**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON** **,
      D.C. 20549**







**FORM
      10-K**





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





For
      the
      fiscal year ended December 31, 2007




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
      - Mobilisa, Inc.**


(Exact
      name of Registrant as specified in its charter)





Delaware
            11-3234779(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            (I.R.S.
                Employer Identification No.)191
                Otto Street, Port Townsend, WA 98368(Address
                of Principal Executive Offices) (Zip
                Code)





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




246
      Crossways Park West, Woodbury, NY 11797




(Former
      Name, Former Address and Former Fiscal Year, if Changed Since Last
      Report)




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




Large
                accelerated filero
            
            Accelerated filero
            
            Non-accelerated
                filero
            
            Smaller
                reporting company x(Do
                not check if a smaller reporting company)




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, 2007).




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
              24,563,378(Title
                  of Class)
              (No.
                  of Shares Outstanding at March 25,
                  2008)




DOCUMENTS
      INCORPORATED BY REFERENCE: None









**TABLE
      OF CONTENTS**


**Part
                I**1.
            
            Business
            
            41A.
            
            Risk
                Factors
            
            211B.
            
            Unresolved
                Staff Comments
            
            312.
            
            Properties
            
            313.
            
            Legal
                Proceedings
            
            324.
            
            Submission
                of Matters to a Vote of Security Holders
            
            32**Part
                II**5.
            
            Market
                for Common Equity, Related Stockholder Matters and Issuer Purchases
                of
                Equity Securities
            
            336.
            
            Selected
                Financial Data
            
            357.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            357A.
            
            Quantitative
                and Qualitative Disclosures About Market Risks
            
            438.
            
            Financial
                Statements and Supplementary Data
            
            439.
            
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            449A.
            
            Controls
                and Procedures
            
            449B.
            
            Other
                Information
            
            44**Part
                III**10.
            
            Directors
                and Executive Officers and Corporate Governance
            
            4511.
            
            Executive
                Compensation
            
            4812.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            5713.
            
            Certain
                Relationships, Related Transactions and Director
                Independence
            
            5814.
            
            Principal
                Accountant, Fees and Services
            
            59**Part
                IV**15.
            
            Exhibits
                and Financial Statement Schedules
            
            61




3




**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.




**Recent
      Developments**





On
      November 20, 2007, we and Mobilisa, Inc.(“Mobilisa”), a private company that is
      a leader in identity systems and mobile and wireless technologies, entered
      into
      a merger agreement pursuant to which our wholly-owned subsidiary would merger
      with and into Mobilisa, resulting in Mobilisa becoming a wholly-owned
      subsidiary. At a special meeting of stockholders held on March 14, 2008, our
      stockholders voted to approve the merger, as well as to amend Intelli-Check’s
      certificate of incorporation to increase the authorized shares of common stock
      and to increase the number of shares issuable under our 2006 Equity Incentive
      Plan. Our corporation was renamed Intelli-Check-Mobilisa, Inc. The headquarters
      of Intelli-Check was moved to Mobilisa’s offices in Port Townsend,
      Washington.




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





We
      intend
      to account for the transaction under the purchase method of accounting in
      accordance with the provisions of Statement of Financial Accounting Standards
      No. 141, “Business Combinations.” Under this accounting method, we will
      record as our cost, the assets of Mobilisa, less the liabilities assumed, with
      the excess of such cost over the estimated fair value of such net assets
      reflected as goodwill. Additionally, certain costs directly related to the
      transaction will be reflected as additional purchase price in excess of net
      assets acquired. Our results of operations will include the operations of
      Mobilisa after March 14, 2008. As of December 31, 2007, we had incurred $208,000
      in connection with the acquisition of Mobilisa, reflected on the balance sheet
      as Deferred Acquisition Costs.




4





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





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




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




·
            Network
                Design: Mobilisa’s AIRchitectTM tool designs optimum wireless networks
                based on user parameters and location
                architecture.




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





For
      purposes of this report, the terms Intelli-Check, Inc. (“Intelli-Check”, “we”,
“our” or “the Company”) refers to the business prior to the acquisition of
      Mobilisa, Including the Financial Statements and Schedule II included in Part
      IV, Item 15.




**INFORMATION
      ABOUT INTELLI-CHECK**




**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.




5




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.




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.




6




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 it is likely 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.




**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.




7




ICARUS




We
      developed an automated remote update system that customers can use to
      automatically download and install updates. This product is currently being
      used
      in instant credit kiosk applications.




**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 driver 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.




8




**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;




·
            improperly
                boarding airplanes;




·
            committing
                credit card, debit card and check cashing fraud;




·
            unlawfully
                obtaining welfare or other government benefits;




·
            committing
                refund fraud,




·
            committing
                pharmacy fraud, including false narcotic prescriptions,




·
            gaining
                entrance to high profile buildings and sensitive infrastructures,
                such as
                nuclear facilities;




·
            illegally
                purchasing firearms;




·
            purchasing
                age restricted products such as alcohol and tobacco while under age;




·
            committing
                employee fraud, including employee theft and payroll theft;
                and




·
            engaging
                in medical fraud.





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




9




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




Then,
      the ID-Check ®  software
      applications can:




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




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




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




**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:




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




10




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




We
      also
      market our products to opportunities where our ID-Check ®  technology
      can be used to enhance productivity. We have made significant progress in the
      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 ·
            Banks
                and other financial institutions


·
            Credit
                unions


·
            Credit
                card issuers


·
            Check
                cashing services


·
            Auto
                dealerships and rental car agencies


·
            Casino
                for enrollment of guests


·
            Hospital
                patient admissions


·
            Lodging
                Industry


·
            Airlines




**Commercial
      fraud protection**




·
            Mass
                merchandisers and retailers


·
            Banks and other financial
              institutions


·
            Credit unions


·
            Credit card issuers


·
            Check cashing services


·
            Auto dealerships and rental car
              agencies


·
            Casino cage operations


·
            Hospitals, medical facilities and health
              plans


·
            Lodging Industry


·
            Pharmacies




**Access
      control**


·
            Airports
                and airlines


·
            Departments
                of Motor Vehicles


·
            Prisons


·
            Law
                enforcement agencies


·
            Notable
                buildings


·
            Court
                houses


·
            Nuclear
                facilities


·
            Oil
                refineries and storage facilities


·
            Military
                establishments


·
            College
                Campuses


·
            Department
                of Homeland Security


·
            Bus,
                rail and port facilities




**Age
      verification market**




·
            Bars
                and night clubs


·
            Convenience
                stores


·
            Grocery
                chains


·
            Restaurants


·
            Stadiums
                and arenas


·
            Casinos
                and gaming establishments


·
            Sellers
                of sexually explicit material


·
            Firearm
                dealers




11


**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


·
            MGM
                Grand


·
            Caesar’s
                Palace


·
            Vanguard


·
            Toys
                R Us


·
            Century
                21Department Stores


·
            Foxwoods
                Resorts and Casino


·
            Mohegan
                Sun Resort Casino


·
            Barclaycard
                USA


·
            JPMorgan
                Chase


·
            GE
                Consumer Finance





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




·
            John
                F. Kennedy International Airport in New
                York


·
            O’Hare
                International Airport in Chicago


·
            Reagan
                National Airport in Washington, DC


·
            American
                Stock Exchange


·
            Fort
                Sam Houston


·
            Fort
                Hood


·
            Pentagon
                Force Protection Agency


·
            New
                York Department of Motor Vehicles


·
            Vermont
                Department of Motor Vehicles


·
            Delaware
                Department of Motor Vehicles


·
            New
                Hampshire Department of Motor
                Vehicles


·
            Port
                Authority of New York and New
                Jersey


·
            United
                States Supreme Court


·
            Registered
                Traveler Program





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




·
            Idaho
                State Liquor Dispensary


·
            Sunoco


·
            Exxon/Mobil
                franchisees


·
            Drake
                Petroleum


·
            Houston’s
                Restaurants


·
            Michael
                Jordan’s Steakhouse





**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.




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;


·
            Trade
                publications;


·
            Trade
                shows;


·
            Paid
                keyword searches;


·
            Web
                seminars, as well as our own
                website;


·
            Various
                conventions and industry specific
                seminars.





12





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.
      The agreement automatically renews for successive one year terms on December
      31
      of each year pursuant to the terms of the Agreement. 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.




**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 its 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.




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, 2007, total fees
      payable under this agreement amounted to less than $1,000.




13




**INFORMATION
      ABOUT MOBILISA**





***Mobilisa’s
      Products and Projects***





Defense
      ID ®





Mobilisa’s
      Defense ID ® system
      offers law enforcement personnel and military security officers additional
      information for protecting their facilities. The Defense ID ® System
      uses rugged, handheld, mobile devices to read barcodes, magnetic stripes, RFID
      (radio frequency identification) and OCR (optical character recognition) codes
      printed on current forms of identification cards. By scanning and comparing
      the
      information contained on the ID card to over 140 databases, Defense
      ID ® can
      immediately determine if the card has been reported lost or stolen, the
      individual’s identity information matches watch lists or law enforcement
      databases, or if they are on an authorized roster of previously-cleared
      personnel.




***Background
      on Identification***




Driver
      Licenses. State-issued driver licenses are the most widely used form of government-issued
      photo identification. The Real ID Act, which became federal law in
      May 2005, imposed standards for the issuance, data content, and acceptance
      of state-issued driver licenses. When the act is fully implemented,
      non-compliant driver licenses may not be accepted by any federal agency for
      any
      official purpose. The Real ID Act contemplates the inclusion of machine-readable
      technology, which is already included on many driver licenses, on all compliant
      licenses. The Defense ID ® system
      is capable of reading all machine-readable technologies currently in
      use.




Other
      Identification Cards. Since
      some 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 ID cards and passports, are used
      in
      the same way as driver licenses as proof of identification. Presently, the
      Mobilisa Defense ID ® system
      can also read all information encoded on these forms of identification.
      State-issued identification cards issued in lieu of driver licenses are also
      covered by some provisions of the Real ID Act.





Databases. There
      are numerous state and federal law enforcement databases containing information
      that may be critical to security and law enforcement officers. Historically,
      officers in the field have had limited access to such information, which greatly
      reduces the value of accurate identification. The Defense ID ® system
      links information contained on readable forms of identification with information
      compiled from more than 140 different law enforcement databases. An individual
      using the system can immediately check the validity of the identification card
      and has instant access to key information concerning, among other things,
      outstanding wants and warrants.




***Current
      Challenges Associated with Access Control***




Secure
      facilities routinely rely on entry point identification checks as an important
      security measure. The most common verification performed at entry points is
      a
      visual check of identification cards presented by individuals attempting to
      access the facility. Entry point controls are used in a wide variety of
      settings, including military base entrances, airports, and commercial
      buildings.




There
      are
      many challenges associated with visual checks on identification cards. Because
      of the numerous forms of identification accepted, including driver licenses,
      military IDs, passports, base-specific badges, and vendor and visitor badges,
      it
      is virtually impossible for security officers to memorize each individual format
      and to distinguish fake forms of identification. Because identification cards
      vary greatly in their format, security officers waste precious time searching
      for pertinent information on the identification card, which causes unnecessary
      delays and resulting expense.




With
      a
      visual check, even though a security officer may be able to quickly determine
      if
      a card is expired, the security officer has no way of knowing whether the
      individual, even if properly identified, should be granted access. The officer
      typically cannot quickly review multiple no-access lists, confirm that the
      individual does not have a law enforcement or warrant, or determine if the
      identification card has been reported lost or stolen. As an additional
      frustration, there are no readily-accessible common databases that compile
      all
      of this shared information.




14




By
      using
      the Mobilisa Defense ID ® system,
      security officers have the ability to instantly view the machine-readable
      information contained in the identification card’s barcode or magnetic stripe.
      This information is then immediately checked against over 140 law enforcement
      databases and the system alerts the guard if the individual matches anyone
      in
      any of the databases. This greatly increases efficiency and gives the security
      officer real-time access to critical information, enabling the security officer
      to make an on-the-spot determination relating to access with increased speed
      and
      confidence in accuracy.




***Defense
      ID*** **®** **** ***Solutions
      and Benefits***





The
      Mobilisa Defense ID ® system
      offers invaluable tools to users enabling them to increase safety and monitor
      the security of their installations. As an access control system, it offers
      instant checks of those individuals attempting to gain access and alerts the
      security or law enforcement officer if that check raises any
      suspicions.





Mobilisa
      Defense ID ® works as
      a complete system that cuts down costs and implementation time by using cards
      already in existence as opposed to manufacturing and issuing new identification
      cards to each individual who wishes to access an installation. For ease of
      use
      and adaptability, Mobilisa offers this solution in multiple form factors.





·
            M2100
                Agent Handheld.The M2100 Agent Handheld is a handheld that fits easily into a pocket
                or
                attaches to a belt. This device is recommended for any use that requires
                high mobility and easy concealment.




·
            M2500
                Sentry Handheld.The M2500 Sentry Handheld is a rugged, mobile, handheld computer.
                This
                device is recommended for entry control points and other heavy use
                areas.




·
            M3000
                Visitor/Vendor Control Station.The M3000 Visitor/Vendor Control Station makes it easier to process
                visitors and vendors. The system pre-populates fields, takes photos,
                runs
                instant background checks, prints badges and allows users to control
                visitors’ or vendors’ access by date, time, location or Force Protection
                Condition (“FPCON”) or Homeland Security threat condition.




Wireless




Mobilisa
      creates custom wireless solutions for all types of industries. The Company
      provides a complete range of services, including consultation, custom wireless
      software, wireless infrastructure installation, wireless LAN security
      evaluation, and advanced research and development.




*WOW*




Mobilisa’s
      Wireless on Water (“WOW”) technology, based on IEEE 802.11 standards, uses a mix
      of terrestrial-based RF band radio and antenna hardware in conjunction with
      advanced optimization techniques to provide reliable, high speed wireless access
      coverage for constantly moving watercraft within a local waterway. The
      technology has been successfully implemented on the Washington State Ferries
      and
      the British Columbia Ferry System in British Columbia, Canada and is suited
      for
      other terrestrial forms of transportation including rail, bus and automobile
      applications.




*AIRchitectTM*




Mobilisa’s
      AIRchitectTM is a tool to aid in the design of optimal wireless networks. It can
      be used for marine vessels, hangars, office buildings or outdoor facilities.
      The
      software uses imported structural drawings and other user input to calculate
      and
      display the optimal wireless network based on coverage, signal spill-over,
      bandwidth, interference, cost and security. AIRchitectTM eliminates the trial and
      error survey method commonly used in the design of wireless networks and, as
      a
      result, users realize a significant life-cycle cost reduction and an increase
      in
      network efficiency.




15




*FAN*




The
      Mobilisa Floating Area Network (“FAN”) project created a Line of Sight (“LOS”),
      high-speed, wireless mesh-type network for use in marine and, in particular,
      naval applications. Currently, ships in a naval battle group rely on satellite
      communication to communicate both with one another and with shore facilities.
      However, the ever-increasing demand for bandwidth in naval communications taxes
      existing satellite communications systems and can result in slow and unreliable
      communication.




FAN
      uses
      advanced WOW technology based on IEEE 802.11 standards. FAN creates an ad hoc
      network between vessels operating within line of sight of one another that
      can
      be used for, among things, data exchange, VOIP (Voice over Internet Protocol)
      and video teleconferencing. FAN removes ship-to-ship communication within a
      battle group from the satellite network thereby freeing up valuable bandwidth
      for ship-to-shore communications. In addition, smaller vessels with less
      ship-to-shore bandwidth can share the greater capabilities of the larger
      platforms. The system design allows ships to join and leave the network as
      they
      come within communication range, while continuously adjusting for local
      conditions and ship movement.




FAN
      is
      currently in the approved prototype stage with the U.S. Navy. In addition to
      U.S. battle group applications, FAN technology provides a lower-cost method
      of
      integrating multinational naval forces. It also has many potential commercial
      applications such as port security, shipping coordination and commercial fishing
      fleet operations.




*Littoral
      Sensor Grid*




Mobilisa
      is developing a wireless buoy network using a variety of wireless technologies,
      sensors and instruments that will enable buoys to communicate near real-time
      data between other buoys and shore for environmental monitoring, analysis and
      security applications. Currently, most sensor buoys rely on VHF radio
      transmissions to transmit collected data back to shore facilities. The low
      bandwidth of VHF limits both the type and quantity of data that can be collected
      by the buoys and the ability to access the data in real time.




The
      Littoral Sensor Grid leverages Mobilisa’s WOW technology to extend wireless
      technology into a low-level, height-of-eye, littoral environment ideal for
      use
      on buoys. Mobilisa’s ongoing research and development efforts related to the
      Littoral Sensor Grid must consider the impact of Fresnel zones, reflectivity
      and
      line of sight limitations in the use of directional antennas and other advanced
      wireless technology to create a working wireless local area network for buoys
      within each other’s line of sight. The range of the network will depend on the
      height above water of the antennas atop the buoys, the physics related to
      propagation near water of radio waves and the ability to switch between several
      highly directional antennas that operate within FCC guidelines. Mobilisa
      anticipates that such a system will enable the buoys to communicate at ranges
      of
      up to 5 miles apart.




Because
      the sensor buoys can be equipped with a variety of different types of sensors,
      Mobilisa envisions a wide variety of uses for the Littoral Sensor Grid. The
      possible sensor capabilities of this buoy network include wireless connectivity
      and networking, environmental data collection, mobile and configurable
      surveillance packages, TIS/VIS (Thermal Imaging System/Visual Imaging
      System), radar and sonar. The Littoral Sensor Grid may be used to gather
      near real-time sea and weather conditions, to gather environmental data that
      will enable scientists to monitor changing conditions in littoral waters and
      to
      enhance port security as a component in the layered harbor defense concept.
      The
      wireless network capabilities of the Littoral Sensor Grid may also be used
      to
      extend the capabilities of a FAN.





***Strategy***




Mobilisa’s
      objective is to become a leading provider of enhanced security access systems
      and to continue to enhance its role as a leading provider and innovator of
      wireless technologies for the military.




Product
      Enhancement




Due
      to
      the success of Defense ID ® in the
      military and government markets, Mobilisa intends to enhance its product line
      to
      support other entities such as law enforcement, port security and commercial
      installations. Mobilisa continues its ongoing efforts to research and implement
      the use of new identification cards, additional databases and upgraded equipment
      form factors in order to increase the efficiency and performance of the
      system.




16




Strengthen
      Sales and Marketing Efforts




As
      the
      need for access control systems continues to grow, Mobilisa’s experienced sales
      and marketing departments must adjust to target new markets. Sales and marketing
      materials are specially designed to clearly outline the capabilities of the
      system and how it is valuable to each of these specific markets. Mobilisa has
      sales staff on the West Coast, Midwest and East Coast, which allows a quick
      response to questions and personalized assistance for each customer based on
      location. In the future, Mobilisa’s experience in marketing the Defense ID ® system
      will provide the foundation to successfully market new products and
      technologies, such as FAN and the Littoral Sensor Grid, as they become ready
      for
      application in the military, government, and commercial sectors.




Additional
      Access to Multiple Databases




Mobilisa
      continues to increase the data source information accessed through its Defense
      ID ® system.
      This is achieved by increasing the capabilities of its internally-developed
      scraping programs for publicly-available information as well as by negotiating
      additional data source agreements with various law enforcement and government
      agencies. In addition to these general databases, Mobilisa customizes databases
      for each individual customer based on information provided by the
      customer.




Protect
      Intellectual Property





Mobilisa
      intends to continue to protect its intellectual property in order to retain
      its
      value and unique products. As discussed below, Mobilisa currently has three
      pending patents:





·
            Dynamic
                Identity Matching in Response to Threat
                Levels;




·
            Aggregation
                in Persons-of-Interest Information for Use in an Identification System;
                and




·
            Dynamic
                Access Control in Response to Flexible
                Rules




Mobilisa
      intends to apply for patents as products and technology mature and challenge
      any
      attempt to infringe its patent rights. Where appropriate, Mobilisa will also
      utilize trade secret, copyright, trademark and similar laws to protect its
      intellectual property.




Research
      and Development




Mobilisa
      intends to pursue research and development projects through funding from various
      government agencies, and its current classification as a woman-owned,
      veteran-owned, small business located in a HUBZone has allowed it to receive
      several specialized grants for research and development work in the wireless
      and
      security arenas. Jefferson County, Washington, where Port Townsend is located,
      has been designated as a HUBZone until the year 2010. As long as combined
      company maintains its headquarters in Jefferson County, Washington and one-third
      of the total number of employees live in the designated HUBZone area, the
      combined company will maintain its HUBZone status.




