Accounting Standards
        (“SFAS” or “Statement”) No. 123, “Accounting for Stock-Based
        Compensation.”
 
 Effective
        January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
        transition method. Statement 123(R) revised Statement 123 to eliminate the
        option to use the intrinsic value method and required the Company to expense
        the
        fair value of all employee options over the vesting period. Under the modified
        prospective transition method, the Company recognized compensation cost for
        the
        year ended December 31, 2006 which includes a) period compensation cost related
        to share-based payments granted prior to, but not yet vested, as of January
        1,
        2006, based on the grant date fair value estimated in accordance with the
        original provisions of Statement 123; and b) period compensation cost related
        to
        share-based payments granted on or after January 1, 2006, based on the grant
        date fair value estimated in accordance with Statement 123(R). In accordance
        with the modified prospective method, the Company has not restated prior
        period
        results.
 
 The
        Company recognized compensation expense related to stock option grants on
        a
        straight-line basis over the vesting period. For the year ended December
        31,
        2006, the Company recognized share-based employee and director compensation
        cost
        of $590,031, in accordance with Statement 123(R). Of this expense, $201,180
        resulted from the grant of stock options to employees of the Company on or
        prior
        to December 31, 2005. The balance of $388,851 relates to the granting of
        stock
        options to employees and officers on or after January 1, 2006. The Company
        did
        not capitalize any share-based compensation cost.
  F-9
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
  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."  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.
 
 The
        following table illustrates the effect on 2005 and 2004 net loss and loss
        per
        share as if the Company had applied the fair value recognition provision
        of SFAS
        No. 123, as amended by SFAS No. 148 “Accounting for Stock Based
        Compensation-Transition and disclosure.” This standard preceded SFAS 123(R) and
        required different measurement criteria:
 
 Years
                  EndedDecember
                  31, 2004
              
              December
                  31, 2005Net
                    loss attributable to common stockholders, as
                    reported
              
              $
              (8,127,269
              )
              $
              (3,436,503
              )Add:Total
                    stock based employee compensation expense
                    determined under fair value based method
                    for all awards
              
              
              (2,107,593
              )
              
              (2,878,820
              )Net
                  loss, pro forma
              
              $
              (10,234,862
              )
              $
              (6,315,323
              )Basic
                  and diluted loss per share, as reported
              
              $
              (0.79
              )
              $
              (0.31
              )Basic
                  and diluted loss per share, pro forma
              
              $
              (1.00
              )
              $
              (0.56
              )
 
 As
        of
        December 31, 2004 and 2005, the fair market value of each option grant has
        been
        estimated on the date of grant using the Black-Scholes option pricing model
        based upon expected option lives of 5 and 5 years; risk free interest rates
        of
        4.0% and 4.3%; expected volatility of 60% and 74 % and a dividend yield of
        0%
        and 0%, respectively.
  Comprehensive
        Loss
 
 The
        Company’s comprehensive net loss is equal to its net loss for the years ended
        December 31, 2004, 2005 and 2006.
 
 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.
  F-10
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 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
        inventory reserves, deferred tax valuation allowances and doubtful accounts
        and
        allowances. 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.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how
        prior year misstatements should be taken into consideration when quantifying
        misstatements in current year financial statements for purposes of determining
        whether the current year’s financial statements are materially misstated. SAB
        108 permits registrants to record the cumulative effect of initial adoption
        by
        recording the necessary “correcting” adjustments to the carrying values of
        assets and liabilities as of the beginning of that year with the offsetting
        adjustment recorded to the opening balance of retained earnings only if material
        under the dual method. SAB 108 is effective for fiscal years ending on or
        after
        November 15, 2006. The Company has assessed the effect of adopting this guidance
        and has determined that there will be no impact on the Company’s financial
        statements.
 
 In
        September 2006, the Financial Accounting Standards Board ("FASB") issued
        Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
        Measurements,” which is effective for calendar year companies on January 1,
        2008. The Statement defines fair value, establishes a framework for measuring
        fair value in accordance with Generally Accepted Accounting Principles, and
        expands disclosures about fair value measurements. The Statement codifies
        the
        definition of fair value as the price that would be received to sell an asset
        or
        paid to transfer a liability in an orderly transaction between market
        participants at the measurement date. The standard clarifies the principle
        that
        fair value should be based on the assumptions market participants would use
        when
        pricing the asset or liability and establishes a fair value hierarchy that
        prioritizes the information used to develop those assumptions. The Company
        is
        currently assessing the potential impacts of implementing this
        standard.
 
