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, 2008




OR




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




For the
transition period from ________________ to ________________





Commission
File No.: 001-15465





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  ̈No x




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes xNo  ̈




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














Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
One):





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




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





State the
aggregate market value of the voting and non-voting stock held by non-affiliates
of the Issuer: $25,597,925 (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, 2008).




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
                  
                  25,392,451(Title
      of Class)
                  
                  (No.
      of Shares Outstanding at March 26,
2009)




DOCUMENTS
INCORPORATED BY REFERENCE: None


2





TABLE
OF CONTENTS





Part I1.
                          Business
                          41A.
                          Risk
      Factors
                          181B.
                          Unresolved
      Staff Comments
                          252.
                          Properties
                          253.
                          Legal
      Proceedings
                          254.
                          Submission
      of Matters to a Vote of Security Holders
                          27Part II5.
                          Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
                          276.
                          Selected
      Financial Data
                          297.
                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          297A.
                          Quantitative
      and Qualitative Disclosures About Market Risks
                          418.
                          Financial
      Statements and Supplementary Data
                          419.
                          Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
                          419A.
                          Controls
      and Procedures
                          419B.
                          Other
      Information
                          41Part III10.
                          Directors
      and Executive Officers and Corporate Governance
                          4211.
                          Executive
      Compensation
                          4612.
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          5413.
                          Certain
      Relationships, Related Transactions and Director
    Independence
                          4614.
                          Principal
      Accountant, Fees and Services
                          57Part IV15.
                          Exhibits
      and Financial Statement Schedules
                          58


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.  On March 14, 2008, our corporation was renamed
Intelli-Check – Mobilisa, Inc. (“Intellicheck Mobilisa,” “we,” “our,” or “the
Company”) after the consummation of the merger with Mobilisa, Inc. (“Mobilisa”)
as detailed in Recent Developments below.  Our headquarters is in Port
Townsend, Washington, an area designated by the U.S. Small Business
Administration as a Historically Underutilized Business Zone
("HUBZone").  Our primary businesses include commercial applications
of identity card reading and verification, government sales of defense security
and identity card applications, and the development of wireless communications
applications with an emphasis in wireless over water (WOWTM)
applications.




Our technologies address problems such
as:




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




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




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




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




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




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




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


4




RECENT
DEVELOPMENTS





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





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





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




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




IDENTITY
CARD READING AND VERIFICATION MARKET




Background on Identification
Documentation




Driver
license




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




Non-driver identification
card




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


5


Regulation of Retailers of
Tobacco Products and Alcoholic Beverages




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




Current Challenges
Associated with Verifying Identification
Documents




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





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





Given the ease with which
identification can be falsified, simply looking at a driver license may not be
sufficient to verify age or identity and determine whether or not it is
fraudulent. Since merchants are facing significant economic losses due to these
frauds, we believe that a document verification system which can accurately read
the electronically stored information is needed.  We possess patented
technology that provides an analysis of the data contained on the encoded
formats of these identification documents by reading and analyzing the encoded
format on the magnetic stripe or bar code on the driver license and comparing it
against known standards.  We believe that we are the only company able
to do this for all national jurisdictions without infringing our
patents.




OUR PRODUCTS AND
SERVICES




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


6




Commercial Identification
Products and Services




ID√Check®Family —Solutions and
Benefits




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




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




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




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




§
            the
      format of the document is valid;




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




§
            the
      document has expired; and




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




Then, the
ID√Check® software
applications can:




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




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




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




ID√Check®SDK




Our
software product, ID√Check SDK, is designed for software developers that wish to
incorporate our ID√Check technology into their applications. It contains our
proprietary technology, as well as a device controller, which is also capable of
reading the smart chip contained in the military CAC.  We currently
have multiple license agreements with third parties for integration and
sub-licensing of our software applications into their core
applications.  The SDK is available for multiple platforms such as
Microsoft® Windows,
Windows Mobile, AIX, and certain versions of Linux. It can easily be ported to
other platforms as the need arises.




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.