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




***Revenue
      Sources***




Mobilisa
      derives revenue from the following sources:





·
            Sales
                of systems by its own direct sales
                force;




17




·
            Subscription
                fees from the licensed use of Mobilisa
                technology;




·
            Extended
                maintenance programs; and




·
            Government
                grants for research and development
                projects




***Target
      Markets***





Defense
      ID ®





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




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




***Military***·Army
            
            ·Navy·Air Force
            
            ·Marines·Coast Guard
            
            ·Military Academies·Military Hospitals***Law
                Enforcement/Government***·FBI
            
            ·Drug Enforcement Administration·State Police
            
            ·Local Sheriffs·Bureau of Alcohol, Tobacco and Firearm
            
            ·CIA·Customs
            
            ·Department of Transportation·Department of Homeland Security
            
            ·Border Patrol





Other
      Products




Mobilisa
      provides wireless services, including wireless environment analysis, custom
      wireless network design and application and custom wireless application
      development, to a range of customers across a variety of markets. Mobilisa’s
      AIRchitectTM enables Mobilisa to design the ideal wireless network for a variety
      of different facilities. In addition to designing shipboard networks for the
      U.S. Navy and the Washington State and British Columbia Ferries, Mobilisa
      targets metropolitan areas, warehouses, hospitals, public transportation
      providers and other businesses requiring wireless design and specialty services.
      Mobilisa’s WOW technology can be adapted for a variety of forms of
      transportation, including buses and trains, and the company continues to further
      explore potential customers in those markets. Currently, Mobilisa’s target
      market for both FAN and the Littoral Sensor Network is the U.S. Navy, although
      there are many additional markets where such technology may be sold in the
      future.





***Representative
      Customers***




Mobilisa
      has generated revenue from its customers from the sale of systems, licensing
      of
      software and sale of extended service agreements. The following representative
      customers are using Mobilisa systems and software for security and
      identification purposes.





·The United States Air Force Academy
            ·Fort Richardson·Fort Wainwright
            ·Bolling AFB·Elmendorf Air Force Base (“AFB”)
            ·Fort Polk·Andrews AFB
            ·Fort Dix




18




·Fort Meade
            ·Schriever AFB·Fort Belvoir
            ·Walter Reed Army Hospital·Maxwell AFB
            ·McChord AFB·Vandenberg AFB
            ·Claremont County Sheriff Department·The US Military Academy at West Point
            ·BAE Systems·Bangor Naval Submarine Base
            ·Peterson AFB




The
      following representative customers have used Mobilisa wireless solutions,
      including AIRchitectTM:





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





***Marketing
      and Distribution***




Defense
      ID ®




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




When
      dealing with military and government entities, Mobilisa must comply with
      applicable procurement regulations. As a woman-owned, veteran-owned small
      business in a HUBzone, Mobilisa has a considerable advantage in the procurement
      process. These designations allow Mobilisa to quickly be awarded sole source
      contracts with the military and government. Since Intelli-Check’s headquarters
      will be moved to Mobilisa’s headquarters in Port Townsend, WA, the HUBZone
      designation will remain in place and Mobilisa anticipates that the combined
      entity will continue to meet the Small Business Administration’s definition of a
“small business.”




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




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




Mobilisa
      has offices in the West (Port Townsend, WA), the Midwest (Dayton, OH), and
      the
      East (Alexandria, VA) to fully support its current and potential customers.
      This
      makes it easy to schedule and complete installations and maintenance in an
      efficient, time-conscious manner.




Wireless




Marketing
      for Mobilisa’s wireless products and capabilities is performed primarily via the
      Mobilisa website and tradeshow exhibitions. Mobilisa attends market-specific
      tradeshows to demonstrate current products and capabilities. Mobilisa prides
      itself on being an innovative solutions provider and this is a prime arena
      for
      showcasing the Company’s talents and for interfacing with potential customers
      who can benefit from Mobilisa’s wireless solutions.





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




19





***Competition***




Defense
      ID ®





Mobilisa
      competes in a market that is relatively new, intensely competitive and rapidly
      changing. Unless a device can read, decode and analyze all of the
      electronically-stored information that is legally permitted to be analyzed
      from
      an identification card, the user may not obtain accurate and reliable
      confirmation that a identification card is valid and has not been altered.
      There
      are several companies, including Eid Passport, L-1 Identity Solutions, and
      Core
      Street, that are currently offering products that compete with the Defense
      ID ® system.





Wireless





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





***Manufacturing***





All
      Mobilisa products are created with commercial off the shelf (“COTS”) items that
      Mobilisa personally customizes with software and specialized configurations.
      All
      products are customized, assembled, and tested in-house and then installed
      and
      placed by Mobilisa employees in the field.




***Intellectual
      Property***





Mobilisa
      has pending the following patent applications:





Utility
      application entitled DYNAMIC IDENTITY MATCHING IN RESPONSE TO THREAT LEVELS.
      This patent is for a dynamic identity matching system that enables a person
      to
      determine the status of an individual based on identification information
      contained in a record provided by the individual. An operator scans the
      individual’s identification and the system, using a name match algorithm and
      generates a candidate score. Based on current security conditions, the system
      will display some or all of name or identity-match results. In addition, the
      system will rank results from highest score (BOLO violent terrorist based on
      direct id number match) to lowest score (EAL authorized).





Provisional
      application entitled AGGREGATION OF PERSONS-OF-INTEREST INFORMATION FOR USE
      IN
      AN IDENTIFICATION SYSTEM. This patent is for a software and/or hardware facility
      that gathers Person of Interest (“POI”) information from public databases
      maintained by the FBI, U.S. Customs Enforcement, U.S. Secret Service, U.S.
      Drug
      Enforcement Agency, Interpol, U.S. Postal Service, State law enforcement
      agencies, Attorney General’s Office, and various military departments. The
      system scans information and uses structural semantic and syntax to determine
      whether the data is in a form that the system recognizes. The system next
      converts POI information into a common format for use in aggregating information
      with the other scanned databases. The system reconciles received data with
      previously-stored data to ensure that duplicate entries do not exist for
      identical or similar individuals.





Provisional
      application entitled a DYNAMIC ACCESS CONTROL IN RESPONSE TO FLEXIBLE RULES.
      This patent is for a dynamic access control facility that enables an operator
      to
      determine whether to grant or deny facility access to an individual based,
      in
      part, on the status of the individual. The operator scans the individual's
      identification information from the identification record using a scanning
      device. To determine the status of the individual, the facility decodes the
      scanned identification information and identifies candidates based on the
      decoded identification information. For each authorized candidate, the facility
      selects for display the locations or resources that the candidate is authorized
      to access. When there is at least one candidate, the facility displays the
      selected candidate(s) to the operator indicating the status of the individual
      and/or whether access should be denied or granted.





20





**Employees**




As
      of
      March 2008, Intelli-Check
      - Mobilisa had forty eight (48) full-time employees. Five (5) are engaged in
      executive management, eighteen (18) in information technology, nineteen (19)
      in
      sales and marketing and six (6) in administration. All employees, other than
      our
      CEO, Nelson Ludlow, are
      employed “at will.” We
      believe our relations with our employees are generally good and we have no
      collective bargaining agreements with any labor unions.




**Item
      1A.**  **Risk
      Factors**





**RISK
      FACTORS**




**Risks
      Related to Our Business and Industry**




**Risks
      Related to Intelli-Check’s Business**




**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 $2,673,218 and $2,879,970 for the fiscal years ended
      December 31, 2007 and December 31, 2006, respectively and our accumulated
      deficit was $44,661,070 as of December 31, 2007. 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.




21




**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.




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.




22





**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.




23




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 15, 2008, 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.




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




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





**Risks
      related to Mobilisa’s Business**





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





In
      the
      years ended December 31, 2007 and 2006, Mobilisa derived 40.2% and 48.3% of
      its
      revenue respectively from government R&D contracts. These government
      contracts often include provisions that substantially differ from those found
      in
      typical private commercial transactions. For instance, government contracts
      may:





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




24




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




·
            include
                bonding requirements;




·
            contain
                comprehensive procurement provisions that require Mobilisa to expend
                substantial resources in pursuing the
                contract




·
            specify
                performance criteria that Mobilisa must satisfy before the customer
                accepts the products and services;
                and




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




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





**Mobilisa
      has been granted contracts based on its status as a small business in a HUBZone
      and, in the future, Mobilisa may not continue to meet the qualifications for
      such status.**





At
      times,
      Mobilisa has been granted government contracts in part due to its status as
      a
      small business in a HUBZone. There is a possibility that, due to future growth,
      Mobilisa will no longer meet the Small Business Administration’s definition of a
“small business”, that Port Townsend, WA will no longer be designated a HUBZone,
      or that Mobilisa will relocate all or a portion of its operations outside of
      a
      HUBZone. If any of these things were to happen, Mobilisa may be at a
      disadvantage when competing for future government contracts, which may in turn
      reduce Mobilisa’s revenue.





**Mobilisa’s
      business strategy exposes it to long sales and implementation cycles for its
      products.**





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





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





Mobilisa’s
      backlog represents sales value of firm orders for products and services not
      yet
      delivered and, for long-term, executed contractual arrangements (contracts,
      subcontract and customer commitments), the estimated future sales value of
      product shipments, transactions processed and services to be provided over
      the
      term of the contractual arrangements, including anticipated renewal options.
      For
      contracts with indefinite quantities, Mobilisa’s backlog is estimated based on
      current activity levels. Its backlog includes estimates of revenues, the receipt
      of which require future government appropriations, depend on option exercise
      by
      clients or are subject to contract modification or termination. At December
      31,
      2007, Mobilisa’s backlog approximated $11.4 million, $3.0 million of which is
      estimated to be realized in the next twelve months. These estimates are based
      on
      Mobilisa’s experience under such contracts and similar contracts, and it
      believes that such estimates are reasonable. If Mobilisa does not realize a
      substantial amount of its backlog, its operations could be harmed and future
      revenues could be significantly reduced.




25





**The
      market for Mobilisa’s products is evolving and its growth is
      uncertain.**





Demand
      and market acceptance for recently introduced and existing products and sales
      from such products are subject to a high level of uncertainty and risk.
      Mobilisa’s business may suffer if the market for those products develops more
      slowly than anticipated or if products do not obtain market
      acceptance.





**Failure
      to manage Mobilisa’s operations if they expand could impair future
      growth.**





If
      Mobilisa is able to expand its operations, particularly through multiple sales
      to government agencies, the expansion will place significant strain on its
      existing management, financial controls, operating systems, personnel and other
      resources. Mobilisa’s ability to manage future growth, should it occur, will
      depend to a large extent upon several factors, including its ability to do
      the
      following:





·
            build
                and train its sales force;




·
            establish
                and maintain relationships with
                distributors;




·
            develop
                customer support systems;




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




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




If
      Mobilisa is able to grow its business, but does not manage growth successfully,
      it may experience increased operating expenses, loss of customers, distributors
      or suppliers and declining or slowed growth of revenues.





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





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




**Mobilisa
      relies on commercial off-the-shelf technology to provide hardware
      products.**





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





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





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




26





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





Currently,
      Mobilisa’s Defense ID ® system
      accesses over 140 separate databases run by various government and law
      enforcement agencies. Mobilisa cannot be assured that each of these agencies
      will continue to cooperate with it. In the event that one or more of these
      agencies does not continue to provide access to these databases, the utility
      of
      the Defense ID ® system
      may be diminished.





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





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





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





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





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





**Mobilisa
      is subject to risks associated with product failure and technological
      flaws.**





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




27





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





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





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





**Failure
      to protect its proprietary technology may impair Mobilisa’s competitive
      position.**





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





·
            contractual
                arrangements providing for nondisclosure of proprietary
                information;




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




·
            protecting
                trade secrets;




·
            protecting
                copyrights and trademarks by registration and other appropriate
                means




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




·
            establishing
                practices for identifying unauthorized use of intellectual
                property.




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





In
      addition, foreign laws treat the protection of proprietary rights differently
      from laws in the United States and may not protect proprietary rights to the
      same extent as U.S. laws. The failure of foreign laws or judicial systems to
      adequately protect Mobilisa’s proprietary rights or intellectual property,
      including intellectual property developed on Mobilisa’s behalf by foreign
      contractors or subcontractors may have a material adverse effect on Mobilisa’s
      business, operations and financial results.





**Legal
      claims regarding infringement of third-party intellectual property rights by
      Mobilisa or its suppliers could result in substantial costs, diversion of
      managerial resources and harm to Mobilisa’s reputation.**





To
      Mobilisa’s knowledge, its current products do not infringe on the intellectual
      property rights of any third parties and there are no claims regarding
      infringement of third-party intellectual property rights against either it
      or
      its supplier. If any third party were to bring such an infringement claim
      against either Mobilisa or its suppliers, it may result in substantial costs
      to
      Mobilisa, diversion of Mobilisa’s resources and harm to Mobilisa’s
      business.




28





**If
      Mobilisa’s future products incorporate technologies that infringe the
      proprietary rights of third parties and it does not secure licenses from them,
      Mobilisa could be liable for substantial damages.**





To
      Mobilisa’s knowledge, its current products do not infringe the intellectual
      property rights of any third parties, and it is not aware of any third-party
      intellectual property rights that may hamper Mobilisa’s ability to provide
      future products and services. However, Mobilisa recognizes that the development
      of services or products may require it to 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 Mobilisa, whether or not they are upheld, such
      claims could:





·
            consume
                substantial time and financial
                resources;




·
            divert
                the attention of management from growing Mobilisa’s business and managing
                operations; and




·
            disrupt
                product sales and shipments.




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





**Failure
      to attract and retain management and other personnel may damage operations
      and
      financial results and cause revenue to decline.**





Mobilisa
      depends, to a significant degree, on the skills, experience and efforts of
      executive officers and other key management and of technical, finance, sales
      and
      other personnel. A failure to attract, integrate, motivate and retain existing
      or additional personnel could disrupt or otherwise harm Mobilisa’s operations
      and financial results. Mobilisa does not carry key employee life insurance
      policies covering any employees. The loss of services of certain of key
      employees, an inability to attract or retain qualified personnel in the future,
      or delays in hiring additional **** personnel could delay the development of Mobilisa’s business and could cause
      revenues to decline.





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





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





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





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





**Risks
      of the Combined Company**





**Because
      Intelli-Check does not intend to pay dividends on its Common Stock, stockholders
      will benefit from an investment in Intelli-Check’s Common Stock only if it
      appreciates in value.**





Intelli-Check
      has never declared or paid any cash dividends on its shares of Common Stock.
      Post acquisition, Intelli-Check currently intends to retain all future earnings,
      if any, for use in the operations and expansion of the business. As a result,
      Intelli-Check does not anticipate paying cash dividends in the foreseeable
      future. Any future determination as to the declaration and payment of cash
      dividends will be at the discretion of Intelli-Check’s Board of Directors and
      will depend on factors Intelli-Check’s Board of Directors deems relevant,
      including among others, Intelli-Check’s results of operations, financial
      condition and cash requirements, business prospects, and the terms of
      Intelli-Check’s credit facilities and other financing arrangements. Accordingly,
      realization of a gain on stockholders’ investments will depend on the
      appreciation of the price of Intelli-Check’s Common Stock. There is no guarantee
      that Intelli-Check’s Common Stock will appreciate in value.




29





**Intelli-Check
      has had a limited ability to evaluate the target business’
management.**





Although
      Intelli-Check closely examined the management of Mobilisa, Intelli-Check cannot
      provide assurance that its assessment of Mobilisa’s management will prove to be
      correct, or that future management will have the necessary skills,
      qualifications or abilities to manage its business successfully. Many of the
      current members in the management of Mobilisa are now involved with the
      management of the combined company and have the ability to affect its day to
      day
      operations.





**Post
      acquisition, Intelli-Check's management team will control a substantial interest
      in Intelli-Check and thus may influence certain actions requiring a
      stockholder vote.**





Post-acquisition,
      Intelli-Check's management team (including all of
      Intelli-Check's directors) will own approximately 52.3% of Intelli-Check's
      issued and outstanding common stock, approximately 49.6% of which would be
      owned
      by Nelson Ludlow and Bonnie Ludlow, Mobilisa’s two primary shareholders. By
      owning this many shares, Intelli-Check's management team will be able to
      control decisions to be made by Intelli-Check's **** stockholders.





**If
      Intelli-Check is not successful in integrating the two organizations,
      Intelli-Check will not be able to operate efficiently after the
      merger.**





Achieving
      the benefits of the merger will depend in part on the successful integration
      of
      Intelli-Check’s and Mobilisa’s operations, products and personnel in a timely
      and efficient manner. The integration process requires coordination of different
      sales forces, administrative staff and development and engineering teams, and
      involves the integration of systems, applications, policies, procedures,
      business processes and channel operations. This, too, will be difficult,
      unpredictable, and subject to delay because of possible cultural conflicts
      and
      different opinions on technical decisions and product roadmaps. If Intelli-Check
      cannot successfully integrate the operations and personnel of the two companies,
      Intelli-Check will not realize the expected benefits of the merger.





**Integrating
      the companies may divert management’s attention away from
      operations.**





Successful
      integration of Intelli-Check’s and Mobilisa’s operations, products and personnel
      may place a significant burden on the management and the internal resources
      of
      both Intelli-Check and Mobilisa. The diversion of management attention and
      any
      difficulties encountered in the transition and integration process could harm
      the business, financial condition and operating results of each of the
      companies, and the combined company after completion of the merger.





**Intelli-Check
      expects to incur significant costs integrating the companies into a single
      business, and if such integration is not successful, Intelli-Check may not
      realize the expected benefits of the merger.**





Intelli-Check
      expects to incur significant costs integrating Intelli-Check’s and Mobilisa’s
      operations, products and personnel. These costs may include costs
      for:





·
            employee
                severance;




·
            conversion
                of information systems;




·
            combining
                research and development teams and
                processes;




·
            relocation
                or disposition of excess equipment.




30




In
      addition, Intelli-Check expects to incur significant transaction costs in
      connection with the merger. Intelli-Check does not know whether it will be
      successful in these integration efforts or in consummating the merger and cannot
      assure its investors that it will realize the expected benefits of the
      merger.





**If
      Intelli-Check fails to retain key employees, the benefits of the merger could
      be
      diminished.**





The
      successful combination of Intelli-Check and Mobilisa will depend in part on
      the
      retention of key personnel. There can be no assurance that Intelli-Check will
      be
      able to retain its or Mobilisa’s key management, technical, sales and customer
      support personnel. If Intelli-Check fails to retain such key employees, it
      may
      not realize the anticipated benefits of the merger.





**If
      Intelli-Check does not integrate Mobilisa’s products, Intelli-Check may lose
      customers and fail to achieve its financial objectives.**





Achieving
      the benefits of the merger will depend in part on the integration of
      Intelli-Check’s and Mobilisa’s products in a timely and efficient manner. In
      order for Intelli-Check to provide enhanced and more valuable products to its
      customers after the merger, Intelli-Check will need to integrate its product
      lines and development organizations with those of Mobilisa. This will be
      difficult, unpredictable, and subject to delay because Intelli-Check’s and
      Mobilisa’s products are highly complex, have been developed independently and
      were designed without regard to such integration. If Intelli-Check cannot
      successfully integrate Mobilisa’s products and continue to provide customers
      with products and new product features in the future on a timely basis,
      Intelli-Check may lose customers and its business and results of operations
      may
      be harmed.




**Sales
      could decline if customer or supplier relationships are disrupted by the
      merger.**





The
      customers of Intelli-Check and Mobilisa may not continue their current buying
      patterns following, the merger. Any significant delay or reduction in orders
      for
      Intelli-Check’s or Mobilisa’s products could harm the combined company’s
      business, financial condition and results of operations. Customers may defer
      purchasing decisions as they evaluate the likelihood of successful integration
      of Intelli-Check’s and Mobilisa’s products and the combined company’s future
      product strategy, or consider purchasing products of competitors. Customers
      may
      also seek to modify or terminate existing agreements, or prospective customers
      may delay entering into new agreements or purchasing products. In addition,
      by
      increasing the breadth of Intelli-Check’s and Mobilisa’s business, the merger
      may make it more difficult for the combined company to enter into or maintain
      relationships, including customer relationships, with suppliers or strategic
      partners, some of whom may view the combined company as a more direct competitor
      than either Intelli-Check or Mobilisa as an independent company.





**The
      trading price of the combined company’s stock may be affected by factors
      different from those currently affecting the prices of Intelli-Check and
      Mobilisa Common Stock.**





Upon
      completion of the merger, holders of Mobilisa’s Common Stock became holders of
      the Common Stock of Intelli-Check. The results of operations of the combined
      company, as well as the trading price of Intelli-Check’s Common Stock after the
      merger, may be affected by factors different from those currently affecting
      the
      results of operations and the trading price of the Common Stock of
      Intelli-Check.





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




Not
      applicable.





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




As
      of
      March 14, 2008, our corporate headquarters will be relocated to Mobilisa’s
      facility consisting of approximately 5,840 square feet located in Port
      Townsend, WA. The lease for this premise expires on July 31, 2017. We also
      lease approximately 7,100 square feet in Woodbury, NY pursuant to an amended
      lease expiring on December 31, 2010. In addition, we lease approximately 3,289
      square feet in Alexandria, VA pursuant to an amended lease that expires on
      January 31, 2010 and approximately 931 square feet in Beavercreek, OH pursuant
      to a lease that expires on September 30, 2009. Most U.S. sales, marketing and
      technical personnel for all product divisions are in these locations, with
      a
      small number of individuals operating out of their home offices. We believe
      that
      our existing facilities are adequate to meet current requirements and that
      additional or substitute space will be available as needed to accommodate any
      expansion of operations.