 In
        July
        2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes - an interpretation of FASB No. 109” (“FIN 48”), effective for
        fiscal years beginning after December 15, 2006.  FIN 48 requires a two-step
        approach to determine how to recognize tax benefits in the financial statements
        where recognition and measurement of a tax benefit must be evaluated
        separately.  A tax benefit will be recognized only if it meets a
“more-likely-than-not” recognition threshold.  For tax positions that meet
        this threshold, the tax benefit recognized is based on the largest amount
        of tax
        benefit that is greater than 50 percent likely of being realized upon ultimate
        settlement with the taxing authority.  We estimate compliance with FIN 48
        will not have a material impact on our results of operations or cash flows.
  3. PROPERTY
        AND EQUIPMENT
 
 Property
        and equipment are comprised of the following as of December 31, 2005 and
        2006:
 
 2005
              
              2006Computer
                  equipment
              
              $
              525,128
              
              $
              550,279Furniture
                  and fixtures
              
              
              137,251
              
              
              136,008Leasehold
                  improvements
              
              
              143,253
              
              
              143,253Office
                  equipment
              
              
              46,287
              
              
              46,287851,919
              
              
              875,827Less
                  - Accumulated depreciation and amortization
              
              
              (759,673
              )
              
              (790,224
              )$
              92,246
              
              $
              85,603
  F-11
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 Depreciation
        expense for the years ended December 31, 2004, 2005 and 2006 amounted to
        $99,944, $46,055 and $30,551, respectively.
 
 4. INTANGIBLE
        ASSETS
 
 The
        following summarize the carrying amounts of intangible assets and related
        amortization:
  As
                  of December 31, 2005
              
              As
                  of December 31, 2006Gross
                  CarryingAmount
              
              AccumulatedAmortization
              
              Gross
                  CarryingAmount
              
              AccumulatedAmortizationAmortized
                  intangible assetsPatents
              
              
              105,661
              
              
              69,282
              
              
              105,661
              
              
              75,491Copyrights
              
              
              17,500
              
              
              17,500
              
              
              17,500
              
              
              17,500Total
              
              $
              123,161
              
              $
              86,782
              
              $
              123,161
              
              $
              92,991
  Amortization
        expense for years ended December 31, 2004, 2005, and 2006 were $11,799, $6,210
        and $6,209, respectively.
 
 As
        of
        December 31, 2006, estimated amortization expense for each of the succeeding
        five years is $6,209.
 
 5.  ACCRUED
        EXPENSES
 
 Accrued
        expenses are comprised of the following as of December 31, 2005 and
        2006:
 
 2005
              
              2006Professional
                  fees
              
              $
              159,635
              
              $
              71,401Payroll
                  and related
              
              
              158,252
              
              
              237,303Rent
              
              
              17,102
              
              
              13,682Other
              
              
              54,753
              
              
              55,642$
              389,742
              
              $
              378,028
 
 6. INCOME
        TAXES
 
 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, 2005 and 2006 are as follows:
 
 2005
              
              2006Deferred
                  tax assets, net:Net
                  operating loss carryforwards
              
              $
              12,467,000
              
              $
              13,296,000Depreciation
              
              
              (15,000
              )
              
              (15,000
              )Reserves
              
              
              307,000
              
              
              307,000Research
                  & development tax credits
              
              
              -
              
              
              26,000Gross
                  deferred tax assets
              
              
              12,759,000
              
              
              13,614,000Less:
                  Valuation allowance
              
              
              12,759,000
              
              
              13,614,000Deferred
                  tax assets, net
              
              $
              -
              
              $
              -
 
 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, 2006 the Company had net operating loss carryforwards (NOL’s) for
        federal and New York State income tax purposes of approximately $33.2 million.
        There can be no assurance that the Company will realize the benefit of the
        NOL’s. The federal NOL’s are available to offset future taxable income and
        expire from 2018 through 2025 if not utilized. Under Section 382 of the Internal
        Revenue Code, these NOL’s may be limited due to ownership changes.
  F-12
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 The
        effec tive
        tax
        rate for the years ended December 31, 2004, 2005 and 2006 is different from
        the
        tax benefit that would result from applying the statutory tax rates primarily
        due to the recognition of valuation allowances.
 