7




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.




C-Link®Software




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




ID√Check®PC




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




ID√Check®Mobile




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




Data Collection
Devices




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




Instant Credit Application
Kiosk Software Applications





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


8




ID√Check®Focus and
ID-Cap67TMHandheld
Imager




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




Upgrade
Capability




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





Defense Security Products
and Services





Defense ID®System





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




TWIC Reader (IM
2700)





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





Visitor Center (IM
3000)





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




Upgrade
Capability





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


9


Wireless Communications
Products and Services





Wireless over Water
Technology (“WOW”)TM





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





Floating Area Network
(“FAN”)TM





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





Littoral Sensor Grid
(“LSG”)





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





AIRchitect®





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




STRATEGY




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




Commercial
Systems




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




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


10




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




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




Protect Intellectual
Property. We intend to strongly protect our intellectual property
portfolio in order to preserve value and obtain favorable settlements where
warranted. For example, in February 2003, we filed suit against CardCom, Inc.
d/b/a CardCom Technology, Inc., claiming that CardCom had infringed one of our
patents. Subsequently, we entered into a patent licensing agreement with CardCom
effective March 2003 which provided for a non-exclusive three year license in
connection with the manufacture, use and sale of CardCom's age verification
products in the United States and Canada.  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.





Government
Identity Systems





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





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




Strengthen Sales and
Marketing Efforts.  As the need for access control systems
continues to grow, our experienced sales and marketing departments is
adjusting  to target new 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. We have sales staff and office
locations on the West Coast, Midwest and East Coast, which allows a quick
response to questions and personalized assistance for each customer based on
location.




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


11


Wireless Communications
Systems





Research and
Development.  Our wireless communications systems program is
primarily research and development funded by the federal
government.  We intend to continue to pursue research and development
projects through funding from various government agencies for research and
development work in the wireless and security arenas. Jefferson County,
Washington, where Port Townsend is located, has been designated as a HUBZone
until the year 2010. As long as the Company maintains its headquarters in
Jefferson County, Washington and one-third of the total number of employees live
in the designated HUBZone area, the combined company will maintain its HUBZone
status.




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




Our RevenueSources




We derive our revenue from the
following sources:




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




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




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




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




§
            Sale
      of software upgrades and extended maintenance programs;
  and




§
            Government
      grants for research and development
projects.




Our Target
Markets




Commercial Identity
Systems




The use
of false identification cards, primarily driver licenses and non-driver
identification cards, to engage in commercial fraud, to gain access to
unauthorized areas and to gain entry to critical infrastructure, or to purchase
products from, establishments that sell age-restricted items, is
common.  Given the ease with which identification can be falsified, we
believe that simply looking at a driver license may not be sufficient to verify
age or identity and determine whether or not such an identification card is
fraudulent.  Since merchants are facing significant economic losses
due to these frauds, we believe that what they need is a document verification
system that can accurately read the electronically stored
information.  We target the 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
                
                §
                Auto
      dealerships and rental car agencies§
                Banks
      and other financial institutions
                
                §
                Casinos
      for enrollment of guests§
                Credit
      unions
                
                §
                Hospital
      patient admissions§
                Credit
      card issuers
                
                §
                Lodging
      Industry§
                Check
      cashing services
                
                §
                Airlines


12


Commercial
fraud protection




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





Access
control




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





Age
verification market




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





Government Identity
Systems





Our Defense ID system is tailored to
locations that validate identification cards as a means of access. Historically,
the military market has been the 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
      and Veterans 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


13


Wireless Communications
Systems




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





REPRESENTATIVE
CUSTOMERS





Commercial Identity
Systems





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





§
                Fidelity
      National Information Services
                
                §
                Foxwoods
      Resorts and Casino§
                MGM
      Grand
                
                §
                Mohegan
      Sun Resort Casino§
                Caesar’s
      Palace
                
                §
                Barclaycard
      USA§
                Vanguard
                
                §
                JPMorgan
      Chase§
                Toys
      R Us
                
                §
                LL
      Bean§
                Century
      21Department Stores
                
                §
                GE
      Consumer Finance





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





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





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





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





Government Identity
Systems




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





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


14


Wireless Communications
Systems





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





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





MARKETING AND
DISTRIBUTION




Commercial Identity
Systems




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




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




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




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





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





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





Government Identity
Solutions




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




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


15


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




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




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




Wireless Communications
Systems




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





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




COMPETITION




Commercial Identity
Systems




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




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




We have
experienced and expect to continue to experience increased competition in the
age verification 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.