31




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





On
      August
      1, 2003, Intelli-Check filed a summons and complaint against Tricom Card
      Technologies, Inc. alleging infringement on its patent and seeking injunctive
      and monetary relief. On October 23, 2003, Intelli-Check amended its complaint
      to
      include infringement on an additional patent. On May 18, 2004, Intelli-Check
      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 Intelli-Check’s request to discuss a proposed motion to
      disqualify defendants' counsel for a conflict of interest. Pursuant to the
      Court's order, Intelli-Check served moving papers upon defendants on July 14,
      2006 and defendants served opposition to the motion on or about July 28, 2006.
      Intelli-Check 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 Intelli-Check’s
      opposition to defendants' motion and defendants’ reply to the opposition. As of
      March 2008, the Court has not scheduled a hearing date for either motion and
      there is no trial date pending.





Intelli-Check
      is not aware of any infringement by its products or technology on the
      proprietary rights of others.





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




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




During
      the fourth quarter of our fiscal year ended December 31, 2007 there were no
      matters submitted to a vote of security holders.




32





**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****2006**First
                Quarter
            
            $
            3.77
            
            $
            7.30Second
                Quarter
            
            $
            4.41
            
            $
            6.60Third
                Quarter
            
            $
            4.80
            
            $
            6.23Fourth
                Quarter
            
            $
            5.40
            
            $
            7.49**2007**First
                Quarter
            
            $
            5.75
            
            $
            7.85Second
                Quarter
            
            $
            4.76
            
            $
            7.41Third
                Quarter
            
            $
            2.63
            
            $
            5.70Fourth
                Quarter
            
            $
            2.96
            
            $
            4.25**2008**January
                1 - March 25, 2008*
            
            $
            2.43
            
            $
            3.68




*
      Portion
      of first fiscal quarter of 2008.




(b)  Number
      of Record Holders of Common Stock .
      The
      number of holders of record of our Common Stock on March 25, 2008 was 70, 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, 2007. 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
      March
      14, 2008, in connection with the Transaction, the Company issued 12,281,649
      shares of its common stock to 6 individuals. No commissions or fees were paid
      in
      connection with the issuance of such securities. The shares were issued pursuant
      to the exemption from registration contained in Section 4(2) of the Securities
      Act of 1933, as amended, and the regulations promulgated thereunder, because
      the
      shares were issued to a small number of sophisticated individuals in a private
      transaction.





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. These
      shares were subsequently registered on a Registration Statement on Form S-8,
      which was filed with the SEC on June 1, 2007. 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.




33





(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, 2007, we cumulatively purchased 40,200 shares totaling approximately
      $222,000 and subsequently retired these shares. There were no shares purchased
      during 2007. We may purchase additional shares when warranted by certain
      conditions.





**SHAREHOLDER
      RETURN PERFORMANCE GRAPH**





Set
      forth
      below is a line graph comparing the cumulative total return on our common stock
      assuming a $100 investment as of December 31, 2002, and based on the market
      prices at the end of each fiscal year, with the cumulative total return of
      the
      AMEX Composite Index and the AMEX Technology Index.










Cumulative
                Total Return12/02
            
            12/03
            
            12/04
            
            12/05
            
            12/06
            
            12/07Intelli-Check,
                Inc.
            
            
            **100.00**
            
            
            **114.64**
            
            
            **65.22**
            
            
            **56.38**
            
            
            **97.54**
            
            
            **46.09**AMEX
                Composite
            
            
            **100.00**
            
            
            **143.18**
            
            
            **175.20**
            
            
            **215.26**
            
            
            **257.04**
            
            
            **299.37**AMEX
                Technology
            
            
            **100.00**
            
            
            **147.88**
            
            
            **177.15**
            
            
            **165.29**
            
            
            **213.06**
            
            
            **231.42**




34




**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, 2007, are derived from the financial statements
        of
        Intelli-Check, Inc. The selected financial data should be read in conjunction
        with the financial statements as of December 31, 2007 and 2006 and for each
        of
        the three years in the period ended December 31, 2007, 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,****2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2007**(In
                  thousands)**Statement
                  of Operations Data:**Revenue
              
              $
              1,236
              
              $
              1,119
              
              $
              2,384
              
              $
              3,162
              
              $
              3,512Loss
                  from operations
              
              
              (5,537
              )
              
              (7,017
              )
              
              (3,385
              )
              
              (3,103
              )
              
              (2,835
              )Net
                  Loss
              
              
              (6,451
              )
              
              (6,923
              )
              
              (3,239
              )
              
              (2,880
              )
              
              (2,673
              )Net
                  loss per common share - basic and diluted
              
              
              (0.74
              )
              
              (0.79
              )
              
              (0.31
              )
              
              (0.24
              )
              
              (0.22
              )Common
                  shares used in computing per share amounts - basic and
                  diluted
              
              
              9,218
              
              
              10,225
              
              
              11,201
              
              
              12,146
              
              
              12,263
  **As
                  of December 31,****2003**
              
              **2004**
              
              **2005**
              
              **2006**
              
              **2007**(In
                  thousands)**Balance
                  sheet data:**Cash
                  and cash equivalents
              
              $
              3,307
              
              $
              1,750
              
              $
              528
              
              $
              527
              
              $
              393Working
                  capital
              
              
              8,350
              
              
              3,594
              
              
              5,289
              
              
              3,860
              
              
              1,763Total
                  assets
              
              
              10,732
              
              
              5,615
              
              
              6,909
              
              
              5,656
              
              
              4,074Total
                  liabilities
              
              
              1,956
              
              
              1,907
              
              
              1,519
              
              
              1,719
              
              
              2,054Stockholders
                  equity
              
              
              6,901
              
              
              868
              
              
              5,390
              
              
              3,937
              
              
              2,020
  **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 and state issued non-driver
        and
        military identification cards used as proof of identity. Our patented ID-Check®
software technology instantly reads, analyzes, and verifies the encoded format
        in magnetic stripes and barcodes on government-issued IDs from over 60
        jurisdictions in the U.S. and Canada to determine if the encoded format is
        valid. We have served as the national testing laboratory for the American
        Association of Motor Vehicle Administrators (AAMVA) since 1999 and have access
        to all the currently available encoded driver license formats.
 
 Because
        of continuing terrorist threats worldwide, we believe there has been a
        significant increase in awareness of our software technology to help improve
        security across many industries, including airlines, rail transportation
        and
        high profile buildings and infrastructure, which we believe 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, 2007, we had
        an
        accumulated deficit of approximately $45 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.
  35
 
 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 used or 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-Check ® EHO is
        an executable helper object for non browser based applications. 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.
 
 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 allowances for
        doubtful accounts and stock-based compensation. Due to the inherent
        uncertainties involved in making estimates, actual results reported in future
        periods may be different from those estimates.
  36
  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,
        2007, due to the uncertainty of the realizability of those assets.
 
 *Commitments
        and Contingencies*
 
 We
        are
        currently involved in certain legal proceedings as discussed in Item 3, above.
        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.
  37
 
 **Results
        of Operations**
  **COMPARISON
        OF THE YEAR ENDED DECEMBER 31, 2007 TO THE YEAR ENDED DECEMBER 31,
        2006**
  REVENUE .
        Revenues increased by 11.1%, or $350,054, from $3,161,854, for the year ended
        December 31, 2006 to $3,511,908 for the year ended December 31, 2007. Revenues
        for the year ended December 31, 2007 consisted of revenues from direct sales
        to
        customers of $2,447,966, revenues from distributors of $1,042,064 and royalty
        payments of $21,878 compared to $2,074,925, $1,058,426 and $28,503,
        respectively, in the year ended December 31, 2006. We remain optimistic that
        revenues will continue to increase, since our pipeline of sales opportunities
        is
        substantial and growing, particularly in the commercial sector. We expect
        our
        recently announced partnerships, together with the success of our technology
        in
        tests in both the commercial and government sectors, to contribute to this
        anticipated growth. While we continue to believe that the government sector
        could ultimately be a significant market segment, we have been disappointed
        that
        there have been insignificant government revenues to date. We are encouraged
        by
        the President’s signing of the 911 Homeland Security bill on August 3, 2007;
        however, the timing of the ultimate funding of each of the proposed initiatives
        is still uncertain at this time. Also, additional legislative efforts to
        address
        identity management and to control under-age access to age-restricted products
        could, if enacted, lead to future sales opportunities. We anticipate that
        the
        acquisition of Mobilisa will significantly increase our business in the
        government sector beginning in the second quarter of 2008. Period to period
        comparisons may not be indicative of future operating results, since we still
        face long sales cycles, particularly in the government sector, and, therefore,
        we cannot predict with certainty at this time in which period the opportunities
        currently in the pipeline will develop into sales or if they will develop
        at
        all. Our booked orders, which represent the total value of all new
        non-cancellable orders for products, services and fees received from our
        customers and distributors, were approximately $4.6 million in 2007 as compared
        to $4.0 in 2006. As of December 31, 2007, our backlog, which represents
        non-cancelable sales orders for products and services not yet shipped or
        performed, was approximately $1.9 million, an increase of 73% over the backlog
        of $1.1 million at December 31, 2006. Approximately $1.0 million of the 2007
        backlog could be recognized over one to four years depending upon release
        dates
        by the customer. We expect that our backlog will continue to increase as
        we
        shift our revenue model towards pursuing more subscription based and transaction
        based contracts rather than product sales for a one time fee. While this
        may
        initially result in lower current period revenues, our total revenue stream
        over
        the period of the contract will be greater as we increase the proportion
        of this
        contract to the total orders booked.
 
 GROSS
        PROFIT . Gross
        profits decreased by $3,546 or 0.2% from $2,124,513 for the year ended December
        31, 2006 to $2,120,967 for the year ended December 31, 2007. Our gross profit,
        as a percentage of revenues, decreased 6.8% to 60.4% in the year ended December
        31, 2007 compared to the 67.2% reported for the year ended December 31, 2006.
        Our gross profit percentage was lower than in the prior year period as a
        result
        of a higher mix of our bundled sales of hardware and software products,
        including laptops purchased on behalf of larger customers which have lower
        margins than our licensing products which have a higher gross profit percentage.
        Based upon the mix of products included in the orders in backlog, it is
        anticipated that near term margins will continue to be lower as a percent
        of
        revenues.
 
 OPERATING
        EXPENSES . Operating
        expenses, which consist of selling, general and administrative and research
        and
        development expenses, decreased 5.2% from $5,227,357 for the year ended December
        31, 2006 to $4,955,818 for the year ended December 31, 2007. Selling expenses,
        which consist primarily of salaries and related costs for marketing, decreased
        1.9% from $1,564,843 for the year ended December 31, 2006 to $1,534,660 for
        the
        year ended December 31, 2007, primarily due to higher employee costs of
        approximately $92,000 due to an increase in sales headcount and higher marketing
        expenses, including website development fees, of $60,000, which was offset
        by a
        reductions in sales consulting fees of $22,000, recruiting fees of $18,000,
        travel $14,000, sales support costs of $12,000 and non-cash stock-based
        compensation expense from the granting of stock options totaling approximately
        $116,000. 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
        12.7% from $2,664,950 for the year ended December 31, 2006 to $2,333,154
        for the
        year ended December 31, 2007, primarily as a result of a reduction in legal
        fees
        of approximately $255,000 relating to decreased activity on our patent
        infringement litigation, lower non cash stock-based compensation expense
        from
        the granting of stock options totaling $311,000, a decrease in employee costs
        and related expenses of $232,000 and decreases in other office related expenses
        of $6,000. These amounts were offset by the death benefit and other payroll
        costs of $152,000 resulting from the untimely passing of our Chairman and
        CEO,
        Frank Mandelbaum in June 2007, higher directors’ fees $154,000 (including fees
        and a bonus to the interim Chairman and CEO of $149,000) and increased
        accounting and consulting fees of $142,000, including Sarbanes-Oxley Section
        404
        compliance fees. Also, included in the year ended December 31, 2006 was a
        bad
        debt recovery of approximately $26,000. Research and development expenses,
        which
        consist primarily of salaries and related costs for the development of our
        products, increased 9.1% to $1,088,004 for the year ended December 31, 2007
        from
        $997,564 for the year ended December 31, 2006, primarily as a result of higher
        project management and employee related expenses of approximately $82,000
        and an
        increase in non cash stock-based compensation expense from the granting of
        stock
        options of $48,000. These were partially offset by reductions in travel and
        convention expenses of $22,000 and lower prototype and office costs of $18,000.
        As the Company experiences sales growth, we expect that we will incur additional
        operating expenses to support this growth. Research and development expenses
        may
        also increase as we integrate additional products and technologies with our
        patented ID-Check technology.
  38
 
 INTEREST
        INCOME . Interest
        income decreased from $222,874 for the year ended December 31, 2006 to $161,633
        for the year ended December 31, 2007, which is a result of a decrease in
        our
        cash and cash equivalents, marketable securities and short term investments,
        partially offset by higher interest rates received on investments during
        2007.
 
 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 7.2% from $2,879,970
        for the year ended December 31, 2006 to $2,673,218 for the year ended December
        31, 2007.
  **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. Revenue increases are due to Intelli-Check’s ongoing success in
        penetrating certain key markets. 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 had 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.
  39
 
 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.
 
 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. We used the net proceeds
        of the
        financings for the primary purpose of funding working capital and general
        corporate purposes as well as for the purchase of hardware terminals.
  As
        of
        December 31, 2007, the Company had cash and cash equivalents, marketable
        securities and short term investments of $2,042,983, working capital (defined
        as
        current assets minus current liabilities) of $1,763,493, total assets of
        $4,074,411 and stockholders’ equity of $2,020,153. The Company currently has no
        bank financing or long term debt. Cash used in operating activities for the
        year
        ended December 31, 2007 was $2,239,438, an increase of $233,263 over the
        cash
        used in operating activities for the year ended December 31, 2006. The increase
        was primarily a result of cash used to fund the increase in accounts receivable
        and a reduction in non-cash adjustments for stock-based expenses, partially
        offset by a lower net loss. Cash provided by investing activities for the
        year
        ended December 31, 2007 of $1,873,145 resulted primarily from net redemptions
        of
        marketable securities and short term investments, which were the principal
        means
        used to fund the operating cash deficit and deferred merger costs. Cash provided
        by financing activities was $232,359 for the year ended December 31, 2007
        and
        resulted from the proceeds from the issuance of common stock from the exercise
        of stock options and warrants.
 
 During
        the year ended December 31, 2007, the Company used net cash of approximately
        $2.2 million or approximately $187,000 per month. During the fourth quarter
        of
        2007, the level of accounts receivable increased by $171,000 resulting from
        a
        delay in payment from some of our larger customers. We anticipate full
        collection from these accounts in the first quarter of 2008. Also, as a result
        of the decrease in the market price of our common stock in the second half
        of
        the year, there were no stock option exercises in the last six months of
        2007
        compared to cash proceeds of $232,000 in the first six months of 2007. Not
        taking into account our transaction with Mobilisa (as described below), we
        currently anticipate that our available cash on hand and marketable securities
        and cash resources from expected revenues from the sale of the units in
        inventory and the licensing of our technology, as well as from the significant
        amount of deferred revenues and backlog, 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. In addition, Mobilisa
        generated positive cash flows from its operations in 2007 and has a substantial
        backlog of orders as of March 14, 2008, the date the transaction with Mobilisa
        was consumated. We anticipate that these will provide us with additional
        sources
        of liquidity and capital resources beginning in the second quarter of 2008.
        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.
        There
        can be no assurance that the Company will be able to secure the additional
        funds
        when needed or obtain such on terms satisfactory to the Company, if at all.
  40
 
 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.
 
 On
        November 20, 2007, we and Mobilisa, Inc., a private company that is a leader
        in
        identity systems and mobile and wireless technologies, entered into a merger
        agreement pursuant to which our wholly-owned subsidiary would merger with
        and
        into Mobilisa, resulting in Mobilisa becoming a wholly-owned subsidiary.
        At a
        special meeting of stockholders held on March 14, 2008, our stockholders
        voted
        to approve the merger, as well as to amend Intelli-Check’s certificate of
        incorporation to increase the authorized shares of common stock and to increase
        the number of shares issuable under our 2006 Equity Incentive Plan. Our
        corporation was renamed Intelli-Check-Mobilisa, Inc. The headquarters of
        Intelli-Check was moved to Mobilisa’s offices in Port Townsend,
        Washington.
  The
        former shareholders of Mobilisa received a number of shares of our common
        stock
        such that they will own 50% of the common stock of the combined company.
        Mobilisa option holders will also exchange their options for our options.
        The
        aggregate value of the purchase consideration is equal to $50,722,000, based
        on
        the closing price of our common stock on November 20, 2007.
  We
        intend
        to account for the transaction under the purchase method of accounting in
        accordance with the provisions of Statement of Financial Accounting Standards
        No. 141, “Business Combinations.” Under this accounting method, based on
        our preliminary assessment, we will record as our cost, the assets of Mobilisa,
        less the liabilities assumed, with the excess of such cost over the estimated
        fair value of such net assets (including identifiable intangibles) reflected
        as
        goodwill. Additionally, certain costs directly related to the transaction
        will
        be reflected as additional purchase price in excess of net assets acquired.
        Our
        results of operations will include the operations of Mobilisa from the closing
        date of the transaction. As of December 31, 2007, we had incurred $208,000
        reflected on the balance sheet as Deferred Acquisition Costs.
 
 In
        March
        2001, the Company declared a dividend distribution of one non-transferable
        right
        to purchase one share of its 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. On May 10, 2007,
        the
        Board of Directors authorized extending these rights, which were due to expire
        on June 30, 2007 to June 30, 2008. We have the right to redeem the outstanding
        rights for $.01 per right under certain conditions, which were not met as
        of
        August 10, 2007. We reserved 970,076 shares of common stock for future issuance
        under this rights offering. To date, we have received $2,482,009 before expenses
        from the exercise of 292,001 of these rights, which has reduced the amount
        of
        shares available for future issuance. None of these rights were exercised
        in the
        years ended December 31, 2007, 2006 and 2005.
 
 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.
  41
 
 As
        of
        December 31, 2007, the Company had total warrants outstanding for 922,636
        shares
        of common stock at a weighted average exercise price of $6.12 that expire
        between March 26, 2008 and August 21, 2011.
 
 Net
        Operating Loss Carry Forwards
  As
        of
        December 31, 2007, the Company had net operating loss carry forwards (NOL’s) for
        federal and state income tax purposes of approximately $36.1 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 2018 if not utilized. Under Section 382 of the Internal
        Revenue Code, these NOL’s may be limited due to the acquisition of
        Mobilisa.
 
 **Contractual
        Obligations**
 
 Below
        is
        a table, which presents our contractual obligations and commitments at December
        31, 2007:
 
 **Payments
        Due by Period**
 
 **Total**
              
              **Less
                  than****One Year**
              
              **1-3
                  years**
              
              **4-5
                  years**
              
              **After
                  5 years**Operating
                  Leases
              
              $
              670,172
              
              $
              218,864
              
              $
              451,308
              
              $
              -
              
              $
              -Consulting
                  Contracts
              
              
              54,000
              
              
              54,000
              
              
              -
              
              
              -
              
              
              -Purchase
                  Commitment
              
              
              143,550
              
              
              143,550
              
              
              -
              
              
              -
              
              
              -Total
                  Contractual Cash Obligation
              
              $
              867,722
              
              $
              416,414
              
              $
              451,308
              
              $
              -
              
              $
              -
 
 **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.
 
 On
        December 4, 2007, Financial Accounting Standards Board ("FASB") issued
        Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business
        Combinations. SFAS 141R replaces SFAS 141, Business Combinations and
        applies to all transactions or other events in which an entity obtains control
        of one or more businesses. SFAS 141R requires the acquiring entity in a
        business combination to recognize all (and only) the assets acquired and
        liabilities assumed in the transaction; establishes the acquisition-date
        fair
        value as the measurement objective for all assets acquired
        and liabilities assumed; and requires the acquirer to disclose additional
        information needed to evaluate and understand the nature and financial effect
        of
        the business combination. SFAS 141R is effective prospectively for fiscal
        years beginning after December 15, 2008 and may not be applied before that
        date. The Company is currently evaluating the impact, if any, that the adoption
        of SFAS 141R will have on its consolidated results of operations and
        financial condition.
 