 7. SERIES
        A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
 
 On
        March
        27, 2003, pursuant to a Securities Purchase Agreement, we sold 30,000 shares
        of
        our Series A 8% Convertible Redeemable Preferred Stock, par value $.01 per
        share, for $3,000,000 before expenses to Gryphon Master Fund, L.P. Each share
        of
        Preferred Stock entitled the holder to receive dividends of 8% per annum
        and was
        convertible into 15.1515 shares of our common stock. Additionally, each investor
        received one (1) five year warrant to purchase 3.787875 shares of common
        stock
        at an exercise price of $6.78 with each share of Preferred Stock purchased.
        The
        total amount of shares that may be issued upon conversion of the Preferred
        Stock
        and exercise of the warrants are 454,545 and 113,636, respectively. Dividend
        payments of $120,000 in cash were due semi-annually beginning September 30,
        2003. In connection with this financing, we paid agent fees of $150,000 and
        issued warrants and options to purchase 8,854 shares of our common stock
        at a
        price of $6.78. We also paid professional fees of approximately $136,000.
        We
        recorded the relative fair value of all the warrants issued in connection
        with
        this transaction of $497,700 against the amount of the Convertible Redeemable
        Preferred Stock as of March 27, 2003, which was calculated using the
        Black-Scholes valuation method, as well as $540,000 of beneficial conversion
        feature in accordance with EITF 00-27 and such amounts were being accreted
        along
        with issuance cost of $285,900 over the five year period until the mandatory
        redemption date of the Preferred Stock, the fifth anniversary of closing.
        We
        recorded accretion of dividends of $240,000 for 2004 and $36,822 in 2005.
        On
        February 25, 2005, Gryphon Master Fund, L.P. converted the Company’s Preferred
        Stock into 454,545 shares of the Company’s common stock at a conversion price of
        $6.60 per share. The Company retired the 30,000 shares of preferred stock,
        issued 454,545 shares of its common stock and recorded $3,000,000 as an increase
        to stockholders equity. **** Additionally,
        as a result of this conversion, the period we used in estimating the accretion
        of all of the costs associated with the issuance of the Preferred Stock changed
        from 5 years to 1.9166 years. Accordingly, the accretion was increased in
        the
        fourth quarter of 2004 by $669,618 and amounted to $964,338 for the year
        ended
        December 31, 2004. The effect of this change in accounting estimate in 2004
        was
        a reduction in equity.
 
 8.  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, 2005 and 2006, there were no outstanding
        shares of Series A Convertible Preferred Stock.
 
 Secondary
        Offerings
 
 On
        August
        9, 2005, the Company successfully completed its private offering of 1,250,000
        shares of common stock at $4.00 per share and received net proceeds of
        approximately $4,440,000. In connection with the offering, investors received
        five year warrants to purchase 500,000 shares of common stock at an exercise
        price of $5.40 per share. The Company purchased 110,000 of these warrants
        in
        December 2005 for $25,000 and retired them, leaving 390,000 currently
        outstanding. In addition, the Company granted to its placement agent a warrant
        to purchase 125,000 shares of our common stock at a price of $ 5.40 per share
        which expires on August 8, 2010. On October 7, 2005, the Registration Statement
        on Form S-3, which included the shares issued in the Company’s secondary
        offering, was declared effective by the Securities and Exchange Commission.
  F-13
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 Common
        Stock, Warrants and Rights
 
 In
        March
        2001, the Company declared a dividend distribution of one non-transferable
        right
        to purchase one share of the Company’s common stock for every 10 outstanding
        shares of common stock continuously held from the record date to the date
        of
        exercise, as well as common stock underlying vested stock options and warrants,
        held of record on March 30, 2001, at an exercise price of $8.50. The rights
        were
        due to expire on October 4, 2002, which was one year after the effective
        date of
        the registration statement related to the shares of common stock underlying
        the
        rights. The Company extended the expiration date until April 4, 2003, further
        extended the rights until December 31, 2003, June 30, 2004, June 30, 2005,
        June
        30, 2006 and has additionally extended the expiration date to June 30, 2007.
        Under certain conditions, the Company has the right to redeem the outstanding
        rights for $.01 per right. Such conditions were not met as of March 27, 2007.
        The Company reserved 970,076 shares of common stock for future issuance under
        this rights offering. The Company has recorded the fair value of the rights
        of
        $1,082,000 as a dividend during the quarter ended March 31, 2001, which was
        calculated using the Black-Scholes valuation method and recorded as an increase
        in additional paid-in capital and a reduction in accumulated deficit. The
        Company also recorded the fair value of the additional rights extension of
        $525,000 during the year ended December 31, 2004, using the Black-Scholes
        valuation method and recorded an increase in additional paid-in-capital and
        a
        reduction in accumulated deficit. There was no expense recorded in 2005 and
        2006
        for the extension of these rights. As of December 31, 2006, 292,001 of these
        rights had been exercised and the Company received cumulatively $2,482,009
        before expenses of $133,834.
 