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


16




MANUFACTURING




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




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




INTELLECTUALPROPERTY




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




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




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




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, 2008, total fees
payable under this agreement amounted to less than $1,000.




Employees




As of
March 26 2009, we 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.


17


Item 1A.Risk
Factors





RISK
FACTORS




Risks
Related to Our Business and Industry




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




We
sustained net losses of $33,061,704 and $2,673,218 for the fiscal years ended
December 31, 2008 and December 31, 2007, respectively and our accumulated
deficit was $77,722,774 as of December 31, 2008.  Since we expect to
incur additional expenditures in line with the sales growth of our business, we
may not achieve operating profits in the near future.  This could lead
to a decline in the value of our securities.




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.




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.


18





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.  With changing administration in government,
changes in government budgets, and slowly evolving government standards on use
of identity products, the government market is slowly
developing.  Commercial markets have the ability to develop faster
than the government market space, but are also subject to a high level of
uncertainty and risk including factors of the economic affects of our customers
and long sales cycles.  Our business may suffer if the 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.





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.





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





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


19


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




§
            establishing
      practices for identifying unauthorized use of intellectual
      property.




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





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




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




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




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 25, 2009, the closing price of our common stock has varied from a
high of $19.45 to a low of $0.50 per share, as reported on the
American Stock Exchange and NYSE Amex.  Many factors may cause
the market price for our common stock to decline, including:




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




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


20




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




§
            unfavorable
      outcomes from outstanding
litigation.




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




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




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





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





In the years ended December 31, 2008
and 2007, Intellicheck Mobilisa derived 35.1% and Mobilisa derived 40.2% of its
revenue respectively from government R&D contracts. These government
contracts often include provisions that substantially differ from those found in
typical private commercial transactions. For instance, government contracts
may:





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




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




§
            include
      bonding requirements;




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




§
            specify
      performance criteria that 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 us could result in revenue volatility. State and local government
agency contracts may depend on the availability of matching funds from federal,
state or local entities. State and local government agencies are subject to
political, budgetary, purchasing and delivery constraints that may result in
irregular revenue and operating results. Revenue volatility makes management of
our business difficult. Outright loss of any material government contract
through the protest process or otherwise, could significantly reduce our
revenues.


21


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





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





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





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





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





Our backlog represents sales value of
firm orders for products and services not yet delivered and, for long-term,
executed contractual arrangements (contracts, subcontract and customer
commitments), the estimated future sales value of product shipments,
transactions processed and services to be provided over the term of the
contractual arrangements, including anticipated renewal options. For contracts
with indefinite quantities, our backlog is estimated based on current activity
levels. Our backlog includes estimates of revenues, the receipt of which require
future government appropriations, depend on option exercise by clients or are
subject to contract modification or termination. At December 31, 2008, our
backlog approximated $10.0 million, $4.5 million of which is estimated to be
realized in the next twelve months. These estimates are based on our experience
under such contracts and similar contracts, and we believe that such estimates
are reasonable. If we do not realize a substantial amount of our backlog, as we
presently anticipate, our operations could be harmed and future revenues could
be significantly reduced.





The
market for our 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. Our business may suffer if the
market for those products develops more slowly than anticipated or if products
do not obtain market acceptance.





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





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





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





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


22


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





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





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





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





Our
Defense ID system requires permission from each branch of the U.S. military in
the form of an Authority To Operate (ATO).  If an ATO or Interim ATO
is not granted, or if an existing ATO or Interim ATO is revoked, we would risk
losing our ability to install our Defense ID system at military
bases.