 On
        December 4, 2007, the FASB also issued SFAS No. 160, Noncontrolling
        Interests in Consolidated Financial Statements. SFAS 160 amends ARB 51 to
        establish accounting and reporting standards for the noncontrolling interest
        (or
        minority interests) in a subsidiary and for the deconsolidation of a subsidiary
        by requiring all noncontrolling interests in subsidiaries be reported in
        the
        same way, as equity in the consolidated financial statements and eliminates
        the
        diversity in accounting for transactions between an entity and noncontrolling
        interests by requiring they be treated as equity transactions. SFAS 160 is
        effective prospectively for fiscal years beginning after December 15, 2008
        and may not be applied before that date. The Company is currently evaluating
        the
        impact, if any, that the adoption of SFAS 160 will have on its consolidated
        results of operations and financial condition.
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financials Liabilities — Including an Amendment of FASB
        Statement No. 115”. This standard permits measurement of certain financial
        assets and financial liabilities at fair value. If the fair value option
        is
        elected, the unrealized gains and losses are reported in earnings at each
        reporting date. Generally, the fair value option may be elected on an
        instrument-by-instrument basis, as long as it is applied to the instrument
        in
        its entirety. The fair value option election is irrevocable, unless a new
        election date occurs. SFAS No. 159 requires prospective application and also
        establishes certain additional presentation and disclosure requirements.
        The
        standard is effective as of the beginning of the fiscal year that begins
        after
        November 15, 2007. The Company is currently evaluating the provisions
        of SFAS No. 159 to determine the potential impact, if any, the adoption will
        have on the Company’s financial statements.
  42
 
 In
        September 2006, the FASB issued 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. In December 2007, the
        FASB
        issued proposed FSP FAS No. 157-2 which would delay the effective date of
        SFAS No. 157 for all non-financial assets and non-financial liabilities,
        except those that are recognized or disclosed at fair value in the financial
        statements on a recurring basis (at least annually). This proposed FSP partially
        defers the effective date of Statement 157 to fiscal years beginning after
        November 15, 2008, and interim periods within those fiscal years for items
        within the scope of this FSP. Effective January 1, 2008, we will adopt
        SFAS No. 157 except as it applies to those non-financial assets and
        non-financial liabilities as noted in proposed FSP FAS No.157-2. We are
        currently evaluating the impact that SFAS No. 157 will have on our financial
        statements.
 
 In
        June
        2007, the FASB issued EITF Issue No. 07-3, “Accounting for Nonrefundable
        Advance Payments for Goods or Services Received for Use in Future Research
        and
        Development Activities,” which is effective for calendar year companies on
        January 1, 2008. The Task Force concluded that nonrefundable advance
        payments for goods or services that will be used or rendered for future research
        and development activities should be deferred and capitalized. Such amounts
        should be recognized as an expense as the related goods are delivered or
        the
        services are performed, or when the goods or services are no longer expected
        to
        be provided. The Company is currently assessing the potential impact of
        implementing this standard.
 
 **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.
 
 **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 highly liquid Municipal Rate Auction Securities. 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.
  43
 
 **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, 2007.
 
 **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; (ii) to record,
        process, summarize and disclose this information within the time periods
        specified in the rules of the SEC; and (iii) to ensure that information is
        accumulated and communicated to our management, including our Interim Chief
        Executive Officer and Chief Financial Officer, as appropriate to allow timely
        decisions regarding required disclosure.
  Changes
        in Internal Control Over Financial Reporting
  There
        was **** no
        change
        in the Company’s internal control over financial reporting that occurred during
        our most recently completed fiscal quarter that has materially affected,
        or is
        reasonably likely to materially affect, our internal control over financial
        reporting.
  Annual
        Report of Management on Internal Control over Financial Reporting
  Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting (as defined in Rule 15d-15(f) under the Exchange Act)
        for the Company. Management, with the participation of our principal executive
        officer and our principal financial officer, evaluated the effectiveness
        of our
        internal control over financial reporting as of December 31, 2007 (the end
        of our fiscal year), based on the framework and criteria established in Internal
        Control — Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission. Based on this evaluation, management
        concluded that our internal control over financial reporting was effective
        as of
        December 31, 2007. This evaluation did not include an evaluation of
        Mobilisa’s internal controls over financial reporting.
  This
        annual report does not include an attestation report of the Company’s registered
        public accounting firm regarding internal control over financial reporting.
        Management’s report was not subject to attestation by the Company’s registered
        public accounting firm pursuant to temporary rules of the Securities and
        Exchange Commission that permit the Company to provide only management’s report
        in this annual report.
  **Item
        9B. Other Information**
  None.
  44
 
 **PART
        III**
  **Item
        10.**  Directors
        and Executive Officers of the Company and Corporate Governance
  As
        of
        March 25, 2008, the Company's directors and executive officers were as
        follows:
  **Name**
              
              **Age**
              
              **Position**Dr.
                  Nelson Ludlow
              
              46
              
              Chief
                  Executive Officer and DirectorRussell
                  T. Embry
              
              44
              
              Senior
                  Vice President and Chief Technology OfficerPeter
                  J. Mundy
              
              51
              
              Vice
                  President Finance, Chief Financial Officer, Treasurer &
                  SecretaryJeffrey
                  Levy
              
              66
              
              Chairman
                  and DirectorJohn
                  W. Paxton
              
              71
              
              Vice
                  Chairman and DirectorLt.
                  General Emil R. Bedard
              
              64
              
              DirectorBonnie
                  L. Ludlow
              
              52
              
              DirectorJohn
                  E. Maxwell
              
              53
              
              DirectorArthur
                  L. Money
              
              68
              
              DirectorGuy
                  L. Smith
              
              58
              
              Director
 
 **Nelson
        Ludlow, PhD** was
        named the Chief Executive Officer and Director of the Company on March 14,
        2008.
        He was a co-founder of Mobilisa, Inc. and was its Chief Executive Officer
        and a
        director since its inception in March 2001. Dr. Ludlow has over 20 years
        experience in software development for the military and corporate sectors.
        From
        1982 to 1988, while in the Air Force, Dr. Ludlow served as a mathematician,
        a
        pilot, an intelligence officer at the National Air Intelligence Center,
        Technical Director for Artificial Intelligence at USAF Rome Laboratory,
        Assistant Professor of Computer Science at the Naval Postgraduate School,
        and
        the Director of Technology and Services for Radar Evaluation Squadron. In
        the
        corporate sector, Dr. Ludlow served as the Director of C2 Modeling for SAIC,
        Chief Scientist for the ORINCON Corporation and Chief Technology Officer
        for
        Ameranth Wireless--all in San Diego. He holds a PhD in Artificial Intelligence
        from the University of Edinburgh, Scotland and completed Post-Doctoral work
        in
        Computer Science at the University of Cambridge, England. Additional degrees
        include a Bachelors of Science Degree from Washington State University in
        Math
        and Physical Sciences, as well as a Masters of Science degree in Computer
        Science from Wright State University in Dayton, Ohio.
  **Russell
        T. Embry** was
        appointed Senior Vice President and Chief Technology Officer in July 2001
        and
        has been Vice President, Information Technology, since July 1999. From January
        1998 to July 1999, Mr. Embry was Lead Software Engineer with RTS Wireless.
        From
        April 1995 to January 1998, he served as Principal Engineer at GEC-Marconi
        Hazeltine Corporation. From August 1994 through April 1995, he was a staff
        software engineer at Periphonics Corporation. From September 1989 to August
        1994, Mr. Embry served as Senior Software Engineer at MESC/Nav-Com. From
        July
        1985 through September 1989, he was a software engineer at Grumman Aerospace.
        Mr. Embry holds a B.S. in Computer Science from Stony Brook and an M.S. in
        Computer Science from Polytechnic University, Farmingdale.
 
 **Peter
        J. Mundy** 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 received his BBA in
        accounting from Adelphi University and is a certified public
        accountant.
  45
 
 **Jeffrey
        Levy** was
        named Chairman on March 14, 2008. He was the Interim Chairman and CEO of
        Intelli-Check from June 2007 until March 14, 2008. Mr. Levy was appointed
        a
        member of Intelli-Check’s Board of Directors in December 1999 and has served as
        Chairman of the Governance and Nominating, Compensation and Technology Oversight
        Committees. He has been, since January 1997, President and Chief Executive
        Officer of LeaseLinc, Inc., a third-party equipment leasing company and lease
        brokerage. 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 and before that as Chief Operating Officer of ICC
        Technologies, Inc. and AWK Consulting Engineers, Inc.  Mr. Levy has had a
        distinguished career as a fighter pilot in the United States Air Force
        from which he retired as a colonel in 1988.  He also serves as President
        and CEO of Virginia College Parents, Inc. and is a board member or appointee
        in
        several other non-profit organizations and commissions including Mothers
        Against
        Drunk Driving, the International Institute on Alcohol Awareness, the Washington
        Regional Alcohol Program, Security on Campus, Inc., Virginia Attorney General's
        Task Force on Drinking by College Students and Virginia Crime Commission
        Task
        Force on Campus Security. Mr. Levy holds a BS degree 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
        W. Paxton** was
        appointed a member of the Board of Directors on March 14, 2008. He was a
        director and Chairman of the Board of Mobilisa in September 2005. Mr. Paxton
        brings 30 years of experience in the wireless networking field to Mobilisa's
        board. Mr. Paxton was the President of Zebra Technologies’ Bar Code Business
        Unit in 2003. Prior to 2000, Mr. Paxton served as Chairman and Chief Executive
        Officer of Telxon Corporation, President and Chief Executive Officer of Monarch
        Marking Systems, Executive Vice President of Paxar Corporation and President
        of
        Paxar’s Printing Solutions Group. Mr. Paxton joined Litton Industries as a
        corporate Vice President in 1991, when the company acquired Intermec
        Corporation. Between 1986 and 1991, he led Intermec, joining as President
        and
        Chief Operating Officer, and becoming Chairman and Chief Executive Officer
        in
        1988. In addition to Mr. Paxton’s corporate experience, he brings venture
        capital experience as the Chairman of Odyssey Industrial Technologies, LLC,
        a
        joint venture partnership with Odyssey Investment Partners, as well as
        consulting experience as the head of Paxton Associates LLC, a business
        consulting firm. Mr. Paxton has a Bachelor of Science degree and a Master
        of
        Science degree in Business Management from LaSalle University, is a registered
        Professional Engineer and is a fellow of Seattle Pacific University. He has
        served on the board of the National Association of Manufacturers, and has
        been
        the Chairman and Vice Chairman of the Automatic Identification Manufacturers
        (AIM), a leading industry association.
 
 **Lieutenant
        General Emil R. "Buck" Bedard** was
        appointed a member of the Board of Directors on March 14, 2008, General Bedard
        was appointed a director of Mobilisa in September 2004. He retired from the
        US Marine Corps with over 37 years of active duty service in 2003. General
        Bedard’s military career included two combat tours in Vietnam, as well as
        commanding the 7th Marine Regiment in Somalia and the 1st Marine Expeditionary
        Force during Operation Desert Storm. General Bedard’s final active duty tour was
        as the Deputy Commandant for Plans, Policies and Operations for the US Marine
        Corps Headquarters in Washington, D.C., where he served until his retirement
        in
        2003. He has continued to serve with the Marine Corps in Afghanistan and
        Iraq
        since his retirement. General Bedard’s many military awards include a
        Distinguished Service Medal, Legion of Merit, and Bronze Star (with Combat
        V).
        General Bedard graduated from the University of North Dakota in 1967 with
        a
        Masters in Science.
 
 **Bonnie
        L. Ludlow** was
        appointed a member of the Board of Directors on March 14, 2008. Ms. Ludlow
        was a
        co-founder of Mobilisa, Inc. and was its Sr. Vice President, Finance and
        a
        director since its inception in March 2001. As a Senior Vice President of
        Finance, Ms. Ludlow was responsible for all financial transactions, including
        contracting and purchasing agreements, invoicing, and payroll as well as
        managing human resources for recruiting, hiring, and benefits administration.
        Ms. Ludlow has fifteen years of experience working with the Federal Government,
        six of which were active duty in the United States Air Force (March 1980
        to
        February 1986), and nine as a Department of Defense civilian (February 1986
        to
        October 1995). While on active duty, she was assigned to the Defense Security
        Agency (DSA) as a Czech linguist (September 1981 to September 1983). As a
        civil
        servant, Ms. Ludlow worked as a geodetic surveyor and engineering assistant,
        in
        which she positioned navigational aids on military runways. Additional duties
        in
        this position included the generation of technical drawings, maps and reports. ****
  46
 
 **John
        E. (Jay) Maxwell** was
        appointed a member of Intelli-Check’s Board of Directors in September
        2005.  Mr. Maxwell has been the President & CEO of Clerus Solutions
        LLC, a firm dedicated to assisting the states and federal government with
        implementing secure identification as called for in the 9/11 Commission Report,
        since January 2006.  From May 2002 to August 2005, he was the Senior Vice
        President of Technology and the Chief Information Officer (CIO) of the American
        Association of Motor Vehicle Administrators (AAMVA).  At AAMVA, he was
        responsible for all of the information systems developed, implemented and
        operated by the association.  Mr. Maxwell also 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.
 
 **Arthur
        L. Money** was
        appointed a member of Intelli-Check’s Board of Directors in February 2003. The
        Honorable Arthur L. Money was sworn in as Assistant Secretary of Defense
        for
        Command, Control, Communications and Intelligence by the Senate in 1999 and
        served in that position until 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 Board of Directors of Terremark Worldwide, Inc. (NASDAQ: TMRK) an
        international company specializing in network and telecommunications services.
        He also serves on the advisory board of several corporations including the
        Boeing Company (NYSE: BA) and Northrop Grumman (NYSE: NOC) and has been
        recognized for his vision, leadership and commitment to excellence in systems
        and process re-engineering. Mr. Money 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. He also currently serves on several U.S. Government Boards
        and
        Panels such as the FBI Science & Technology Advisory Board (Chairman), the
        NSA Advisory Board (Chairman), the Defense Science 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 TRW’s Avionics and
        Surveillance Group where he served as Vice President and Deputy General Manager
        of the Group from 1995 to 1996.
 
 **Guy
        L. Smith** was
        appointed a member of Intelli-Check’s Board of Directors in June 2005. Mr. Smith
        has been the Executive Vice President of Diageo, the world’s leading premium
        drinks company, since 2000 and is responsible for Corporate Relations and
        Marketing Public Relations. At Diageo, Mr. Smith’s responsibilities include
        overseeing the corporation’s civic and social responsibility efforts in North
        America, including the Diageo Marketing Code. The Code governs the company’s
        social responsibility activities with regard to the marketing and sale of
        alcoholic beverages and the company’s undertakings to reduce underage access and
        abuse of alcohol. From 1998 - 1999, prior to joining Diageo, Mr. Smith was
        Special Advisor to President Clinton on The White House staff, where he served
        on the impeachment defense team. Mr. Smith also served as an informal strategic
        communications advisor to President Clinton from the beginning of the Clinton
        Administration. From 1999 to 2000, Mr. Smith was associated with The Hawthorn
        Group, a Washington-based public affairs firm, as well as with his own firm,
        Smith Worldwide Inc., from 1994 to 1996, which focused on reputation and
        crisis
        management. He was Chief Operating Officer of Hill & Knowlton International
        Public Relations, from 1992 to 1993, where he consulted with the firm's largest
        consumer product, technology, and legal clients. Prior to that Mr. Smith
        was
        Vice President-Corporate Affairs, the senior public affairs and public relations
        officer, for Philip Morris Companies Inc. from 1975 to 1992. During his 17
        years
        with Philip Morris, Mr. Smith led the Corporate Affairs departments of the
        Miller Brewing Company and The Seven-Up Company, both then Philip Morris
        operating companies. Mr. Smith began his career as a reporter and assistant
        city
        editor for The Knoxville Journal. He is currently chairman of the Barrier
        Island
        Trust, an environmental protection organization and sits on the Board of
        Advisors of Mount Vernon, George Washington’s home outside Washington, D.C. Mr.
        Smith also serves as an Honorary Battalion Chief of the Fire Department of
        New
        York.
 
 On
        March
        14, 2008, in connection with the acquisition of Mobilisa, Inc. Edwin Winiarz
        and
        Robert J. Blackwell resigned from the Company’s Board of Directors. Their
        resignation was not the result of any disagreement on any matter relating
        to the
        registrant’s operations, policies or practices.
  47
 
 There
        have been no material changes to the procedures by which security holders
        may
        recommend nominees to our Board of Directors.
  **Audit
        Committee of the Board of Directors**
  The
        Board
        of Directors has a separately designated Audit Committee established in
        accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
        which is currently comprised of Mr. Paxton, chairperson, General Bedard and
        Mr.
        Money. Mr. Paxton was appointed as a director and chairperson of Audit Committee
        in March 2007 upon the acquisition of Mobilisa and after the resignation
        of Mr.
        Blackwell.. The members of the Audit Committee are independent as defined
        in
        Section 121(A) of the American Stock Exchange’s listing standards. The Audit
        Committee recommends to the Board of Directors the annual engagement of a
        firm
        of independent accountants and reviews with the independent accountants the
        scope and results of audits, the Company’s internal accounting controls and
        audit practices and professional services rendered to Intelli-Check by the
        independent accountants. The Audit Committee has adopted a written charter,
        which sets forth the responsibilities, authority and specific duties of the
        Audit Committee.
 
 The
        Board
        of Directors has determined that it has at least one audit committee financial
        expert serving on the audit committee. John W. Paxton has vast corporate
        experience including his positions as Chairman, CEO and President of several
        publicly traded companies. He brings venture capital experience as the Chairman
        of Odyssey Industrial Technologies, LLC, a joint venture partnership with
        Odyssey Investment Partners, as well as consulting experience as the head
        of
        Paxton Associates LLC, a business consulting firm. Mr. Paxton has a Master
        of
        Science degree in Business Management from LaSalle University. Mr. Paxton
        is an
“audit committee financial expert” and is an independent member of the Board of
        Directors.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
  The
        Securities and Exchange Commission has adopted rules relating to the filing
        of
        ownership reports under Section 16(a) of the Securities Exchange Act of 1934.
        One such rule requires disclosure of filings, which under the Commission’s
        rules, are not deemed to be timely. Based on a review of the filings received,
        Intelli-Check is not aware of any non-timely filings for fiscal year
        2007.
 
 **Code
        of Ethics**
 
 We
        maintain a code of ethics that applies to our Chief Executive Officer and
        Chief
        Financial Officer, and other persons who perform similar functions. A copy
        of
        our Code of Ethics is incorporated
        by reference as an
        exhibit to 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. The Code of Ethics is also available on our website
        at
        www.intellicheck.com.
 
 **Item
        11.  Executive Compensation**
  **INTELLI-CHECK
        EXECUTIVE COMPENSATION**
 
 **COMPENSATION
        DISCUSSION AND ANALYSIS**
 
 **Overview**
 
 This
        compensation discussion describes the material elements of compensation awarded
        to, earned by, or paid to each of Intelli-Check’s executive officers who served
        as named executive officers during the last completed fiscal year. This
        compensation discussion focuses on the information contained in the following
        tables and related footnotes and narrative for primarily the last completed
        fiscal year, but also describes compensation actions taken before or after
        the last completed fiscal year to the extent it enhances the understanding
        of
        Intelli-Check’s executive compensation disclosure.
  48
 
 The
        Compensation Committee currently oversees the design and administration of
        Intelli-Check’s executive compensation program and compensation for the Board of
        Directors.
 
 The
        principal elements of Intelli-Check’s executive compensation program are base
        salary, annual cash incentives, long-term equity incentives in the form of
        stock
        options and other benefits. Intelli-Check’s other benefits consist of reimbursed
        business travel and entertainment expenses, a vehicle allowance, health
        insurance benefits, vacation and sick pay and a qualified 401(k) savings
        plan.
        Intelli-Check’s philosophy is to position the aggregate of these elements at a
        level that is commensurate with Intelli-Check’s size and
        performance.
 
 **Compensation
        Program Objectives and Philosophy**
 
 ***In
        General.*** The
        objectives of Intelli-Check’s compensation programs are to:
 
 ·
              attract,
                  motivate and retain talented and dedicated executive
                  officers;
  ·
              provide
                  Intelli-Check’s executive officers with both cash and equity incentives to
                  further Intelli-Check’s interests and those of Intelli-Check’s
                  stockholders, and
  ·
              provide
                  employees with long-term incentives so Intelli-Check can retain
                  them and
                  provide stability during Intelli-Check’s growth
                  stage.
 
 Generally,
        the compensation of Intelli-Check’s executive officers is composed of a base
        salary, an annual incentive compensation award and equity awards in the form
        of
        stock options. In setting base salaries, the Compensation Committee generally
        reviewed the individual contributions of the particular executive. The annual
        incentive compensation awards for 2007 and 2008 are and will be discretionary
        awards determined by the Compensation Committee based on expected Company
        performance. No annual incentive compensation has been paid to executive
        officers in the last three years. In addition, stock options are granted
        to
        provide the opportunity for long-term compensation based upon the performance
        of
        Intelli-Check’s common stock over time.
 
 Intelli-Check
        generally intends to qualify executive compensation for deductibility without
        limitation under Section 162(m) of the Internal Revenue Code.
        Section 162(m) provides that, for purposes of the regular income tax and
        the alternative minimum tax, the otherwise allowable deduction for compensation
        paid or accrued with respect to a covered employee of a publicly-held
        corporation (other than certain exempt performance-based compensation) is
        limited to no more than $1.0 million per year. The non-exempt compensation
        paid to any of our executive officers for fiscal 2007 as calculated for purposes
        of Section 162(m) did not exceed the $1.0 million limit.
 
 ***Competitive
        Market*** .    Intelli-Check defines its competitive market for
        executive talent and investment capital to be the technology and business
        services industries. To date, Intelli-Check has not engaged in the benchmarking
        of executive compensation but Intelli-Check may choose to do so in the
        future.
 