 In
        March
        2001, the Board of Directors authorized, subject to certain business and
        market
        conditions, the purchase of up to $1,000,000 of our common stock. As of December
        31, 2006, the Company cumulatively purchased 40,200 shares of the Company’s
        common stock for approximately $222,000 and subsequently retired those shares.
        No shares were purchased in 2006. The Company may purchase additional shares
        when warranted by certain conditions.
 
 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.
 
 Stock
        Options
 
 In
        order
        to retain and attract qualified personnel necessary for the success of the
        Company, the Company adopted a Stock Option Plan (the “1998 Stock Option Plan”)
        covering up to 400,000 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 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 the Company. The 1998 Stock Option Plan also entitles
        nonemployee directors to receive grants of non-qualified stock options as
        approved by the Board of Directors.
 
 In
        August
        1999, the Company adopted the 1999 Stock Option Plan (the “1999 Stock Option
        Plan”) covering up to 1,000,000 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 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
        nonemployee 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 shares,
        pursuant to which the 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
        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 15% 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.
  F-14
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 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 shares,
        pursuant to which the 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
        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 15% 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.
 
 At
        the
        Company’s Annual Meeting held on July 8, 2004, the stockholders approved the
        2004 Stock Option Plan covering up to 850,000 of the Company’s common shares,
        pursuant to which the 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
        the
        2004 Stock Option Plan and determines the terms and conditions of options
        granted, including the exercise price. The 2004 Stock Option Plan provides
        that
        all stock options will expire within ten years of the date of grant. Incentive
        stock options granted under the 2004 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 15% of the voting stock of the Company. The 2004 Stock Option Plan
        also entitles non-employee directors to receive grants on non-qualified stock
        options as approved by the Board of Directors.
 
 During
        2004, the Company granted warrants to purchase 100,000 shares of common stock
        at
        an exercise price of $7.54 per share to consultants (see footnote 9). During
        2005, the Company granted warrants and options to purchase 150,000 shares
        of
        common stock at exercise prices ranging from $5.10 to $5.40 per share to
        consultants under various agreements. The fair market value of each option
        was
        estimated on the date of grant using the Black-Scholes option pricing model.
        Accordingly, we have recorded $542,648, $402,995 and $0 as deferred compensation
        for these services as of December 31, 2004, 2005 and 2006, respectively.
        As a
        result of some of the granted options having varying vesting periods, the
        Company revalued certain options and warrants either as of the vesting date
        or
        as of the balance sheet date for those options unvested using the Black Scholes
        option pricing model. Accordingly, the Company recorded a reduction of the
        fair
        value of $430,739 and $122,246 for the years ended December 31, 2004 and
        2005,
        respectively. During December 31, 2004, 2005 and 2006, the Company recognized
        amortization of deferred compensation of $363,407, $143,758 and $129,756,
        respectively. In March, 2006, our consultant returned and cancelled a stock
        option agreement which the Company issued in February 2002 that granted options
        to purchase 50,000 shares of common stock at an exercise price of $12.10.
        The
        remaining unamortized balance in deferred compensation of $82,812 was reduced
        and offset against additional paid in capital and amortization expense of
        $53,317 recorded through December 31, 2005 and was recognized as income in
        the
        first quarter of 2006.
 
 Stock-Based
        Compensation
 
 Stock
        option activity under the 1998, 1999, 2001, 2003 and 2004 Stock Option Plans
        during the periods indicated below is as follows:
  F-15
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 Number
                  of
                Shares
                Subject
                  to
                Issuance
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                Contractual
                Term
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at January 1, 2004
              
              
              2,701,124
              
              $
              7.97
              
              
              2.89
                  yearsGranted
              
              
              655,550
              
              
              5.07Forfeited
                  or expired
              
              
              (436,500
              )
              
              7.93Exercised
              
              
              (142,700
              )
              
              3.00Outstanding
                  at December 31, 2004
              
              
              2,777,474
              
              
              7.11
              
              
              4.42
                  yearsGranted
              
              
              476,980
              
              
              5.02Forfeited
                  or expired
              
              
              (410,499
              )
              
              7.78Exercised
              
              
              (79,000
              )
              
              3.09Outstanding
                  at December 31, 2005
              
              
              2,764,955
              
              
              6.77
              
              
              3.94
                  yearsGranted
              
              
              197,050
              
              
              5.99Forfeited
                  or expired
              
              
              (331,500
              )
              