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





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





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





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


23


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





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





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





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





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





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





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





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





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





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





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




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




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


24


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





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





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





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




Item
      1B.
            Unresolved Staff
      Comments





Not applicable.





Item
      2.
            Properties




Our
corporate headquarters is currently located in Port Townsend, WA, where we
occupy approximately 5,840 square feet pursuant to a lease that expires on
July 31, 2017.  We also lease approximately 7,100 square feet in
Woodbury, NY pursuant to an amended lease expiring on December 31,
2010.  In addition, we lease approximately 3,289 square feet in
Alexandria, VA pursuant to an amended lease that expires on January 31, 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 home offices. We believe that our existing
facilities are adequate to meet current requirements and that additional or
substitute space will be available as needed to accommodate any expansion of
operations.




Item
      3.
            Legal
      Proceedings





On August
1, 2003, Intellicheck Mobilisa 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, Intellicheck Mobilisa amended its
complaint to include infringement on an additional patent. On May 18, 2004,
Intellicheck Mobilisa 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 Intellicheck Mobilisa’s request to discuss a proposed
motion to disqualify defendants' counsel for a conflict of interest. Pursuant to
the Court's order, Intellicheck Mobilisa served moving papers upon defendants on
July 14, 2006 and defendants served opposition to the motion on or about July
28, 2006. Intellicheck Mobilisa 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
Intellicheck Mobilisa’s opposition to defendants' motion and defendants’ reply
to the opposition.  On October 21, 2008, the Court issued an order
denying our motion to disqualify defendant’s counsel for conflict of
interest.  Except for this order, there has been no change in the
status of this lawsuit.  As of March 2009, the Court has not scheduled
a hearing date for either motion and there is no trial date
pending.


25


Intellicheck
Mobilisa is not aware of any infringement by its products or technology on the
proprietary rights of others.





Other
than as set forth above, Intellicheck Mobilisa 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




Our
Annual Meeting of Stockholders was held October 14, 2008.





A
proposal to elect eight (8) directors each to serve for a one-year term was
approved by our stockholders.  The nominees received the following
votes:





Name
                    
                    Votes For
                    
                    
                    Votes WithheldJeffrey
      Levy
                    
                    
                    23,257,163
                    
                    
                    
                    205,508John
      W. Paxton
                    
                    
                    23,370,103
                    
                    
                    
                    92,568Nelson
      Ludlow
                    
                    
                    23,372,163
                    
                    
                    
                    90,508Bonnie
      Ludlow
                    
                    
                    23,372,103
                    
                    
                    
                    90,568Lt.
      General Emil R. Bedard
                    
                    
                    23,353,263
                    
                    
                    
                    109,408John
      E. Maxwell
                    
                    
                    23,367,148
                    
                    
                    
                    95,523Arthur
      L. Money
                    
                    
                    23,365,663
                    
                    
                    
                    97,008Guy
      L. Smith
                    
                    
                    23,370,103
                    
                    
                    
                    92,568





Our
stockholders ratified the appointment of Amper, Politziner & Mattia, LLP as
the Company’s independent public accountants for the year ended December 31,
2008.  This proposal received the following votes:





For
                    
                    Against
                    
                    
                    Abstain23,352,331
                    
                    
                    87,332
                    
                    
                    
                    23,008


26





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
                        
                        
                        High2007First
      Quarter
                        
                        $
                        5.75
                        
                        
                        $
                        7.85Second
      Quarter
                        
                        $
                        4.76
                        
                        
                        $
                        7.41Third
      Quarter
                        
                        $
                        2.63
                        
                        
                        $
                        5.70Fourth
      Quarter
                        
                        $
                        2.96
                        
                        
                        $
                        4.252008First
      Quarter
                        
                        $
                        2.43
                        
                        
                        $
                        3.68Second
      Quarter
                        
                        $
                        2.02
                        
                        
                        $
                        3.35Third
      Quarter
                        
                        $
                        1.01
                        
                        
                        $
                        2.75Fourth
      Quarter
                        
                        $
                        1.13
                        
                        
                        $
                        2.802009First
      Quarter*
                        
                        $
                        0.50
                        
                        
                        $
                        1.78




* Portion
of first fiscal quarter through March 25, 2009.