 ***Compensation
        Process.*** For
        each of Intelli-Check’s named executive officers, the Compensation Committee
        reviews and approves all elements of compensation, taking into consideration
        recommendations from Intelli-Check’s CEO (for compensation other than his own),
        as well as competitive market guidance. Based upon its review, the Compensation
        Committee approves salaries for executive officers. The Compensation Committee
        sets the salary level of each executive officer on a case by case basis,
        taking
        into account the individual’s level of responsibilities and performance. All
        executive officer salaries are reviewed on an annual basis. Salary changes
        for
        executives are based primarily on their performance in supporting the strategic
        initiatives of the Chief Executive Officer, economic and competitive factors,
        meeting individual goals and objectives set by the Chief Executive Officer,
        and
        improving the operating efficiency of the company. Also, where applicable,
        changes in the duties and responsibilities of each other executive officer
        may
        be considered in deciding on changes in annual salary. For 2007, the aggregate
        of the compensation paid to Intelli-Check’s Chief Executive Officer and other
        executive officers was 61% cash and 39% non-cash option awards.
 
 ***Executive
        Officer Bonuses.*** The
        Compensation Committee has made a significant portion of executive officer
        compensation contingent upon Intelli-Check’s performance and each individual’s
        contribution to Intelli-Check’s success. For 2007, the Board of Directors
        approved a bonus plan for executives and employees which consisted of a bonus
        pool of up to $200,000 if the Company’s results of operations exceeded the
        approved 2007 budget by that amount. Intelli-Check did not meet this threshold
        during 2007, and therefore, the Compensation Committee did not authorize
        the
        payment of bonuses for 2007.
  49
 
 ***Stock
        Option Grants.*** The
        Compensation Committee currently administers Intelli-Check’s stock option and
        equity incentive plans for executive officers, employees, consultants and
        outside directors. Under the plans, the Compensation Committee grants options
        to
        purchase Common Stock with an exercise price equal to the fair market value
        of
        the Common Stock on the date of grant. The Compensation Committee believes
        that
        providing stock options to the executive officers, who are responsible for
        Intelli-Check’s management and growth, gives them an opportunity to own
        Intelli-Check stock and better aligns their interests with the interests
        of the
        stockholders. It also promotes retention of the officers because of the vesting
        provisions of the option grants and the potential for stock price
        appreciation.
 
 For
        these
        reasons, the Compensation Committee considers stock options as an important
        element of compensation when it reviews executive officer compensation. At
        its
        discretion, the Compensation Committee also grants options based on individual
        and corporate achievements.
 
 Normally,
        the Chief Executive Officer makes a recommendation to the Committee for awards
        to be made to executive officers other than the Chief Executive Officer.
        The
        Committee approves grants made to the Chief Executive Officer and other
        executive officers and, in certain cases, recommends grants for approval
        by the
        entire Board. The Compensation Committee determines the number of shares
        underlying each stock option grant based upon the executive officer’s and
        Intelli-Check’s performance, the executive officer’s role and responsibilities
        at Intelli-Check and the executive officer’s base salary. Effective November 7,
        2006, the Board enacted a new policy regarding all future stock option grants.
        Such policy requires that all future stock option issuances will be granted
        on
        the third Thursday of each month after they have been approved and that each
        such issuance will have a strike price per share equal to the closing price
        of
        the Corporation’s common stock on such day.
 
 ***Chief
        Executive Officer Compensation.***  On
        March
        14, 2008, the Company entered into an employment agreement with Dr. Ludlow,
        pursuant to which Dr. Ludlow was appointed the Company’s Chief Executive
        Officer. The Compensation Committee determined that it was in the best interest
        of the Company to enter into this two year agreement to provide assurance
        to the
        Company of the continued availability of Dr. Ludlow’s services after the
        transaction with Mobilisa. Dr. Ludlow will receive a salary of $220,000 per
        year, be granted options to purchase 25,000 shares of the Company’s common stock
        on March 20, 2008 that will be immediately exercisable at a price per share
        equal to the fair market value of the Company’s common stock on the date of
        grant, and an annual bonus based on reasonable objectives established by
        the
        Company’s Board of Directors. Dr. Ludlow will be entitled to receive benefits in
        accordance with the Company’s existing benefit policies and will be reimbursed
        for Company expenses in accordance with the Company’s expense reimbursement
        policies. The employment agreement has a term of two years. Dr. Ludlow may
        terminate the agreement at any time on 60 days prior written notice to the
        Company. In addition, the Company or Dr. Ludlow may terminate the employment
        agreement immediately for cause, as described in the employment agreement.
        If
        the Company terminates the agreement without cause, Dr. Ludlow will be entitled
        to severance equal to one year of his base salary, in addition to salary
        already
        earned. If Dr. Ludlow terminates the agreement for cause, Dr. Ludlow will
        be
        entitled to receive a payment equal to $50,000, in addition to salary already
        earned.
 
 The
        determination of the base salary to be paid to the Chief Executive Officer
        was
        based on a number of factors including the historical compensation of Dr.
        Ludlow
        and the relative compensation in comparison to the other existing senior
        executives in the Company. In deciding on future
        changes in the base salary of the Chief Executive Officer, the Compensation
        Committee will consider several performance factors. Among these are operating
        and administrative efficiency and the maintenance of an appropriately
        experienced management team. The Compensation Committee also evaluates the
        Chief
        Executive Officer’s performance in the area of finding and evaluating new
        business opportunities to establish the most productive strategic direction
        for
        Intelli-Check.
  50
  **INTELLI-CHECK
        SUMMARY COMPENSATION TABLE**
 
 The
        following table sets forth compensation paid to executive officers whose
        compensation was in excess of $100,000 for any of the three fiscal years
        ended
        December 31, 2007. No other executive officers received total salary and
        bonus
        compensation in excess of $100,000 during any of such fiscal years.
  **Name
                  and Principal Position**
              
              
              **Year**
              
              
              **Salary**
                **($)**
              
              
              **Bonus**
                **($)**
              
              
              **Option**
                **Awards**
                **($)
                  (1)**
              
              
              **All
                  Other**
                **Compensation**
                **($)
                  (2) (3)**
              
              
              **Total**
                **($)**Jeffrey
                  Levy (4)
              
              
              2007
              
              
              99,167
              
              
              50,000
              
              
              80,140
              
              
              -
              
              
              229,405Former
                  Interim Chairman &
              
              
              2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chief
                  Executive Officer
              
              
              2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Russell
                  T. Embry
              
              
              2007
              
              
              170,652
              
              
              -
              
              
              33,706
              
              
              2,040
              
              
              206,398Senior
                  Vice President
              
              
              2006
              
              
              166,480
              
              
              -
              
              
              -
              
              
              2,040
              
              
              168,520&
                  Chief Technology Officer
              
              
              2005
              
              
              162,766
              
              
              -
              
              
              10,089
              
              
              2,040
              
              
              174,895Lou
                  Gryga (5)
              
              
              2007
              
              
              50,739
              
              
              -
              
              
              80,446
              
              
              4,175
              
              
              135,360Former
                  Senior Vice President of Marketing,
              
              
              2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Sales
                  and Operations
              
              
              2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Peter
                  J. Mundy (6)
              
              
              2007
              
              
              105,961
              
              
              -
              
              
              98,317
              
              
              -
              
              
              204,278Vice
                  President Finance
              
              
              2006
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -&
                  Chief Financial Officer
              
              
              2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Frank
                  Mandelbaum (7)
              
              
              2007
              
              
              124,569
              
              
              -
              
              
              -
              
              
              7,500
              
              
              132,069Former
                  Chairman &
              
              
              2006
              
              
              254,763
              
              
              -
              
              
              104,571
              
              
              18,000
              
              
              377,334Chief
                  Executive Officer
              
              
              2005
              
              
              250,000
              
              
              -
              
              
              64,902
              
              
              18,000
              
              
              332,902Todd
                  Liebman (8)
              
              
              2007
              
              
              124,678
              
              
              -
              
              
              -
              
              
              5,450
              
              
              130,128Former
                  Senior Vice President Marketing
              
              
              2006
              
              
              171,536
              
              
              -
              
              
              307,391
              
              
              9,000
              
              
              487,927&
                  Chief Operating Officer
              
              
              2005
              
              
              135,128
              
              
              -
              
              
              -
              
              
              9,000
              
              
              144,128Edwin
                  Winiarz (9)
              
              
              2007
              
              
              33,157
              
              
              -
              
              
              -
              
              
              -
              
              
              33,157Former
                  Senior Executive Vice President
              
              
              2006
              
              
              172,087
              
              
              -
              
              
              104,571
              
              
              15,000
              
              
              291,658&
                  Chief Financial Officer
              
              
              2005
              
              
              161,343
              
              
              -
              
              
              116,740
              
              
              15,000
              
              
              293,083
  (1)
              The
                  amounts reported in the “Option Awards” column reflect the dollar amount
                  of expense recognized for financial statement reporting purposes
                  for the
                  fiscal year ended December 31, 2007 and 2006, in accordance with SFAS
                  123R. Assumptions used in the calculation of these amounts are
                  included in
                  Note 3 to the Company’s unaudited financial statements for the quarter
                  ended September 30, 2007 and in Note 8 to the audited financial
                  statements
                  for the fiscal year ended December 31, 2006, included in the
                  Company’s Annual Report on Form 10-K filed with the Securities and
                  Exchange Commission on November 13, 2007 and March 26, 2007,
                  respectively.(2)
              Amount
                  represents car allowances.(3)
              No
                  other compensation in excess of $10,000 , including perquisites,
                  was paid
                  to any of Intelli-Check’s named executive officers.(4)
              Mr.
                  Levy was named Interim CEO as of June 8, 2007. Amount listed under
                  salary
                  is the consulting fee paid and options granted to Mr. Levy for
                  his
                  services as Interim Chairman & CEO. The payment of Mr. Levy’s bonus of
                  $50,000 was deferred until the merger with Mobilisa was completed.
                  Effective upon the consummation of the acquisition of Mobilisa,
                  Mr. Levy
                  is no longer our Interim CEO
  51
  (5)
              Mr.
                  Gryga started with Intelli-Check as of August 16, 2007 and resigned
                  as of
                  January 4, 2008.(6)
              Mr.
                  Mundy started with Intelli-Check as of March 26, 2007.(7)
              Mr.
                  Mandelbaum passed away on June 7, 2007. Amount excludes the death
                  benefit
                  of $132,000 paid to his surviving spouse in 2007.(8)
              Mr.
                  Liebman resigned on August 8, 2007.(9)
              Mr.
                  Winiarz resigned on January 21, 2007. Salary includes accrued vacation
                  of
                  $16,827.
 
 **Employment
        Agreement**
  On
        March
        14, 2008, the Company entered into an employment agreement with Dr. Ludlow,
        pursuant to which Dr. Ludlow was appointed the Company’s Chief Executive
        Officer. Dr. Ludlow will receive a salary of $220,000 per year, be granted
        options to purchase 25,000 shares of the Company’s common stock on March 20,
        2008 that will be immediately exercisable at a price per share equal to the
        fair
        market value of the Company’s common stock on the date of grant, and an annual
        bonus based on reasonable objectives established by the Company’s Board of
        Directors. Dr. Ludlow will be entitled to receive benefits in accordance
        with
        the Company’s existing benefit policies and will be reimbursed for company
        expenses in accordance with the Company’s expense reimbursement policies. The
        employment agreement has a term of two years. Dr. Ludlow may terminate the
        agreement at any time on 60 days prior written notice to the Company. In
        addition, the Company or Dr. Ludlow may terminate the employment agreement
        immediately for cause, as described in the employment agreement. If the Company
        terminates the agreement without cause, Dr. Ludlow will be entitled to severance
        equal to one year of his base salary, in addition to salary already earned.
        If
        Dr. Ludlow terminates the agreement for cause, Dr. Ludlow will be entitled
        to
        receive a payment equal to $50,000, in addition to salary already
        earned.
 
 **Severance
        Arrangements**
 
 Mr.
        Peter
        Mundy, Intelli-Check’s Chief Financial Officer, has a severance arrangement with
        Intelli-Check, which provides that if Intelli-Check acquires a company and
        retains and appoints an employee from the acquired company in the role of
        Chief
        Financial Officer and Mr. Mundy chooses not to accept a lesser role in the
        combined company he would be entitled to a severance payment of $72,500 (equal
        to six months salary).
 
 **Stock
        Option and Equity Incentive Plans**
 
 The
        principal purpose of the Stock Option and Equity Incentive Plans is to attract,
        motivate, reward and retain selected employees, consultants and directors
        through the granting of stock-based compensation awards. The Plans provide
        for a
        variety of awards, including non-qualified stock options, incentive stock
        options (within the meaning of Section 422 of the Code), stock appreciation
        rights, restricted stock awards, performance-based awards and other stock-based
        awards. 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 company’s Common Stock on such day.
 
 Intelli-Check
        adopted a Stock Option Plan (the “1998 Stock Option Plan”) covering up to
        400,000 of the Company’s Common Stock, pursuant to which officers, directors,
        key employees and consultants to the Company are eligible to receive incentive
        stock options and nonqualified stock options. The Compensation Committee
        of the
        Board of Directors currently administers the 1998 Stock Option Plan and
        determines the terms and conditions of options granted, including the exercise
        price. The 1998 Stock Option Plan provides that all stock options will expire
        within ten years of the date of grant. Incentive stock options granted under
        the
        1998 Stock Option Plan must be granted at an exercise price that is not less
        than the fair market value per share at the date of grant and the exercise
        price
        must not be less than 110% of the fair market value per share at the date
        of
        grant for grants to persons owning more than 10% of the voting stock of
        Intelli-Check . The 1998 Stock Option Plan also entitles non-employee directors
        to receive grants of non-qualified stock options as approved by the Board
        of
        Directors.
 
 In
        August
        1999, Intelli-Check adopted the 1999 Stock Option Plan covering up to 1,000,000
        of the Company’s Common Stock, pursuant to which officers, directors, key
        employees and consultants to Intelli-Check are eligible to receive incentive
        stock options and nonqualified stock options. The Compensation Committee
        of the
        Board of Directors currently administers the 1999 Stock Option Plan and
        determines the terms and conditions of options granted, including the exercise
        price. The 1999 Stock Option Plan provides that all stock options will expire
        within ten years of the date of grant. Incentive stock options granted under
        the
        1999 Stock Option Plan must be granted at an exercise price that is not less
        than the fair market value per share at the date of grant and the exercise
        price
        must not be less than 110% of the fair market value per share at the date
        of
        grant for grants to persons owning more than 10% of the voting stock of the
        company. The 1999 Stock Option Plan also entitles non-employee directors
        to
        receive grants of non-qualified stock options as approved by the Board of
        Directors.
  52
 
 At
        the
        Company’s Annual Meeting held on July 11, 2001, the stockholders approved the
        2001 Stock Option Plan covering up to 500,000 of the Company’s Common Stock,
        pursuant to which the officers, directors, key employees and consultants
        to
        Intelli-Check are eligible to receive incentive stock options and nonqualified
        stock options. The Compensation Committee of the Board of Directors currently
        administers the 2001 Stock Option Plan and determines the terms and conditions
        of options granted, including the exercise price. The 2001 Stock Option Plan
        provides that all stock options will expire within ten years of the date
        of
        grant. Incentive stock options granted under the 2001 Stock Option Plan must
        be
        granted at an exercise price that is not less than the fair market value
        per
        share at the date of the grant and the exercise price must not be less than 110%
        of the fair market value per share at the date of the grant for grants to
        persons owning more than 10% of the voting stock of the company. The 2001
        Stock
        Option Plan also entitles non-employee directors to receive grants on
        non-qualified stock options as approved by the Board of Directors.
 
 At
        the
        Company’s Annual Meeting held on July 10, 2003, the stockholders approved the
        2003 Stock Option Plan covering up to 500,000 of the Company’s Common Stock,
        pursuant to which the officers, directors, key employees and consultants
        to
        Intelli-Check are eligible to receive incentive stock options and nonqualified
        stock options. The Compensation Committee of the Board of Directors currently
        administers the 2003 Stock Option Plan and determines the terms and conditions
        of options granted, including the exercise price. The 2003 Stock Option Plan
        provides that all stock options will expire within ten years of the date
        of
        grant. Incentive stock options granted under the 2003 Stock Option Plan must
        be
        granted at an exercise price that is not less than the fair market value
        per
        share at the date of the grant and the exercise price must not be less than
        110%
        of the fair market value per share at the date of the grant for grants to
        persons owning more than 10% of the voting stock of the company. The 2003
        Stock
        Option Plan also entitles non-employee directors to receive grants on
        non-qualified stock options as approved by the Board of Directors.
 
 At
        the
        Company’s Annual Meeting held on June 16, 2006, the stockholders approved the
        2006 Equity Incentive Plan, which amends and restates the Company’s 2004 Stock
        Option Plan (the “2006 Plan”) covering up to 850,000 of the Company’s Common
        Stock, pursuant to which the officers, directors, key employees and consultants
        to the company are eligible to receive incentive stock options, nonqualified
        stock options and restricted stock awards. The Compensation Committee of
        the
        Board of Directors currently administers the 2006 Plan and determines the
        terms
        and conditions of options or restricted stock awards granted, including the
        option exercise price. The 2006 Plan provides that all stock options or
        restricted stock awards will expire within ten years of the date of grant.
        Incentive stock options granted under the 2006 Plan must be granted at an
        exercise price that is not less than the fair market value per share at the
        date
        of the grant and the exercise price must not be less than 110% of the fair
        market value per share at the date of the grant for grants to persons owning
        more than 10% of the voting stock of the company. The 2006 Plan also entitles
        non-employee directors to receive grants on non-qualified stock options as
        approved by the Board of Directors. At the Company’s special meeting of
        Stockholders held on March 14, 2008, the stockholders voted to amend the
        2006
        Equity Incentive Plan (the “Plan”) to increase the number of shares of Common
        Stock authorized to be issued by 3,000,000.
 
 *Administration.* The
        Stock Option and Equity Incentive Plans are currently administered by the
        Compensation Committee as designated by the Board of Directors. The Compensation
        Committee has the power to interpret the Stock Option and Equity Incentive
        Plans
        and to adopt rules for the administration, interpretation and application
        according to terms of the plans.
 
 *Grant
        of Awards; Shares Available for Awards.* Certain
        employees, consultants and directors are eligible to be granted awards under
        the
        Plans. The Compensation Committee will determine who will receive awards
        under
        the Plans, as well as the form of the awards, the number of shares underlying
        the awards, and the terms and conditions of the awards consistent with the
        terms
        of the Plans.
  53
 
 A
        total
        of 1,149,679 shares of Intelli-Check’s Common Stock are available for issuance
        or delivery under the existing Stock Option and Equity Incentive Plans. The
        number of shares of the Company’s Common Stock issued or reserved pursuant to
        the Plans will be adjusted at the discretion of the Board of Directors or
        the
        Compensation Committee as a result of stock splits, stock dividends and similar
        changes in the Company’s Common Stock.
  *Stock
        Options.* The
        Stock Option and Equity Incentive Plans permit the Compensation Committee
        to
        grant participants incentive stock options, which qualify for special tax
        treatment in the United States, as well as non-qualified stock options. The
        Compensation Committee will establish the duration of each option at the
        time it
        is granted, with maximum ten-year duration for incentive stock options, and
        may
        also establish vesting and performance requirements that must be met prior
        to
        the exercise of options. Stock option grants (other than incentive stock
        option
        grants) also may have exercise prices that are less than, equal to or greater
        than the fair market value of the Company’s Common Stock on the date of grant.
        Incentive stock options must have an exercise price that is at least equal
        to
        the fair market value of the Company’s Common Stock on the date of grant. Stock
        option grants may include provisions that permit the option holder to exercise
        all or part of the holder’s vested options, or to satisfy withholding tax
        liabilities, by tendering shares of the Company’s Common Stock already owned by
        the option holder for at least six months (or another period consistent with
        the
        applicable accounting rules) with a fair market value equal to the exercise
        price.
 
 *Other
        Equity-Based Awards* . In
        addition to stock options, the Compensation Committee may also grant certain
        employees, consultants and directors shares of restricted stock, with terms
        and
        conditions as the Compensation Committee may, pursuant to the terms of the
        2006
        Plan, establish. The 2006 Plan does not allow awards to be made under terms
        and
        conditions which would cause such awards to be treated as deferred compensation
        subject to the rules of Section 409A of the Code.
  *Change-in-Control
        Provisions.* In
        connection with the grant of an award, the Compensation Committee may provide
        that, in the event of a change in control, any outstanding awards that are
        unexercisable or otherwise unvested will become fully vested and immediately
        exercisable.
 
 *Amendment
        and Termination.* The
        Compensation Committee may adopt, amend and rescind rules relating to the
        administration of the Plans, and amend, suspend or terminate the Plans, but
        no
        amendment will be made that adversely affects in a material manner any rights
        of
        the holder of any award without the holder’s consent, other than amendments that
        are necessary to permit the granting of awards in compliance with applicable
        laws. Intelli-Check attempted to structure the Plans so that remuneration
        attributable to stock options and other awards will not be subject to a
        deduction limitation contained in Section 162(m) of the Code.
 