              9.43Exercised
              
              
              (160,450
              )
              
              3.74
              
              
              
              
              $
              292,548Outstanding
                  at December 31, 2006
              
              
              2,470,055
              
              $
              6.55
              
              
              3.66
                  years
              
              $
              3,407,053Exercisable
                  at December 31, 2006
              
              
              2,291,305
              
              $
              6.61
              
              
              3.56
                  years
              
              $
              3,213,178
 
 Included
        in the above schedule are 754,425 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:
 Years
                  Ended December 31,2005
              
              2006Risk-free
                  interest rate
              
              
              4.3
              %
              
              4.7
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %Expected
                  lives
              
              
              5
                  years
              
              
              4.5-9.0
                  yearsExpected
                  volatility
              
              
              74
              %
              
              71
              %Forfeiture
                  rate
              
              
              0
              %
              
              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, 2006:
  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$2.80
                  to $5.00
              
              
              998,730
              
              
              4.15
              
              $
              3.80
              
              
              948,730
              
              $
              3.76$5.01
                  to $9.80
              
              
              1,033,575
              
              
              1.76
              
              
              6.78
              
              
              904,825
              
              
              6.87$11.75
                  to $16.50
              
              
              437,750
              
              
              1.26
              
              
              12.26
              
              
              437,750
              
              
              12.262,470,055
              
              
              3.66
              
              $
              6.55
              
              
              2,291,305
              
              $
              6.61
 
 The
        weighted-average fair value of the options granted during the years ended
        December 31, 2004, 2005 and 2006 is $2.97, $4.03 and $3.99,
        respectively.
 
 As
        of
        December 31, 2006, the Company had 797,811 options available for future grant
        under the 1998, 1999, 2001, 2003 and 2004 Stock Option Plans.
  F-16
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 As
        of
        December 31, 2006, there was $441,046 of total unrecognized compensation
        cost,
        net of estimated forfeitures, related to all unvested stock options, which
        is
        expected to be recognized over a weighted average period of approximately
        2.0
        years.
 
 On
        July
        8, 2004, the Company’s Board of Directors agreed to extend the expiration date
        of the Chief Executive Officer’s options to July 15, 2008, which originally were
        due to expire on July 15, 2004. As a result, the Company recorded the fair
        value
        of the extension of $1,347,000 as a non cash expense during the second quarter
        ended December 31, 2004, which was calculated using the Black-Scholes valuation
        method.
 
 During
        January 2005 and 2006, the Company’s Board of Directors approved the cashless
        exercise of 25,000 options each year which were converted into 6,204 and
        9,277
        shares, respectively of its common stock for the Company’s Chairman and CEO. As
        a result, the Company recorded the fair value of the shares issued as a non-cash
        expense totaling $44,250 and $0, respectively which was calculated using
        the
        Black-Scholes valuation method.
 
 During
        2005 and 2006, the Company’s Board of Directors extended the expiration date of
        270,500 and 56,500 stock options for three and one of the Company’s directors
        who resigned from the Board for an additional 9 and 12 months, respectively.
        As
        a result, we recorded the fair value of the extension of $184,200 and $34,350
        as
        a non cash expense during the year ended December 31, 2005 and 2006,
        respectively which was calculated in accordance with Financial Interpretation
        No. 44 “Accounting for Certain Transactions involving stock compensation.”
 
 On
        September 9, 2005, the Board of Directors agreed to accelerate the vesting
        of
        all employee, officer and director unvested stock options outstanding under
        our
        stock option plans with exercise prices that are “out of the money” prior to
        December 31, 2005.  The total number of options that were earlier vested
        amount to 347,500 and had a range of exercise prices of $4.37 to $6.30 and
        a
        weighted average exercise price of $5.03.  The high and low of the closing
        price of our common stock between September 9, 2005 and December 31, 2005
        was
        $4.37 and $6.30.  The purpose of the accelerated vesting wa s
        to enable us to avoid recognizing compensation expense associated with these
        options upon adoption of SFAS No. 123(R).  The fair value associated
        with the accelerated options that would have been reflected in our financial
        statements amounted
        to $926,189 using the Black-Scholes valuation method ,
        which is included in pro forma stock-based employee compensation expense
        for
        2005. 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 are set to be granted on the third Thursday
        of
        each month 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.
 
 In
        the
        opinion of management, 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.
 