(b)           Number of Record Holders of
Common Stock. The number of holders of record of our common stock on
March 25, 2009 was 74, which does not include individual participants in
security position listings held in “street name.”




(c)           Dividends. There were
no cash dividends or other cash distributions made by us during the fiscal year
ended December 31, 2008.  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 Merger, we issued 12,281,649 shares of its
common stock to six former shareholders of Mobilisa.  No commissions
or fees were paid in connection with the issuance of such
securities.  The shares were issued pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended, and the regulations promulgated there under, because the shares were
issued to a small number of sophisticated individuals in a private
transaction.  These shares were subsequently registered on a
Registration Statement on Form S-3, which was declared effective as of July 30,
2008.





(e)          Repurchases of Equity
Securities




There
were no shares purchased during 2008.


27


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, 2003, 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 Return12/03
                  
                  
                  
                  12/04
                  
                  
                  
                  12/05
                  
                  
                  
                  12/06
                  
                  
                  
                  12/07
                  
                  
                  
                  12/08Intellicheck
      Mobilisa, Inc.
                  
                  
                  100.00
                  
                  
                  
                  56.89
                  
                  
                  
                  49.18
                  
                  
                  
                  85.08
                  
                  
                  
                  40.20
                  
                  
                  
                  20.86AMEX
      Composite
                  
                  
                  100.00
                  
                  
                  
                  124.13
                  
                  
                  
                  155.00
                  
                  
                  
                  184.30
                  
                  
                  
                  217.52
                  
                  
                  
                  132.72AMEX
      Technology
                  
                  
                  100.00
                  
                  
                  
                  135.78
                  
                  
                  
                  116.33
                  
                  
                  
                  125.97
                  
                  
                  
                  110.60
                  
                  
                  
                  51.75


28




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, 2008, are derived from the financial statements of
Intelli-Check–Mobilisa, Inc.  The selected financial data should be
read in conjunction with the financial statements as of December 31, 2008
and 2007 and for each of the three years in the period ended December 31, 2008,
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 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(In
      thousands)Statement
      of Operations Data:Revenue
                
                $
                1,119
                
                
                $
                2,384
                
                
                $
                3,162
                
                
                $
                3,512
                
                
                $
                9,955Loss
      from operations
                
                
                (7,017
                )
                
                
                (3,385
                )
                
                
                (3,103
                )
                
                
                (2,835
                )
                
                
                (33,110
                )Net
      Loss
                
                
                (6,923
                )
                
                
                (3,239
                )
                
                
                (2,880
                )
                
                
                (2,673
                )
                
                
                (33,062
                )Net
      loss per common share - basic and diluted
                
                
                (0.79
                )
                
                
                (0.31
                )
                
                
                (0.24
                )
                
                
                (0.22
                )
                
                
                (1.47
                )Common
      shares used in computing per share amounts - basic and
    diluted
                
                
                10,225
                
                
                
                11,201
                
                
                
                12,146
                
                
                
                12,263
                
                
                
                22,454





As
      of December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(In
      thousands)Balance
      sheet data:Cash
      and cash equivalents
                
                $
                1,750
                
                
                $
                528
                
                
                $
                527
                
                
                $
                393
                
                
                $
                3,401Working
      capital
                
                
                3,594
                
                
                
                5,289
                
                
                
                3,860
                
                
                
                1,763
                
                
                
                2,233Total
      assets
                
                
                5,615
                
                
                
                6,909
                
                
                
                5,656
                
                
                
                4,074
                
                
                
                24,194Total
      liabilities
                
                
                1,907
                
                
                
                1,519
                
                
                
                1,719
                
                
                
                2,054
                
                
                
                3,555Stockholders’
      equity
                
                
                868
                
                
                
                5,390
                
                
                
                3,937
                
                
                
                2,020
                
                
                
                20,640




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





Overview





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





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





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


29


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




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




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




Mobilisa also derived 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.