 **GRANTS
        OF PLAN-BASED AWARDS TABLE**
 
 The
        following table summarizes options granted during the year ended December
        31,
        2007 to the named executive officers:
  **Name**
              
              **Grant
                  Date**
              
              **Approval
                  Date**
              
              **Number
                  of**
                **Securities**
                **Underlying**
                **Options
                  Granted**
              
              **Exercise
                  or**
                **Base
                  Price of**
                **Option**
                **Awards**
                **($/Sh)**
              
              **Fair
                  Value**
                **at
                  Grant**
                **Date
                  ($) (1)**
              
              **Expiration
                  Date**Jeffrey
                  Levy (2)
              
              
              6/21/07
              
              
              6/19/07
              
              
              25,000
              
              $
              6.30
              
              
              80,140
              (3)
              
              6/21/12Russell
                  T. Embry
              
              
              5/17/07
              
              
              5/10/07
              
              
              10,000
              
              $
              6.65
              
              
              33,706
              (4)
              
              11/17/07Lou
                  Gryga
              
              
              8/16/07
              
              
              8/8/07
              
              
              50,000
              
              $
              3.05
              
              
              80,446
              (5)
              
              8/16/12Peter
                  J. Mundy
              
              
              4/19/07
              
              
              3/27/07
              
              
              25,000
              
              $
              7.00
              
              
              98,317
              (6)
              
              4/19/13
  (1)
              
              The
                  amounts reported in the “Option Awards” column reflect the dollar amount
                  of expense recognized for financial statement reporting purposes
                  for the
                  fiscal year ended December 31, 2007, in accordance with SFAS 123R.
                  Assumptions used in the calculation of these amounts are included
                  in Note
                  8 to the company’s audited financial statements for the quarter ended
                  September 30, 2007, included in the company’s Quarterly Report on Form
                  10-Q filed with the Securities and Exchange Commission on November
                  13,
                  2007.
  54
  (2)
              
              Excludes
                  options issued for services as a director.(3)
              
              Vest
                  ratably over a 12 month period.(4)
              
              Vest
                  50% immediately and 50% on 11/17/07(5)
              
              Vest
                  at a rate of 5,000 options for each $500,000 in booked
                  sales.(6)
              
              Vest
                  50% immediately, 25% on 10/19/07 and 25% on
                  4/19/08.
  The
        following table summarizes unexercised options as of year-end December 31,
        2007
        for the named executive officers:
 
 **OUTSTANDING
        EQUITY AWARDS AT FISCAL YEAR END TABLE**
  **No.
                      of Securities**Underlying UnexercisedOptions /
                  Warrants
              
              
              **Option**Exercise
              
              
              **Option**Expiration**Name**
              
              **Exercisable**
              
              
              **Unexercisable**
              
              
              **Price**
              
              
              **Date**Jeffrey
                  Levy
              
              12,500
              
              
              -
              
              $
              6.30
              
              
              6/21/12-
              
              
              12,500
              (1)
              $
              6.30
              
              
              6/21/12Russell
                  T. Embry
              
              6,250
              
              
              -
              
              $
              3.82
              
              
              4/30/086,250
              
              
              -
              
              $
              7.44
              
              
              11/05/086,250
              
              
              -
              
              $
              7.44
              
              
              5/05/095,000
              
              
              -
              
              $
              4.37
              
              
              12/03/095,000
              
              
              -
              
              $
              4.37
              
              
              6/03/105,000
              
              
              -
              
              $
              3.18
              
              
              11/17/105,000
              
              
              -
              
              $
              6.65
              
              
              5/17/125,000
              
              
              -
              
              $
              6.65
              
              
              11/17/12Lou
                  Gryga
              
              5,000
              
              
              -
              
              $
              3.05
              
              
              8/16/125,000
              
              
              -
              
              $
              3.05
              
              
              8/16/125,000
              
              
              -
              
              $
              3.05
              
              
              8/16/12-
              
              
              35,000
              (2)
              $
              3.05
              
              
              8/16/12Peter
                  J. Mundy
              
              12,500
              
              
              -
              
              $
              7.00
              
              
              4/19/127,250
              
              
              -
              
              $
              7.00
              
              
              10/19/12-
              
              
              7,250
              (3)
              $
              7.00
              
              
              4/19/13
  (1)
                These
                      shares vest ratably over a six month period beginning January
                      2008.
 (2)
              These
                  shares vest ratably upon the achievement of certain sales
                  targets.
 (3)
                These
                      shares vest on 4/19/08.
 The
        following table summarizes options exercised and stock awards vested during
        the
        year-ended December 31, 2007 for the named executive officers:
 
 **OPTION
        EXERCISES AND STOCK VESTED TABLE**
  **Stock
                    Options**
                
                
                **Stock
                    Awards****Name**
                
                
                **No.
                    of Shares**
                  **Acquired
                    Upon Exercise (#)**
                
                
                **Value
                    Received Upon Exercise ($)**
                
                
                **No.
                    of Shares**
                  **Acquired
                    Upon Vesting (#)**
                
                
                **Value
                    Received Upon Vesting ($)**Frank
                    Mandelbaum
                
                
                25,000
                
                $
                92,250
                (1)
                
                -
                
                
                -Jeffrey
                    Levy
                
                
                8,000
                
                
                5,880
                (2)
                
                -
                
                
                -Russell
                    T. Embry
                
                
                6,250
                
                
                20,813
                (3)
                
                -
                
                
                -Todd
                    Liebman
                
                
                5,000
                
                
                10,150
                (4)
                
                -
                
                
                -
 55
  (1)
              Mr.
                  Mandelbaum exercised 25,000 shares at an exercise price of $3.00
                  per share
                  on January 3, 2007, when the closing price of the company’s Common Stock
                  was $6.69.(2)
              Mr.
                  Levy exercised 8,000 shares at an exercise price of $2.80 per share
                  on
                  June 25, 2007, when the closing price of the company’s Common Stock was
                  $4.76.(3)
              Mr.
                  Embry exercised 6,250 shares at an exercise price of $3.82 per
                  share on
                  June 4, 2007, when the closing price of the company’s Common Stock was
                  $7.15.(4)
              Mr.
                  Liebman exercised 5,000 shares at an exercise price of $4.57 per
                  share on
                  June 19, 2007, when the closing price of the company’s Common Stock was
                  $6.60.
  **Pension
        Benefits**
  The
        company does not sponsor any qualified or non-qualified defined benefit
        plans.
  **Nonqualified
        Deferred Compensation**
  Intelli-Check
        does not maintain any non-qualified defined contribution or deferred
        compensation plans. The Compensation Committee, which is comprised solely
        of
“outside directors” as defined for purposes of Section 162(m) of the Code,
        may elect to provide Intelli-Check’s officers and other employees with
        non-qualified defined contribution or deferred compensation benefits if the
        Compensation Committee determines that doing so is in the company’s best
        interests. Intelli-Check sponsors a tax qualified defined contribution 401(k)
        plan in which Mr. Winiarz, Mr. Embry and Mr. Liebman participate. Intelli-Check
        does not make any matching contributions to the plan.
  **Compensation
        of Directors**
  The
        table
        below sets forth certain information concerning compensation of Intelli-Check’s
        non-employee directors who served in 2007.
  **Name
                  and Principal Position**
              
              **Fees
                  Paid**
                **in
                  Cash**
                **($)**
              
              **Option**
                **Awards**
                **($)**
              
              **Stock**
                **Awards**
                **($)**
              
              **All
                  Other**
                **Compensation**
                **($)
                  (8)**
              
              **Total**
                **($)**Jeffrey
                  Levy
              
              
              6,500
              
              
              -
              
              
              6,000
              (3)
              
              -
              
              
              12,500Robert
                  J. Blackwell
              
              
              3,500
              
              (1)
              -
              
              
              -
              
              
              -
              
              
              3,500John
                  E. (Jay) Maxwell
              
              
              12,500
              
              
              -
              
              
              52,000
              (4)
              
              -
              
              
              64,500Arthur
                  L. Money
              
              
              12,500
              
              
              -
              
              
              20,000
              (5)
              
              -
              
              
              32,500Guy
                  L. Smith
              
              
              9,500
              
              
              13,983
              (2)
              
              -
              
              
              -
              
              
              23,483Edwin
                  Winiarz
              
              
              12,000
              
              
              -
              
              
              -
              (6)
              
              -
              
              
              12,000Ashok
                  Rao
              
              
              6,500
              
              
              -
              
              
              48,000
              (7)
              
              -
              
              
              54,500
 
 (1)
              As
                  a result of the acquisition of Mobilisa, Mr. Blackwell resigned
                  from the
                  Board of Directors on March 14, 2008.(2)
              Fair
                  value of 4,362 options granted 6/21/07 at exercise price of $6.30
                  per
                  share. As of December 31, 2007, including the awards listed above,
                  Mr.
                  Smith had aggregate outstanding options to purchase 81,850 shares
                  of
                  Common Stock.(3)
              Fair
                  value of 952 restricted shares granted 6/21/07 at market price
                  of $6.30
                  per share. As of December 31, 2007, Mr. Levy had aggregate outstanding
                  options to purchase 95,350 shares of Common Stock and holds 952
                  shares of
                  restricted Common Stock.(4)
              Fair
                  value of 8,254 restricted shares granted 6/21/07 at market price
                  of $6.30
                  per share. As of December 31, 2007, Mr. Maxwell had aggregate outstanding
                  options to purchase 49,150 shares of Common Stock and holds 8,254
                  shares
                  of restricted Common Stock.(5)
              Fair
                  value of 3,175 restricted shares granted 6/21/07at market price
                  of $6.30
                  per share. As of December 31, 2007, Mr. Money had aggregate outstanding
                  options to purchase 148,300 shares of Common Stock and holds 10,175
                  shares
                  of restricted Common Stock.
  56
  (6)
              As
                  of December 31, 2007, Mr. Winiarz had aggregate outstanding options
                  to
                  purchase 198,000 shares of Common Stock. As a result of the acquisition
                  of
                  Mobilisa, Mr. Blackwell resigned from the Board of Directors on
                  March 14,
                  2008.(7)
              Fair
                  value of 7,619 restricted shares granted 6/21/07 at market price
                  of $6.30
                  per share. As of December 31, 2007, Mr. Rao holds 16,621 shares
                  of
                  restricted Common Stock. Mr. Rao resigned from the Board of Directors
                  on
                  August 9, 2007.(8)
              No
                  other compensation, including perquisites in excess of $10,000,
                  was paid
                  to any of the directors.
  During
        2007, non-employee directors received fees of $3,000 for in-person attendance
        at
        board meetings and $500 for attendance at such meetings telephonically. Each
        non-employee director also received a fee of $250 for participation, either
        in-person or telephonically, at each separately convened committee meeting
        not
        held in conjunction with a board meeting. The Board recommended that beginning
        in 2006 non-employee directors should be granted the choice of restricted
        shares
        of Intelli-Check’s Common Stock in lieu of stock options or a number of stock
        options equal to that of the stock grant at the director’s option. In addition,
        the Board further recommended that non-employee directors, who are members
        of a
        committee, should be granted the choice of restricted shares of Intelli-Check’s
        Common Stock in lieu of stock options or a number of stock options equal
        to that
        of the stock grant at the director’s option. The number of restricted shares as
        proposed would be determined by the Board at each annual board meeting. This
        plan was included in Intelli-Check’s proxy statement for a vote by
        Intelli-Check’s stockholders at the 2006 Annual Meeting of
        Shareholders.
  **Item
        12.****Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters**
  **BENEFICIAL
        OWNERSHIP OF SECURITIES**
 
 The
        following table sets forth information with respect to the beneficial ownership
        of the combined company’s Common Stock as of March 20, 2008, after the
        consummation of the acquisition of Mobilisa, by each person who is known
        by
        Intelli-Check to beneficially own more than 5% of Intelli-Check’s Common Stock,
        each officer, each director and all officers and directors as a
        group.
 
 Shares
        of
        Common Stock which an individual or group has a right to acquire within 60
        days
        pursuant to the exercise or conversion of options, warrants or other similar
        convertible or derivative securities are deemed to be outstanding for the
        purpose of computing the percentage ownership of such individual or group,
        but
        are not deemed to be outstanding for the purpose of computing the percentage
        ownership of any other person shown in the table.
 
 The
        applicable percentage of ownership is based on 24,563,456 shares outstanding
        after the merger was completed.
  **Name**
              
              **Shares
                  Beneficially****Owned**
              
              **Percent**Dr.
                  Nelson Ludlow (1)
              
              
              4,180,952
              
              
              17.0Bonnie
                  Ludlow (2)
              
              
              8,018,236
              
              
              32.6John
                  W. Paxton (3)
              
              
              327,302
              
              
              1.3L.
                  Gen. Emil R. Bedard (4)
              
              
              436,402
              
              
              1.8Jeffrey
                  Levy (5)
              
              
              187,280
              
              
              *Russell
                  T. Embry (6)
              
              
              43,750
              
              
              *Peter
                  J. Mundy (7)
              
              
              35,800
              
              
              *John
                  E. Maxwell (8)
              
              
              57,604
              
              
              *Arthur
                  L. Money (9)
              
              
              202,850
              
              
              *Guy
                  L. Smith (10)
              
              
              93,669
              
              
              *All
                  Executive Officers & Directors as a group (13 persons)
                  (11)
              
              
              13,577,620
              
              
              52.3
 
 *
        Indicates beneficial ownership of less than one percent of the total outstanding
        Common Stock.
  57
 
 (1)
              Includes
                  21,820 shares issuable upon exercise of stock options and rights
                  exercisable within 60 days.(2)
              Includes
                  21,820 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(3)
              Includes
                  327,302 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(4)
              Includes
                  436,402 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(5)
              Includes
                  160,928 shares issuable upon exercise of stock options and rights
                  exercisable within 60 days.(6)
              Includes
                  43,750 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(7)
              Includes
                  35,000 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(8)
              Includes
                  49,150 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(9)
              Includes
                  202,850 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(10)
              Includes
                  75,350 shares issuable upon exercise of stock options exercisable
                  within
                  60 days.(11)
              Includes
                  1,374,372 shares issuable upon exercise of stock options and rights
                  exercisable within 60 days.
 
 **Equity
        Compensation Plan Information**
 
 The
        following table sets forth information regarding Intelli-Check’s Equity
        Compensation Plans as of December 31, 2007:
 
 **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
              
              
              990,792
              
              $
              6.35
              
              
              1,457,415Equity
                  compensation plans not approved by security holders
              
              
              469,425
              
              $
              3.69
              
              
              NoneTotal
              
              
              1,460,217
              
              $
              5.47
              
              
              1,457,415
 
 From
        time
        to time the Board of Directors of the Company approves the grant of non-plan
        options to officers and employees of, or consultants to, the Company, which
        are
        included in this table.  The shares of common stock listed under equity
        compensation plans not approved by stockholders in the above table consist
        of
        shares of common stock issuable pursuant to such options.  The 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 five (5) persons.  These
        options have a weighted average exercise price per share equal to $3.69 and
        options to purchase 469,425 shares of common stock are currently
        exercisable.
  **Item
        13.**  **Certain
        Relationships, Related Transactions and Director
        Independence**
 
 **Intelli-Check**
 
 Since
        the
        beginning of 2007, Intelli-Check did not have any transactions with related
        persons as described under Item 404(a) of Regulation S-K. The Governance
        Committee reviews transactions with firms associated with directors and nominees
        for director. Intelli-Check’s management also monitors such transactions on an
        ongoing basis. Executive officers and directors are governed by Intelli-Check’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 2007.
        Intelli-Check’s Corporate Governance Guidelines require that all directors
        recuse themselves from any discussion or decision affecting their personal,
        business or professional interests.
  58
  **Mobilisa**
  The
        majority owners, who are members of management, lent money to Mobilisa from
        time
        to time. The loans bore no interest and are payable upon demand. As of
        December 31, 2007, 2006, and 2005, amounts owed to related parties were $0,
        $27,403 and $0, respectively.
 
 Mobilisa
        leases office space from Eagle Coast, LLC, an entity that is wholly-owned
        by Dr.
        Ludlow and Mrs. Ludlow, our Chief Executive Officer and director and one
        of our
        directors, respectively. For the years ended December 31, 2007, 2006, and
        2005, total rental payments for this office space was $63,546, $55,375 and,
        $48,957. Mobilisa entered into a 10-year lease for the office space ending
        in
        2017.
 
 The
        majority owners, who are members of management, have guaranteed all Mobilisa
        credit lines.
 
 The
        Board
        of Directors has determined that Messrs.  Bedard,
        Levy, Maxwell, Money, Paxton and Smith are
        each independent directors as
        defined in Section 121(A) of the American Stock Exchange's
        listing standards.
  The
        board
        of directors has  established a compensation  committee which is
        currently comprised of Mr. Smith, chairperson, Mr. Maxwell and Mr. Paxton,
        each
        of whom  is  independent  as  defined  in 
Section  121(A)  of the  American  Stock Exchange's listing
        standards.  The compensation committee reviews and recommends to the board
        the compensation for all officers and directors of our company and reviews
        general policy matters relating to the compensation and benefits of all
        employees. The compensation committee also administers the stock option
        plans.
 
 The 
        board  of  directors  has  established  a 
corporate  governance  and nominating committee, which is comprised of
        Mr. Maxwell, chairperson, Mr. Bedard and Mr.  Money, each of whom
        is independent as defined in Section 121(A) of the American
        Stock Exchange's listing standards.  The
        corporate governance and nominating committee reviews our internal policies
        and procedures and by-laws. With respect to nominating director candidates,
        this committee identifies and evaluates   potential  
director   candidates and recommends   candidates for
        appointment or election to the Board.
 
 The 
        board  of  directors  has a  separately 
designated  audit  committee established in accordance  with
        Section  3(a)(58)(A) of the Securities  Exchange Act of 1934, which is
        currently comprised of Mr. Paxton,  chairperson,  Mr. Bedard and Mr.
        Money.  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**
  For
        the
        fiscal years ended December 31, 2007 and December 31, 2006, Intelli-Check’s
        principal independent auditor was Amper, Politziner & Mattia, P.C., the
        services of which 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  Intelli-Check’s annual financial
        statements for the fiscal years ended December 31, 2007 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 $105,000 and $104,500,
        respectively.
  59
  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 Intelli-Check
        during fiscal year 2007 or 2006 for assurance and related services in connection
        with the audit or review of the company’s financial statements.
 
 Tax
        Fees
 
 Amper,
        Politziner and Mattia, P.C. billed Intelli-Check for tax related services
        for
        the fiscal year 2007 totaling $5,000, and for the fiscal year 2006 totaling
        $4,000.
 
 All
        Other Fees
 
 The
        aggregate fees billed by Amper, Politziner and Mattia, P.C. for professional
        services rendered in connection with the Company’s Registration Statement on
        Form S-8 to register certain shares under the Company’s 2003 and 2006 Stock
        Option Plan amounted to $3,700 in 2007.
 
 No
        other
        fees were billed by Amper, Politziner & Mattia, PC for 2006.
 
 Pre-approval
        of Services
 
 The
        Audit
        Committee pre-approves all services, including both audit and non-audit
        services, provided by Intelli-Check’s independent registered public accounting
        firm. For audit services, each year the independent auditor provides the
        Audit
        Committee with an engagement letter outlining the scope of proposed audit
        services to be performed during the year, which must be formally accepted
        by the
        Committee before the audit commences. The independent auditor also submits
        an
        audit services fee proposal, which also must be approved by the Committee
        before
        the audit commences.
 