 As
        of
        December 31, 2006, the Company has warrants outstanding for 938,636 shares
        of
        common stock at a weighted average exercise price of $6.11, which expire
        between
        March 26, 2008 and August 21, 2011.
 
 9.COMMITMENTS
        AND CONTINGENCIES
 
 Operating
        Leases
 
 During
        July 2000, the Company entered into a 10-year lease agreement for its new
        office. The lease provided for monthly rental payments of $17,458 beginning
        December 15, 2000 with small annual increases. In connection with this lease,
        the Company provided an irrevocable unconditional letter of credit in the
        amount
        of $250,000 as security, which was cancelled in 2004 and replaced with a
        cash
        security payment of $34,916 for the remaining lease term. Effective October
        16,
        2005, the Company amended its office lease that provided for a reduction
        in
        office space from approximately 9,700 square feet to approximately 7,100
        square
        feet for the remainder of the lease term which expires December 31, 2010.
        In
        addition, payments under the amended lease were reduced to $16,244 per month
        and
        such reduction will increase by approximately 4% per year.
 
 In
        addition, the Company has entered into various leases for office equipment
        and
        office space expiring through December 2010. Future minimum lease payments
        under
        these lease agreements are as follows:
 
 F-17
 **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 
 Year
                  Ending December 31:2007
              
              
              210,6442008
              
              
              219,3202009
              
              
              221,3882010
              
              
              230,376$
              881,728
 
 Rent
        expense for the years ended December 31, 2004, 2005 and 2006 amounted to
        $243,577, $243,731 and $211,825, respectively.
 
 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
        superceded 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, 2006, total fees payable under this agreement
        amounted to approximately $440.
 
 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 three year 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, 2004, 2005 and 2006, the Company received $67,113, $58,480
        and $28,503, 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. We also filed a patent infringement lawsuit against
        Tricom Card Technologies, Inc. in July 2003, which is currently being litigated.
 
 Employment
        Agreements
 
 Effective
        January 1, 2006, we entered into a letter of understanding with our Chairman
        and
        Chief Executive Officer that provides for an annual base salary of $255,604.
        In
        addition, on November 8, 2005, we granted to Mr. Mandelbaum an option to
        purchase 25,000 shares of common stock at an exercise price of $3.22 per
        share.
        We also agreed to provide a severance arrangement that in such case that
        we were
        to terminate Mr. Mandelbaum for any reason other than cause we would pay
        Mr.
        Mandelbaum 2 years of his annual cash base salary in 12 equal monthly
        installments.
 
 On
        November 10, 2006, the Board of Directors increased Mr. Mandelbaum’s annual base
        salary to $264,000 effective January 1, 2007. On November 16, 2006, the Company
        also granted to Mr. Mandelbaum an option to purchase 25,000 shares of common
        stock at an exercise price of $6.00 per share.
 
 If
        there shall occur a change of control, as defined in the agreement, Mr.
        Mandelbaum may terminate his employment at any time and be entitled to receive
        a
        payment equal to 2.99 times his average annual compensation, including bonuses,
        during the three years preceding the date of termination, payable in cash
        to the
        extent of three months salary and the balance in shares of our common stock
        based on a valuation of $2.00 per share.
 
 On
        November 10, 2006, the Company entered into a letter of understanding with
        its
        Chief Financial Officer, Mr. Winiarz, which provided for an annual base salary
        of $175,000. This agreement became effective on January 1, 2007. Mr. Winiarz’
previous employment contract terminated on December 31, 2006. On November
        16,
        2006, the Company also granted to Mr. Winiarz an option to purchase 25,000
        shares of common stock at an exercise price of $6.00 per share. Mr. Winiarz
        would have been eligible to receive a bonus upon Intelli-Check achieving
        certain
        financial targets. The Company agreed in the letter of understanding, that
        if it
        were to terminate Mr. Winiarz for any reason other than cause, it would pay
        Mr.
        Winiarz two (2) years of base salary in twelve (12) equal monthly installments.
        Mr. Winiarz resigned his position with the Company on January 21, 2007 and
        his
        letter of understanding terminated.
  F-18
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 Each
        of the agreements requires the executive to devote substantially all his
        time
        and efforts to our business and contains non-competition and nondisclosure
        covenants of the officer for the term of his employment and for a period
        of two
        years thereafter. Each agreement provides that we may terminate the agreement
        for cause.
 