 60
 **PART
          IV**
  **Item
          15.**  **Exhibits
          and****Financial
          Statement Schedules**
  (a)(1) 
          F inancial
          Statements
  Balance
          Sheets as of December 31, 2007 and 2006
 Statements
          of Operations for the years ended December 31, 2007, 2006 and 2005
 Statements
          of Stockholders’ Equity for the years ended December 31, 2007, 2006 and
          2005
 Statements
          of Cash Flows for the years ended December 31, 2007, 2006 and 2005
  (2)  Schedule
          II - Valuation and Qualifying Accounts
  (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
                
                Amendment
                    to the By-laws of the Company (9)3.4
                
                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
                
                Agreement
                    of Lease between the Company and Industrial and Research Associates,
                    dated
                    as of October 15, 2000 (5)10.2
                
                1998
                    Stock Option Plan (1) *10.3
                
                1998
                    Stock Option Plan (1) *10.4
                
                1999
                    Stock Option Plan (1) *10.5
                
                2001
                    Stock Option Plan (3) *10.6
                
                2003
                    Stock Option Plan (4) *10.7
                
                2006
                    Equity Incentive Plan (5) *10.8
                
                Memorandum
                    of Understanding between AAMVAnet, Inc. and Intelli-Check, Inc.
                    effective
                    November 15, 2000 (6)10.9
                
                Memorandum
                    of Understanding between AAMVAnet, Inc. and Intelli-Check, Inc.
                    effective
                    January 29, 2002 (6)10.10
                
                Securities
                    Purchase Agreement between Intelli-Check, Inc. and Gryphon Master
                    Fund
                    dated March 27, 2003. (8)10.11
                
                Registration
                    Rights Agreement between Intelli-Check, Inc. and Gryphon Master
                    Fund dated
                    March 27, 2003. (8)10.12
                
                Merger
                    Agreement dated November 20, 2007 by and among Intelli-Check
                    Inc.,
                    Intelli-Check Merger Sub, Inc., Mobilisa, Inc., and the Principal
                    Shareholders of Mobilisa, Inc. (11)10.13
                
                Employment
                    Agreement between Intelli-Check - Mobilisa, Inc and Nelson Ludlow
                    dated
                    March 15, 2008. (12)*10.14
                
                Director
                    Agreement between Intelli-Check - Mobilisa, Inc. and its Directors
                    dated
                    March 14, 2008. (12 )10.15
                
                Stockholder
                    Agreement between Intelli-Check - Mobilisa, Inc. and Nelson Ludlow
                    and
                    Bonnie Ludlow dated March 14, 2008. (12 )14.1
                
                Code
                    of Business Conduct and Ethics (8)21**
                
                List
                    of Subsidiaries23.1**
                
                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
  61
 
 *
                    Denotesa
                        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)
                        filedSeptember24,
                        1999.
 (2)
                  Incorporated
                      by reference to Amendment No. 1 to the Registration Statement
                      filed
                      November 1, 1999.
 (3)
                Incorporated
                    by reference to Registrant’s Proxy Statement on Schedule 14A filed May 31,
                    2001.
 (4)
                Incorporated
                    by reference to Registrant’s Proxy Statement on Schedule 14A filed June
                    13, 2003.
 (5)
                Incorporated
                    by reference to Registrant’s Proxy Statement on Schedule 14A filed May 19,
                    2006.
 (6)
                Incorporated
                    by reference to Registrant’s Annual Report on Form 10-K filed March 29,
                    2001.
 (7)
                Incorporated
                    by reference from the Registrant’s Current Report on Form 8-K filed on
                    December 16, 2004.
 (8)
                Incorporated
                    by reference to Registrant’s Annual Report of Form 10-K filed March 31,
                    2003.
 (9)
                Incorporated
                    by reference to Registrant’s Current Report on Form 8-K filed August 14,
                    2007.
 (10)
                Incorporated
                    by reference to Registrant’s Current Report on Form 8-K filed August 14,
                    2007.
 (11)
                Incorporated
                    by reference to Registrant’s Current Report on Form 8-K filed November 30,
                    2007.
 (12)
                Incorporated
                    by reference to Registrant’s Current Report on Form 8-K filed March 20,
                    2008.
 
 62
  **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
                    25, 2008
                
                By:
                /s/
                    Nelson LudlowDr.
                    Nelson Ludlow
                  Chief
                    Executive Officer and Director
  Pursuant
          to the requirements of the Securities Exchange Act of 1934, this report
          has been
          signed below by the following persons on behalf of the Registrant and in
          the
          capacities and on the dates indicated.
  INTELLI-CHECK,
                  INC.Date:March
                    25, 2008
                By:
                /s/
                    Nelson LudlowDr.
                    Nelson Ludlow
                  Chief
                    Executive Officer and Director
                  (Principal
                    Executive Officer)Date:March
                    25, 2008
                
                /s/
                    Peter J. MundyPeter
                    J. Mundy,
                  Vice
                    President of Finance and Chief Financial Officer
                  (Principal
                    Financial and Accounting Officer)Date:March
                    25, 2008
                
                /s/
                    Jeffrey LevyJeffrey
                    Levy, Chairman and Director
 Date:March
                    25 , 2008John
                  W. Paxton, Vice Chairman & DirectorDate:March
                  25 , 2008L.
                    Gen. Emil R. Bedard, DirectorDate:March
                    25, 2008Bonnie
                    Ludlow, DirectorDate:March
                    25, 2008
                
                /s/
                    John E. MaxwellJohn
                    E. Maxwell, DirectorDate:March
                    25, 2008
                
                /s/
                    Arthur L. MoneyArthur
                    L. Money, DirectorDate:March
                    25, 2008
                
                /s/
                    Guy L. SmithGuy
                    L. Smith, Director
  
  **EXHIBIT
          INDEX**
 
 Exhibit
                    No.
                
                Description21
                
                Listing
                    of Subsidiaries23.1
                
                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, 2006 and 2007
            F-2Statements
                of Operations for the Years Ended December 31, 2005, 2006 and
                2007
            F-3Statements
                of Stockholders’ Equity for the Years Ended December 31, 2005, 2006 and
                2007
            F-4Statements
                of Cash Flows for the Years Ended December 31, 2005, 2006 and
                2007
            F-5NOTES
                TO FINANCIAL STATEMENTS
            F-6
                - F-21Schedule
                II - Valuation and Qualifying Accounts
            F-22





F-1




**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, 2007 and 2006, and the related statements of operations,
      stockholders’ equity, and cash flows for each of the three years in the period
      ended December 31, 2007. These financial statements are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Intelli-Check, Inc. as of December
      31, 2007 and 2006, and the results of its operations and its cash flows for
      each
      of the three years in the period ended December 31, 2007 in conformity with
      accounting principles generally accepted in the United States of America.




As
      discussed in Note 6 to the financial statements, effective January 1,
      2007 the Company adopted FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an Interpretation of FASB
      No. 109. *”* As
      discussed in Note 2 to the financial statements, effective January 1,
      2006 the Company adopted Statement of Financial Accounting Standards
      No. 123(R), “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, 2007.
      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
      25,
      2008




F-2


**INTELLI-CHECK,
      INC.**





BALANCE
      SHEETS


DECEMBER
      31, 2007 and 2006





2007
            
            2006ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            392,983
            
            $
            526,917Marketable
                securities and short-term investments, at fair value
            
            
            1,650,000
            
            
            3,759,133Accounts
                receivable, net of allowance of $10,000 and $10,000for
                2007 and 2006, respectively
            
            
            1,076,732
            
            
            591,976Inventory
            
            
            62,784
            
            
            115,193Other
                current assets
            
            
            543,571
            
            
            512,112Total
                current assets
            
            
            3,726,070
            
            
            5,505,331PROPERTY
                AND EQUIPMENT, net (Note 3)
            
            
            81,464
            
            
            85,603PATENT
                COSTS, net (Note 4)
            
            
            23,961
            
            
            30,170DEFERRED
                ACQUISITION COSTS
            
            
            208,000
            
            
            -OTHER
                ASSETS
            
            
            34,916
            
            
            34,916Total
                assets
            
            $
            4,074,411
            
            $
            5,656,020LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            150,099
            
            $
            155,066Accrued
                expenses (Note 5)
            
            
            533,609
            
            
            378,028Deferred
                revenue
            
            
            1,278,869
            
            
            1,037,366Other
                current liabilities
            
            
            -
            
            
            75,000Total
                current liabilities
            
            
            1,962,577
            
            
            1,645,460OTHER
                LIABILITIES
            
            
            91,681
            
            
            73,475Total
                liabilities
            
            
            2,054,258
            
            
            1,718,935COMMITMENTS
                AND CONTINGENCIES (Note 9)STOCKHOLDERS’
                EQUITY:Common
                stock - $.001 par value; 20,000,000 shares authorized; 12,281,728
                and12,202,778
                shares issued and outstanding as of 2007 and 2006,
                respectively
            
            
            12,282
            
            
            12,203Additional
                paid-in capital
            
            
            46,668,941
            
            
            45,912,734Accumulated
                deficit
            
            
            (44,661,070
            )
            
            (41,987,852
            )Total
                stockholders’ equity
            
            
            2,020,153
            
            
            3,937,085Total
                liabilities and stockholders’ equity
            
            $
            4,074,411
            
            $
            5,656,020





The
      accompanying notes are an integral part of these statements.




F-3




**INTELLI-CHECK,
      INC.**





STATEMENTS
      OF OPERATIONS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005





2007
            
            2006
            
            2005REVENUES
            
            $
            3,511,908
            
            $
            3,161,854
            
            $
            2,383,532COST
                OF REVENUES
            
            
            (1,390,941
            )
            
            (1,037,341
            )
            
            (744,615
            )Gross
                profit
            
            
            2,120,967
            
            
            2,124,513
            
            
            1,638,917OPERATING
                EXPENSESSelling
            
            
            1,534,660
            
            
            1,564,843
            
            
            1,257,810General
                and administrative
            
            
            2,333,154
            
            
            2,664,950
            
            
            2,824,384Research
                and development
            
            
            1,088,004
            
            
            997,564
            
            
            941,530Total
                operating expenses
            
            
            4,955,818
            
            
            5,227,357
            
            
            5,023,724Loss
                from operations
            
            
            (2,834,851
            )
            
            (3,102,844
            )
            
            (3,384,807
            )OTHER
                INCOME:Interest
                income
            
            
            161,633
            
            
            222,874
            
            
            145,848161,633
            
            
            222,874
            
            
            145,848Net
                loss
            
            
            (2,673,218
            )
            
            (2,879,970
            )
            
            (3,238,959
            )Accretion
                of convertible redeemable preferred stock costs
            
            
            -
            
            
            -
            
            
            (160,722
            )Dividend
                on convertible redeemable preferred stock
            
            
            -
            
            
            -
            
            
            (36,822
            )Net
                loss attributable to common stockholders
            
            $
            (2,673,218
            )
            $
            (2,879,970
            )
            $
            (3,436,503
            )PER
                SHARE INFORMATION:Net
                loss per common share -Basic
                and diluted
            
            $
            (0.22
            )
            $
            (0.24
            )
            $
            (0.31
            )Weighted
                average common shares used in computingper
                share amounts -Basic
                and diluted
            
            
            12,262,958
            
            
            12,145,866
            
            
            11,201,404





The
      accompanying notes are an integral part of these statements.




F-4


**INTELLI-CHECK,
      INC.**





STATEMENTS
      OF STOCKHOLDERS’ EQUITY


FOR
      THE
      YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007





AdditionalCommon
                Stock
            
            Paid-in
            
            Deferred
            
            AccumulatedShares
            
            Amount
            
            Capital
            
            Compensation
            
            Deficit
            
            TotalBALANCE,
                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 withsecondary
                offering
            
            
            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 stockoptions
            
            
            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 onsurrender
                of stock options
            
            
            -
            
            
            -
            
            
            (53,317
            )
            
            -
            
            
            -
            
            
            (53,317
            )Warrants
                issued to consultants for services rendered
            
            
            -
            
            
            -
            
            
            129,756
            
            
            -
            
            
            -
            
            
            129,756Reclassification
                  of deferred stock compensation uponadoption
                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
            )
            
            3,937,085Stock
                based compensation expense (employees and directors)
            
            
            -
            
            
            -
            
            
            397,927
            
            
            -
            
            
            -
            
            
            397,927Exercise
                of stock options
            
            
            42,950
            
            
            43
            
            
            145,916
            
            
            -
            
            
            -
            
            
            145,959Exercise
                of warrants
            
            
            16,000
            
            
            16
            
            
            86,384
            
            
            -
            
            
            -
            
            
            86,400Issuance
                of stock as director’s compensation
            
            
            20,000
            
            
            20
            
            
            125,980
            
            
            -
            
            
            -
            
            
            126,000Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,673,218
            )
            
            (2,673,218
            )BALANCE,
                December 31, 2007
            
            
            12,281,728
            
            $
            12,282
            
            $
            46,668,941
            
            $
            -
            
            $
            (44,661,070
            )
            $
            2,020,153




The
      accompanying notes are an integral part of these statements.




F-5


**INTELLI-CHECK,
      INC.**





STATEMENTS
      OF CASH FLOWS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005




2007
            
            2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (2,673,218
            )
            $
            (2,879,970
            )
            $
            (3,238,959
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities-Depreciation
                and amortization
            
            
            38,336
            
            
            36,760
            
            
            52,265Non
                cash stock based compensation expense
            
            
            523,927
            
            
            826,356
            
            
            228,450Issuance
                of stock options for services rendered
            
            
            -
            
            
            -
            
            
            2,163Recovery
                of amortization of deferred compensation
            
            
            -
            
            
            (53,317
            )
            
            -Amortization
                of deferred compensation
            
            
            -
            
            
            129,756
            
            
            143,758Loss
                on sale of property and equipment
            
            
            -
            
            
            -
            
            
            4,700Changes
                in assets and liabilities:(Increase)
                decrease in accounts receivable, net
            
            
            (484,756
            )
            
            (183,434
            )
            
            45,570Decrease
                in inventory
            
            
            57,139
            
            
            10,788
            
            
            85,182(Increase)
                in other current assets
            
            
            (36,190
            )
            
            (92,832
            )
            
            (139,729
            )Increase
                (decrease) in accounts payable andaccrued
                expenses
            
            
            150,615
            
            
            (228,170
            )
            
            (511,505
            )Increase
                in deferred revenue
            
            
            241,503
            
            
            342,408
            
            
            184,300(Decrease)
                increase in other current liabilities
            
            
            (75,000
            )
            
            75,000
            
            
            -Increase
                in other liabilities
            
            
            18,206
            
            
            10,480
            
            
            -Net
                cash used in operating activities
            
            
            (2,239,438
            )
            
            (2,006,175
            )
            
            (3,143,805
            )CASH
                FLOWS FROM INVESTINGACTIVITIES:Purchases
                of property and equipment
            
            
            (27,988
            )
            
            (23,908
            )
            
            (12,096
            )Proceeds
                from sale of property and equipment
            
            
            -
            
            
            -
            
            
            2,000Investment
                in marketable securities and short-term investments
            
            
            (3,237,000
            )
            
            (6,384,957
            )
            
            (8,037,905
            )Sales
                of marketable securities and short-term investments
            
            
            5,346,133
            
            
            7,889,132
            
            
            6,866,581Deferred
                acquisition costs
            
            
            (208,000
            )
            
            -
            
            
            -Net
                cash provided by (used in) investing activities
            
            
            1,873,145
            
            
            1,480,267
            
            
            (1,181,420
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                proceeds from issuance of common stock
            
            
            232,359
            
            
            524,575
            
            
            168,900Net
                proceeds from issuance of common stock from secondary
                offering
            
            
            -
            
            
            -
            
            
            4,439,593Payment
                of dividend to preferred stockholders
            
            
            -
            
            
            -
            
            
            (97,315
            )Purchase
                of outstanding warrants
            
            
            -
            
            
            -
            
            
            (25,000
            )Net
                cash provided by financing activities
            
            
            232,359
            
            
            524,575
            
            
            4,486,178Net
                (decrease) increase in cash and cash equivalents
            
            
            (133,934
            )
            
            (1,333
            )
            
            160,953CASH
                AND CASH EQUIVALENTS, beginning of year
            
            
            526,917
            
            
            528,250
            
            
            367,297CASH
                AND CASH EQUIVALENTS, end of year
            
            $
            392,983
            
            $
            526,917
            
            $
            528,250SUPPLEMENTAL
                DISCLOSURE OF NONCASH FINANCING ACTIVITIES:Stock
                options issued for services rendered
            
            $
            -
            
            $
            -
            
            $
            402,995Conversion
                of convertible redeemable preferred stock into Common
                Stock
            
            $
            -
            
            $
            -
            
            $
            3,000,000Accretion
                of convertible redeemable preferred stock cost
            
            $
            -
            
            $
            -
            
            $
            160,722




The
      accompanying notes are an integral part of these statements.




F-6


**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.





Liquidity





Since
      inception, the Company has incurred significant losses and negative cash flow
      from operating activities, and as of December 31, 2007 we had an accumulated
      deficit of $44,661,070. 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, 2007
      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 $356,803 and $155,851, respectively.





Marketable
      Securities





Effective
      in the third quarter of 2007, the Company changed its classification of
      investments in marketable securities as available-for-sale securities and
      currently accounts for them in accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 115, “Accounting for Certain Investments in
      Debt and Equity Securities” (“SFAS No. 115”). Under
      SFAS No. 115, securities purchased to be held for indefinite periods
      of time and not intended at the time of purchase to be held until maturity
      are
      classified as available-for-sale securities. The Company continually evaluates
      whether any marketable investments have been impaired and, if so, whether such
      impairment is temporary or other than temporary. All of the Company’s marketable
      securities have maturities of less than one year with a weighted average
      interest rate of 6.2%. The carrying value of the marketable securities as of
      December 31, 2007 approximated their fair market value. Marketable Securities
      and Short Term Investments are invested in Municipal Auction Rate Securities. Realized
      gains and losses on available-for-sale securities are calculated using the
      specific identification method. During the year ended December 31, 2007,
      realized gains and losses on available-for-sale securities were insignificant. Previously,
      the Company classified its marketable securities as held-to-maturity as the
      Company had the intent and ability to hold these securities to maturity. The
      securities were carried at amortized cost using the specific identification
      method. Interest income was recorded using an effective interest rate, with
      the
      associated premium or discount amortized to interest income.





F-7




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, 2007,
      2006 or 2005.





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, 2007, 2006 and 2005.




F-8


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


Deferred
      Acquisition Costs





The
      Company has deferred certain legal and proxy related charges related to the
      business combination with Mobilisa, Inc. (See note 11). These costs will be
      capitalized as part of the purchase price once the transaction has been
      completed.





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.





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, 2007, 2006 and 2005, the Company received $21,878, $28,503, and
      $58,480 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, 2007 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, 2007 and 2006, the carrying value of the Company’s financial
      instruments approximated fair value, due to their short-term nature.




F-9


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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 Municipal Auction Rate Securities. The Company performs periodic
      evaluations of the relative credit standing of these institutions.





The
      Company’s sales to date have been limited due to the refocus of its marketing
      efforts and introduction of new products to a number of clients which are
      concentrated in the United States of America and the long sales cycle to
      government entities. The Company performs ongoing credit evaluations, generally
      does not require collateral, and establishes an allowance for doubtful accounts
      based upon factors surrounding the credit risk of customers, historical trends
      and other information.





During
      the year ended December 31, 2007, the Company made sales to two customers that
      accounted for approximately 33.6% of total revenues. During the year ended
      December 31, 2006, the Company made sales to two different customers that
      accounted for approximately 31.3% of total revenues. These customers represented
      36.1% and 8.5% of total accounts receivable in 2007 and 2006, respectively.





As
      of
      December 31, 2007, 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, 2007, 2006 and 2005, 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, 2007, 2006 and
      2005
      had been converted:





2007
            
            2006
            
            2005Stock
                options
            
            
            1,460,217
            
            
            2,470,055
            
            
            2,764,955Warrants
            
            
            922,636
            
            
            938,636
            
            
            938,636Total
            
            
            2,382,853
            
            
            3,408,691
            
            
            3,703,591





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.




F-10


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


The
      Company recognizes compensation expense related to stock option grants on a
      straight-line basis over the vesting period.





Options
      granted to consultants and other non-employees are accounted for in accordance
      with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
      than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services."  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 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:





Year
                EndedDecember
                31, 2005Net
                loss attributable to common stockholders,as
                reported
            
            $
            (3,436,503
            )Add:Total
                stock based employee compensationexpense
                determined under fair value basedmethod
                for all awards
            
            
            (2,878,820
            )Net
                loss, pro forma
            
            $
            (6,315,323
            )Basic
                and diluted loss per share, as reported
            
            $
            (0.31
            )Basic
                and diluted loss per share, pro forma
            
            $
            (0.56
            )




Comprehensive
      Loss





The
      Company’s comprehensive net loss is equal to its net loss for the years ended
      December 31, 2007, 2006 and 2005.





Segment
      Information





The
      Company adheres to the provisions of SFAS No. 131, “Disclosures about Segments
      of an Enterprise and Related Information.” This statement establishes standards
      for the way public business enterprises report information about operating
      segments in annual financial statements and requires that those enterprises
      report selected information about operating segments in financial statements
      issued to shareholders. Management has determined that it only has one reporting
      segment.





Use
      of
      Estimates





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




F-11


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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.





On
      December 4, 2007, Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business
      Combinations. SFAS 141R replaces SFAS 141, Business Combinations and
      applies to all transactions or other events in which an entity obtains control
      of one or more businesses. SFAS 141R requires the acquiring entity in a
      business combination to recognize all (and only) the assets acquired and
      liabilities assumed in the transaction; establishes the acquisition-date fair
      value as the measurement objective for all assets acquired
      and liabilities assumed; and requires the acquirer to disclose additional
      information needed to evaluate and understand the nature and financial effect
      of
      the business combination. SFAS 141R is effective prospectively for fiscal
      years beginning after December 15, 2008 and may not be applied before that
      date. The Company is currently evaluating the impact, if any, that the adoption
      of SFAS 141R will have on its consolidated results of operations and
      financial condition.





On
      December 4, 2007, the FASB also issued SFAS No. 160, Noncontrolling
      Interests in Consolidated Financial Statements. SFAS 160 amends ARB 51 to
      establish accounting and reporting standards for the noncontrolling interest
      (or
      minority interests) in a subsidiary and for the deconsolidation of a subsidiary
      by requiring all noncontrolling interests in subsidiaries be reported in the
      same way, as equity in the consolidated financial statements and eliminates
      the
      diversity in accounting for transactions between an entity and noncontrolling
      interests by requiring they be treated as equity transactions. SFAS 160 is
      effective prospectively for fiscal years beginning after December 15, 2008
      and may not be applied before that date. The Company is currently evaluating
      the
      impact, if any, that the adoption of SFAS 160 will have on its consolidated
      results of operations and financial condition.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financials Liabilities — Including an Amendment of FASB
      Statement No. 115”. This standard permits measurement of certain financial
      assets and financial liabilities at fair value. If the fair value option is
      elected, the unrealized gains and losses are reported in earnings at each
      reporting date. Generally, the fair value option may be elected on an
      instrument-by-instrument basis, as long as it is applied to the instrument
      in
      its entirety. The fair value option election is irrevocable, unless a new
      election date occurs. SFAS No. 159 requires prospective application and also
      establishes certain additional presentation and disclosure requirements. The
      standard is effective as of the beginning of the fiscal year that begins after
      November 15, 2007. The Company is currently evaluating the provisions
      of SFAS No. 159 to determine the potential impact, if any, the adoption will
      have on the Company’s financial statements.





In
      September 2006, the FASB issued 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. In December 2007, the FASB
      issued proposed FSP FAS No. 157-2 which would delay the effective date of
      SFAS No. 157 for all non-financial assets and non-financial liabilities,
      except those that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually). This proposed FSP partially
      defers the effective date of Statement 157 to fiscal years beginning after
      November 15, 2008, and interim periods within those fiscal years for items
      within the scope of this FSP. Effective January 1, 2008, we will adopt
      SFAS No. 157 except as it applies to those non-financial assets and
      non-financial liabilities as noted in proposed FSP FAS No.157-2. We are
      currently evaluating the impact that SFAS No. 157 will have on our consolidated
      financial statements.





In
      June
      2007, the FASB issued EITF Issue No. 07-3, “Accounting for Nonrefundable
      Advance Payments for Goods or Services Received for Use in Future Research
      and
      Development Activities,” which is effective for calendar year companies on
      January 1, 2008. The Task Force concluded that nonrefundable advance
      payments for goods or services that will be used or rendered for future research
      and development activities should be deferred and capitalized. Such amounts
      should be recognized as an expense as the related goods are delivered or the
      services are performed, or when the goods or services are no longer expected
      to
      be provided. The Company is currently assessing the potential impact of
      implementing this standard.




F-12


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


3. PROPERTY
      AND EQUIPMENT





Property
      and equipment are comprised of the following as of December 31, 2007 and
      2006:





2007
            
            2006Computer
                equipment
            
            $
            575,977
            
            $
            550,279Furniture
                and fixtures
            
            
            138,298
            
            
            136,008Leasehold
                improvements
            
            
            143,253
            
            
            143,253Office
                equipment
            
            
            46,287
            
            
            46,287903,815
            
            
            875,827Less
                - Accumulated depreciation and amortization
            
            
            (822,351
            )
            
            (790,224
            )$
            81,464
            
            $
            85,603





Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 amounted to
      $32,127, $30,551 and $46,055, respectively.





4.  INTANGIBLE
      ASSETS





The
      following summarize the carrying amounts of intangible assets and related
      amortization:


As
                  of December 31, 2007
              
              As
                  of December 31, 2006Gross
                  Carrying
              
              Accumulated
              
              Gross
                  Carrying
              
              AccumulatedAmount
              
              Amortization
              
              Amount
              
              AmortizationAmortized
                  intangible assetsPatents
              
              
              105,661
              
              
              81,700
              
              
              105,661
              
              
              75,491Copyrights
              
              
              17,500
              
              
              17,500
              
              
              17,500
              
              
              17,500Total
              
              $
              123,161
              
              $
              99,200
              
              $
              123,161
              
              $
              92,991





Amortization
      expense for years ended December 31, 2007, 2006, and 2005 were $6,209, $6,209
      and $6,210, respectively.





As
      of
      December 31, 2007, estimated annual amortization expense for each of the next
      four years is $6,209, $6,209, $6,209 and $5,334.





5.  ACCRUED
      EXPENSES





Accrued
      expenses are comprised of the following as of December 31, 2007 and
      2006:





2007
            
            2006Professional
                fees
            
            $
            250,515
            
            $
            71,401Payroll
                and related
            
            
            226,642
            
            
            237,303Rent
            
            
            10,261
            
            
            13,682Other
            
            
            46,191
            
            
            55,642$
            533,609
            
            $
            378,028





6. INCOME
      TAXES





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.  On May 2, 2007 the FASB issued
      Interpretation No. 48-1, “Definition of Settlement in FASB Interpretation 48”
(“FIN 48-1”). FIN 48-1 amends FIN 48 to provide guidance on how an enterprise
      should determine whether a tax position is effectively settled for the purpose
      of recognizing previously unrecognized tax benefits. The guidance in FIN 48-1
      shall be applied upon the initial adoption of FIN 48. We adopted FIN 48 and
      FIN
      48-1 as of January 1, 2007. The adoption of FIN 48 did not have an impact
      on our results of operations or financial position. As a result of our
      continuing losses for tax purposes, we have historically not paid income taxes
      and have recorded a full valuation allowance against our net deferred tax asset.
      Therefore, we have not recorded a liability for unrecognized tax benefits prior
      to adoption of FIN 48 and there was no adjustment from the implementation.
      There
      continues to be no liability related to unrecognized tax benefits at December
      31, 2007. We recognize interest and penalties related to unrecognized tax
      benefits in income tax expense. There was no accrued interest related to
      unrecognized tax benefits at December 31, 2007. The tax years 2004-2007 remain
      open to examination by the major taxing jurisdictions to which we are subject.




F-13


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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, 2007 and 2006 are as follows:





2007
            
            2006Deferred
                tax assets, net:Net
                operating loss carryforwards
            
            $
            14,456,000
            
            $
            13,296,000Depreciation
            
            
            (15,000
            )
            
            (15,000
            )Reserves
            
            
            30,000
            
            
            307,000Research
                & development tax credits
            
            
            81,000
            
            
            26,000Gross
                deferred tax assets
            
            
            14,552,000
            
            
            13,614,000Less:
                Valuation allowance
            
            
            14,552,000
            
            
            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, 2007 the Company had net operating loss carryforwards (NOL’s) for
      federal and New York State income tax purposes of approximately $36.1 million.
      There can be no assurance that the Company will realize the benefit of the
      NOL’s. The federal and state NOL’s are available to offset future taxable income
      and expire from 2018 through 2025 if not utilized. Under Section 382 of the
      Internal Revenue Code, these NOL’s may be limited due to ownership
      changes.





The
      effective tax rate for the years ended December 31, 2007, 2006 and 2005 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 were issuable 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 $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. ****




F-14


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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, 2007 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.





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 has extended the expiration date for these rights through
      June 30, 2008. 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
      2008. The Company reserved 659,653 shares of common stock for future issuance
      under this rights offering. There was no expense recorded in 2007, 2006 and
      2005
      for the extension of these rights. As of December 31, 2007, 292,001 of these
      rights had been exercised and the Company received cumulatively $2,482,009
      before expenses of $133,834.





All
      warrants have been issued with an exercise price that is equal to or above
      the
      fair market value of the Company’s common stock on the date of grant. As of
      December 31, 2007, the Company had warrants outstanding for 922,636 shares
      of
      common stock at a weighted average exercise price of $6.12, which expire between
      March 26, 2008 and August 21, 2011.





Stock
      Options and Stock Based Compensation





In
      order
      to retain and attract qualified personnel necessary for the success of the
      Company, the Company adopted several Stock Option Plans from 1998 through 2004
      (and an amendment to the 2004 plan in 2006 pursuant to which the plan was
      renamed the “2006 Equity Incentive Plan” and amended to provide for the issuance
      of other types of equity incentives such as restricted stock grants)
      (collectively, the “Plans”) covering up to 3,250,000 of the Company’s common
      shares, pursuant to which officers, directors, key employees and consultants
      to
      the Company are eligible to receive incentive stock options and nonqualified
      stock options. The Compensation Committee of the Board of Directors administers
      these Plans and determines the terms and conditions of options granted,
      including the exercise price. These Plans generally provide that all stock
      options will expire within ten years of the date of grant. Incentive stock
      options granted under these Plans must be granted at an exercise price that
      is
      not less than the fair market value per share at the date of the grant and
      the
      exercise price must not be less than 110% of the fair market value per share
      at
      the date of the grant for grants to persons owning more than 10% of the voting
      stock of the Company. These Plans also entitle non-employee directors to receive
      grants of non-qualified stock options as approved by the Board of Directors.
      At
      the Company’s special meeting of Stockholders held on March 14, 2008, the
      stockholders voted to amend the 2006 Equity Incentive Plan (the “Plan”) to
      increase the number of shares of Common Stock authorized to be issued by
      3,000,000.




F-15


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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 recorded $402,995 as deferred compensation for these services
      as
      of December 31, 2005. 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 $122,246 for the year ended December 31, 2005.
      During December 31, 2006 and 2005, the Company recognized amortization of
      deferred compensation of $129,756 and $143,758, 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. No warrants
      were
      issued in 2007 or 2006. In accordance with SFAS No. 123(R), during the year
      ended December 31, 2006, all remaining deferred compensation expense of $180,648
      was reduced and offset against additional paid in capital.





Stock
      option activity under the 1998, 1999, 2001, 2003 and 2006 Stock Option Plans
      during the periods indicated below is as follows:




Number
                of
              Shares
              Subject
                to
              Issuance
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at December 31, 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
            )
            
            3.74Outstanding
                at December 31, 2006
            
            
            2,470,055
            
            
            6.55
            
            
            3.66
                yearsGranted
            
            
            186,362
            
            
            5.60Forfeited
                or expired
            
            
            (1,153,250
            )
            
            7.87Exercised
            
            
            (42,950
            )
            
            3.40
            
            
            
            
            $
            137,515Outstanding
                at December 31, 2007
            
            
            1,460,217
            
            $
            5.47
            
            
            3.20
                years
            
            $
            74,325Exercisable
                at December 31, 2007
            
            
            1,320,154
            
            $
            5.47
            
            
            2.74
                years
            
            $
            69,450





Included
      in the above schedule are 469,425 non-plan options, all of which are fully
      vested.




F-16


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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 31,2007
            
            2006
            
            2005Risk-free
                interest rate
            
            
            4.6
            %
            
            4.7
            %
            
            4.3
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                lives
            
            
            4.6
                years
            
            
            5.9
                years
            
            
            5
                yearsExpected
                volatility
            
            
            59
            %
            
            74
            %
            
            74
            %Forfeiture
                rate
            
            
            5
            %
            
            5
            %
            
            0
            %





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,
      2007:




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$3.00
                to $5.00
            
            
            568,780
            
            
            2.33
            
            $
            3.31
            
            
            529,780
            
            $
            3.32$5.01
                to $7.00
            
            
            598,337
            
            
            4.94
            
            
            6.04
            
            
            497,274
            
            
            5.98$7.15
                to $15.05
            
            
            293,100
            
            
            1.40
            
            
            8.48
            
            
            293,100
            
            
            8.481,460,217
            
            
            3.20
            
            $
            5.47
            
            
            1,320,154
            
            $
            6.61





The
      weighted-average fair value of the options granted during the years ended
      December 31, 2007, 2006 and 2005 is $3.20, $3.99 and $4.03,
      respectively.





As
      of
      December 31, 2007, the Company had 1,457,415 options available for future grant
      under the 1998, 1999, 2001, 2003 and 2006 Stock Option Plans.





As
      of
      December 31, 2007, there was $247,384 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 1.7
      years.





Stock
      based compensation expense for the years ended December 31, 2007 and 2006 is
      as
      follows:





Years
                ended December 31.2007
            
            2006Compensation
                cost recognized:Stock
                options
            
            $
            397,927
            
            $
            886,789Restricted
                stock
            
            
            126,000
            
            
            16,006$
            523,927
            
            $
            902,795




F-17




**INTELLI-CHECK,
      INC.**





NOTES
      TO
      FINANCIAL STATEMENTS


We
      included stock based compensation in operating expenses as follows:





Years
                ended December 31.2007
            
            2006Selling
            
            $
            178,342
            
            $
            294,322General
                and administrative
            
            
            290,277
            
            
            601,164Research
                and development
            
            
            55,308
            
            
            7,309$
            523,927
            
            $
            902,795





The
      Company did not capitalize any share-based compensation cost in 2007 or 2006.





The
      Company has a net operating loss carry-forward as of December 31, 2007, and
      no excess tax benefits for the tax deductions related to share based awards
      were
      recognized in the statements of operations. Additionally, no incremental tax
      benefits were recognized from stock options exercised in 2007 that would have
      resulted in a reclassification to reduce net cash provided by operating
      activities with an offsetting increase in net cash provided by financing
      activities.




During
      January 2006 and 2005, 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 former Chairman and
      CEO. As a result, the Company recorded the fair value of the shares issued
      as a
      non-cash expense totaling $0 and $44,250, respectively which was calculated
      using the Black-Scholes valuation method.





During
      2006 and 2005, the Company’s Board of Directors extended the expiration date of
      56,500 and 270,500 stock options for one and three of the Company’s directors
      who resigned from the Board for an additional 12 and 9 months, respectively.
      As
      a result, the Company recorded the fair value of the extension of $34,350 and
      $184,200 as a non cash expense during the year ended December 31, 2006 and
      2005,
      respectively. These amounts were calculated in accordance with SFAS 123R in
      2006
      and Financial Interpretation No. 44 “Accounting for Certain Transactions
      involving Stock Compensation” in 2005.





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 were “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.





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.





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 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.




F-18


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


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:





Year
                Ending December 31:2008
            
            $
            218,8642009
            
            
            220,9322010
            
            
            230,376$
            670,172





Rent
      expense for the years ended December 31, 2007, 2006 and 2005 amounted to
      $217,792, $211,825 and $243,731, 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
      superseded by a new agreement which calls for payment of royalties of .005%
      on
      gross sales from $2,000,000 to $52,000,000 and .0025% on gross sales in excess
      of $52,000,000 pertaining to those patents on which Mr. Messina was identified
      as an inventor. As of December 31, 2007, total fees payable under this agreement
      amounted to less than $1,000.





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, 2007, 2006 and 2005, the Company received $21,878, $28,503
      and $58,480, 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





The
      Company has no employment agreements with any of its employees.





Severance
      Arrangements





Mr.
      Peter
      Mundy, Intelli-Check’s Chief Financial Officer, has a severance arrangement with
      Intelli-Check, which provides that if Intelli-Check acquires a company and
      retains and appoints an employee from the acquired company in the role of Chief
      Financial Officer and Mr. Mundy chooses not to accept a lesser role in the
      combined company he would be entitled to a severance payment of $72,500 (equal
      to six months salary).





Supplier
      Agreements





We
      currently have a product supply agreement with a vendor for the purchase of
      input devices. Under the terms of the agreement, these devices, which are
      private labeled, are programmed to work in conjunction with our ID-Check® technology.
      The agreement automatically renews for successive one year terms on December
      31
      of each year pursuant to the terms of the Agreement. As
      of
      December 31, 2007, the Company had a commitment of $143,550 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.




F-19


**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


Investment
      Firm Relationships





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
      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, 2006 and 2005, the Company recorded
      an
      expense of approximately $186,000 and $71,000, respectively. No underwriting
      discounts or commissions were paid with respect to such securities. The Company
      renegotiated the terms of the agreement on September 30, 2006 extending the
      agreement by two additional years and currently pays $6,000 per month for the
      services. As of December 31, 2007, we had a commitment of $54,000 under this
      agreement.





Legal
      Proceedings





On
      August
      1, 2003, Intelli-Check filed a summons and complaint against Tricom Card
      Technologies, Inc. alleging infringement on its patent and seeking injunctive
      and monetary relief. On October 23, 2003, Intelli-Check amended its complaint
      to
      include infringement on an additional patent. On May 18, 2004, Intelli-Check
      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 Intelli-Check’s request to discuss a proposed motion to
      disqualify defendants' counsel for a conflict of interest. Pursuant to the
      Court's order, Intelli-Check served moving papers upon defendants on July 14,
      2006 and defendants served opposition to the motion on or about July 28, 2006.
      Intelli-Check 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 Intelli-Check’s
      opposition to defendants' motion and defendants’ reply to the opposition. As of
      March 2008, the Court has not scheduled a hearing date for either motion and
      there is no trial date pending.





Intelli-Check
      is not aware of any infringement by its products or technology on the
      proprietary rights of others.





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




F-20




**INTELLI-CHECK,
      INC.**





NOTES
      TO
      FINANCIAL STATEMENTS


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, 2007
            
            Year
                Ended December 31, 2006FirstQuarter
            
            SecondQuarter
            
            ThirdQuarter
            
            FourthQuarter
            
            FirstQuarter
            
            SecondQuarter
            
            ThirdQuarter
            
            FourthQuarter(Dollars
                in thousands)Income
                Statement Data:Revenues
            
            $
            685
            
            $
            739
            
            $
            857
            
            $
            1,231
            
            $
            536
            
            $
            718
            
            $
            772
            
            $
            1,136Gross
                profit
            
            
            448
            
            
            490
            
            
            468
            
            
            715
            
            
            355
            
            
            496
            
            
            463
            
            
            810Loss
                from operations
            
            
            (678
            )
            
            (1,101
            )
            
            (645
            )
            
            (411
            )
            
            (1,001
            )
            
            (994
            )
            
            (709
            )
            
            (399
            )Net
                loss
            
            
            (622
            )
            
            (1,058
            )
            
            (608
            )
            
            (385
            )
            
            (945
            )
            
            (938
            )
            
            (651
            )
            
            (346
            )Net
                loss per common shareBasic
                and diluted
            
            
            (0.05
            )
            
            (0.09
            )
            
            (0.05
            )
            
            (0.03
            )
            
            (0.08
            )
            
            (0.08
            )
            
            (0.05
            )
            
            (0.03
            )





Historically,
      we have experienced lower sales volume in the first quarter of the
      year.





11. SUBSEQUENT
      EVENT - BUSINESS COMBINATION





On
      November 20, 2007, the Company and Mobilisa, Inc., a private company that is
      a
      leader in identity systems and mobile and wireless technologies, entered into
      a
      merger agreement pursuant to which a wholly-owned subsidiary of Intelli-Check
      would merger with and into Mobilisa, resulting in Mobilisa becoming a
      wholly-owned subsidiary. At a special meeting of stockholders held on March
      14,
      2008, the Company’s stockholders voted to approve the merger, as well as to
      amend Intelli-Check’s certificate of incorporation to increase the authorized
      shares of common stock and to increase the number of shares issuable under
      our
      2006 Equity Incentive Plan by 3,000,000. The Company was renamed
      Intelli-Check-Mobilisa, Inc. The headquarters of Intelli-Check was moved to
      Mobilisa’s offices in Port Townsend, Washington.




The
      former shareholders of Mobilisa received a number of shares of Intelli-Check
      common stock such that they will own 50% of the common stock of the combined
      company. Mobilisa option holders will also exchange their options for
      Intelli-Check options. The combination is anticipated to be structured as a
      “tax-free reorganization” under Section 368 of the Internal Revenue Code of
      1986, as amended. The aggregate value of the purchase consideration is equal
      to
      $50,722,000, based on the closing price of our common stock on November 20,
      2007.





The
      Company intends to account for the transaction under the purchase method of
      accounting in accordance with the provisions of Statement of Financial
      Accounting Standards No. 141, “Business Combinations.” Under this
      accounting method, based on its preliminary assessment, the Company will record
      as its cost, the assets of Mobilisa, less the liabilities assumed, with the
      excess of such cost over the estimated fair value of such net assets (including
      identifiable intangibles) reflected as goodwill. Additionally, certain costs
      directly related to the transaction will be reflected as additional purchase
      price in excess of net assets acquired. The Company’s results of operations will
      include the operations of Mobilisa from the closing date of the transaction.
      As
      of December 31, 2007, the Company had incurred $208,000 reflected on the balance
      sheet as Deferred Acquisition Costs.





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




F-21




**INTELLI-CHECK,
        INC.**
 
 NOTES
        TO
        FINANCIAL STATEMENTS


Schedule
      II - Valuation and Qualifying Accounts





Year
      Ended December 31, 2007, 2006 and 2005





**Balance
                at**
              **Beginning**
            
            
            
            **Net**
              **Deductions**
            
            **Balance
                at**
              **End****Year
                ended December 31, 2007**
            
            **of
                Period**
            
            **Additions**
            
            **and
                Other**
            
            **of
                Period**Doubtful
                accounts and allowances
            
            $
            10,000
            
            
            -
            
            
            -
            
            $
            10,000Deferred
                tax assets valuation allowance
            
            $
            13,614,000
            
            
            938,000
            
            
            -
            
            
            14,552,000




**Balance
                at**
            
            
            
            
            
            **Net**
            
            
            **Balance
                at****Year
                ended December 31, 2006**
            
            
            **Beginning
                of Period**
            
            
            **Additions**
            
            
            **Deductionsand
                Other**
            
            
            **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




**Balance
                at**
            
            
            
            
            
            **Net**
            
            
            **Balance
                at****Year
                ended December 31, 2005**
            
            
            **Beginning
                of Period**
            
            
            **Additions**
            
            
            **Deductionsand
                Other**
            
            
            **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





F-22