 Supplier
        Agreements
 
 In
        January 2004, we entered into a two year product supply agreement for the
        purchase of input devices. Under the terms, these devices, which were private
        labeled, are programmed to work in conjunction with our ID-Check® technology. On
        December 30, 2005, we entered into a two year product supply agreement with
        the
        same manufacturer and with similar terms and conditions as the prior agreement.
        As of December 31, 2006, the Company had a commitment of $176,695 under this
        agreement. On March 14, 2006, we signed a product supply agreement with another
        manufacturer for the purchase of alternate input devices that are also
        programmed to work in
        conjunction with our ID-Check® technology.
        The Agreement, which was effective until December 31, 2006, was automatically
        renewed for another year per the terms of the Agreement.
 
 Investment
        Firm Relationships
 
 On
        January 21, 2004, the Company entered into a one year agreement with Alexandros
        Partners LLC to act as consultants in advising the Company in financial and
        investor relation matters. The Company agreed to pay a consulting fee of
        $50,000
        payable in 12 equal monthly installments. In addition, the Company issued
        a
        warrant granting the right to purchase 100,000 shares of the Company’s common
        stock at a purchase price of $7.54 per share, which vested ratably over the
        12
        month period. A principal of Alexandros Partners LLC was a member of the
        Company’s Board of Directors. Effective January 1, 2005, the Company renewed its
        agreement with Alexandros Partners LLC for an additional year and paid a
        consulting fee of $50,000 in 12 equal monthly installments. This
        transaction was approved by all of the independent directors of the Company’s
        Board of Directors.  The
        agreement terminated on December 31, 2005.
 
 On
        December 7, 2004, the Company entered into a one year agreement with a
        consulting firm to help with its investor relations activities. The Company
        paid
        a consulting fee of $100,000 in 12 monthly installments. In addition, the
        Company issued 11,500 restricted shares of its common stock. On
        August 6, 2005, the Company terminated the agreement and ceased payment under
        the agreement.
 
 On
        November 2, 2004, the Company entered into an exclusive agreement with an
        investment banking firm for the purpose of investigating the opportunities
        in
        raising additional capital for the Company. On May 3, 2005, the Company
        terminated the agreement eliminating the provision of exclusivity and signed
        an
        exclusive agreement with another investment banking firm as a lead placement
        agent in connection with the private placement described in Note 8 above.
 
 On
        September 21, 2005, the Company entered into a two (2) year agreement with
        a
        consulting firm to help with our public and investor relations activities.
        The
        Company agreed to pay $6,000 per month for the first 12 months of the agreement
        and $9,000 per month for the following 12 months. In addition, the Company
        issued a warrant granting the right to purchase 100,000 shares of our common
        stock at a purchase price of $4.62 per share, which vested ratably over the
        twelve month period after signing. All warrants are currently vested. The
        fair
        value of this warrant amounted to $318,221 using the Black-Scholes valuation
        method and was recorded in Deferred Compensation during the third quarter
        of
        2005. For the years ended December 31, 2005 and 2006, the Company recorded
        an
        expense of approximately $71,000 and $186,000, respectively. The contract
        was
        cancelable after the first year under certain terms and conditions. We
        renegotiated the terms of the Agreement at the end of the twelve month period
        and currently pay $6,000 per month for the services. No underwriting discounts
        or commissions were paid with respect to such securities. Such securities
        were
        issued pursuant to the exemption from registration contained in Section 4(2)
        of
        the Securities Act as they were issued to accredited investors.
 
 Legal
        Proceedings
 
 On
        August
        1, 2003, we filed a summons and complaint against Tricom Card Technologies,
        Inc.
        alleging infringement on our patent and seeking injunctive and monetary
        relief.  On October 23, 2003, we amended our complaint to include
        infringement on an additional patent.  On May 18, 2004, we filed a Second
        Amended Complaint alleging infringement and inducement to infringe against
        certain principals of Tricom in their personal capacities, as well as alleging
        in the alternative false advertising claims under the Lanham Act against
        all the
        defendants.  The principals moved to dismiss the claims against them, and
        Tricom moved to dismiss the false advertising claims, which motions have
        been
        administratively terminated by the Court.  On August 1, 2005, defendants
        filed an Answer and Affirmative Defenses to the Second Amended Complaint
        and
        Tricom filed a declaratory counterclaim.  On November 2, 2005, the Court
        allowed Tricom to plead two additional defenses and declaratory counterclaims
        in
        the case, and on January 3, 2006, the parties filed a Stipulation of Dismissal
        of the Estoppel and Unenforceability Counterclaims and Affirmative
        Defenses.  On February 28, 2006, the parties filed a Supplemental Proposed
        Joint Pretrial Order, and on March 1, 2006, the Court certified that fact
        discovery in this action was complete. On
        June 29, 2006, the Court held a pre-motion conference at our request to discuss
        our proposed motion to disqualify defendants' counsel for a conflict of
        interest.  Pursuant to the Court's order, we served moving papers upon
        defendants on July 14, 2006 and defendants served opposition to the motion
        on
        around July 28, 2006.  We served a reply to the opposition on August 11,
        2006 and filed the motion with the Court.  Also, on or about July 21, 2006,
        defendants filed with the Court a motion for claim construction together
        with
        our opposition to defendants' motion and defendants' reply to the
        opposition.  The Court has not scheduled a hearing date for either motion
        and there is no trial date pending.
  F-19
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          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.
 
 10.  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, 2005
              
              Year
                  Ended December 31, 2006FirstQuarter
              
              SecondQuarter
              
              ThirdQuarter
              
              FourthQuarter
              
              FirstQuarter
              
              SecondQuarter
              
              ThirdQuarter
              
              FourthQuarter(Dollars
                  in thousands)Income
                  Statement Data:Revenues
              
              $
              297
              
              $
              997
              
              $
              430
              
              $
              660
              
              $
              536
              
              $
              718
              
              $
              772
              
              $
              1,136Gross
                  profit
              
              
              194
              
              
              881
              
              
              253
              
              
              311
              
              
              355
              
              
              496
              
              
              463
              
              
              810Loss
                  from operations
              
              
              (1,586
              )
              
              (202
              )
              
              (812
              )
              
              (785
              )
              
              (1,001
              )
              
              (994
              )
              
              (709
              )
              
              (399
              )Net
                  loss
              
              
              (1,570
              )
              
              (182
              )
              
              (765
              )
              
              (722
              )
              
              (945
              )
              
              (938
              )
              
              (651
              )
              
              (346
              )Net
                  loss attributable toCommon
                  stockholders
              
              
              (1,767
              )
              
              (182
              )
              
              (765
              )
              
              (722
              )
              
              (945
              )
              
              (938
              )
              
              (651
              )
              
              (346
              )Net
                  loss per share attributableto
                  Common stockholders:Basic
                  and diluted
              
              
              (0.17
              )
              
              (0.02
              )
              
              (0.07
              )
              
              (0.06(1
              ))
              
              (0.08
              )
              
              (0.08
              )
              
              (0.05
              )
              
              (.03
              )
 
 (1)
            The
                sum of the net loss per share for each of the quarters of fiscal
                2005
                exceeds by $0.01 the basic loss per share for fiscal 2005 in total
                due to
                the impact of stock issuances on the weighted average number of shares
                outstanding. 
 We
        have
        not experienced seasonality in our sales volume or operating
        expenses.
 
 F-20
  **INTELLI-CHECK,
          INC.**
 
 NOTES
          TO
          FINANCIAL STATEMENTS
 Schedule
        II - Valuation and Qualifying Accounts
 
 Year
        Ended December 31, 2006, 2005 and 2004
 
 **Year
                  ended December 31, 2006**
              
              **Balance
                    at****Beginning
                  of Period**
              
              **Additions**
              
              **Net
                    Deductions****and
                  Other**
              
              **Balance
                    at****End
                  of Period**Doubtful
                  accounts and allowances
              
              $
              28,467
              
              $
              10,000
              
              $
              (28,467
              )
              $
              10,000Deferred
                  tax assets valuation allowance
              
              $
              12,759,000
              
              $
              855,000
              
              
              -
              
              $
              13,614,000
   **Year
                  ended December 31, 2005**
              
              **Balance
                    at****Beginning
                  of Period**
              
              **Additions**
              
              **Net
                    Deductions****and
                  Other**
              
              **Balance
                    at****End
                  of Period**Doubtful
                  accounts and allowances
              
              $
              20,000
              
              $
              8,467
              
              
              -
              
              $
              28,467Deferred
                  tax assets valuation allowance
              
              $
              11,441,000
              
              $
              1,318,000
              
              
              -
              
              $
              12,759,000
   **Year
                  ended December 31, 2004**
              
              **Balance
                    at****Beginning
                  of Period**
              
              **Additions**
              
              **Net
                    Deductions****and
                  Other**
              
              **Balance
                    at****End
                  of Period**Doubtful
                  accounts and allowances
              
              
              -
              
              $
              20,000
              
              
              -
              
              $
              20,000Deferred
                  tax assets valuation allowance
              
              $
              9,520,550
              
              $
              1,920,450
              
              
              -
              
              $
              11,441,000
 
 F-21