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.





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





By
verifying the encoded format, our ID-Check® patented technology provides the
ability to verify the validity of military IDs, driver licenses and state issued
non-driver ID cards that contain magnetic stripes, bar codes SMART chips, and
Radio Frequency ID technologies, which enables us to target three distinct
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 and military facilities.  Our
technology is currently being used or tested by several Fortune 500
Companies.  We have a strategic alliance with VeriFone, the largest
provider of credit card terminals in the U.S., several system integrators in the
defense industry and hardware manufacturers to utilize our systems and software
as the proposed or potential verification application for their proposed
solutions for credentialing in the government sector and to jointly market these
security applications.  Recent Department of Homeland Security
initiatives, along with the regulations arising from HSPD-12, which sets the
policy for a common identification standard for federal employees and
contractors, and the new Transportation Worker Identity Credential or TWIC card,
which is currently required for all sea-port workers by April 15, 2009 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.


30


We have
developed additional software products that take advantage of our patented
software technology.  Our products include POS, ID-Check®
BHO,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.  Additional
software solutions include ID-Check® PC and ID-Check® Mobile, which replicate
the features of ID-Check®. Another application is C-Link®, the company’s
networkable data management software. Additionally, ID-Check® PC and C-Link® are
designed to read the smart chip contained on the military Common Access Card
(CAC). These products, which run on a personal computer, were created to work in
conjunction with our ID-Check® technology and allow a user to first verify the
encoded format and then view the encoded data for further
verification.  Our ID-Check® Mobile product gives the user the
additional flexibility of utilizing our software in a hand-held
product.  To date, we have entered into multiple licensing agreements
and are in discussions with additional companies to license our software to be
utilized within other existing systems.  We also have created the
Im2700, or Mobile TWIC Reader, for use with the Department of Homeland
Security’s new TWIC card.





Critical Accounting Policies
and the Use of Estimates





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




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





Valuation
of goodwill and other long-lived assets




Our
long-lived assets include property and equipment, intangible assets and
goodwill. As of December 31, 2008 the balances of property and
equipment, intangible assets and goodwill, all net of accumulated depreciation
and amortization, were $464,790, $6,877,752 and $11,736,660, respectively.
 As of December 31, 2007, the balance of property and equipment and
intangible assets, all net accumulated depreciation and amortization, were
$81,464 and $23,961, respectively.




In the
fourth quarter of 2008, we performed impairment tests as described below and
recorded impairments of goodwill and intangible assets of $25,878,576 and
$6,293,083, respectively.




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


31


SFAS No. 142,
Goodwill and Other Intangible
Assets. SFAS No. 142 requires us to test goodwill for
impairment on an annual basis, or earlier if indicators of potential impairment
exist, and to write-down goodwill when impaired. We evaluate goodwill for
impairment using the two-step process as prescribed in SFAS No. 142.
The first step is to compare the estimated fair value of the reporting unit to
the carrying amount of the reporting unit. If the carrying amount exceeds the
estimated fair value, a second step must be followed to calculate impairment.
Otherwise, if the estimated fair value of the reporting unit exceeds the
carrying amounts, the goodwill is not considered to be impaired as of the
measurement date. We estimate the fair value of our reporting units after
considering a number of factors, including the present value of future cash
flows, our market capitalization, an assessment of the fair value of the
reporting units based on comparable companies, comparable transactions and
multiples. The date of our annual goodwill impairment test was December 31,
2008.




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




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


Although
we believe that the remaining recorded amounts of our long-lived tangible and
intangible assets and goodwill were realizable as of December 31, 2008,
future events could cause us to conclude otherwise.




Subsequent
to December 31, 2008 through March 25, 2009 our stock price has closed
at a volume weighted average price of $1.06 per share compared $1.78 per share
for the 60 days prior to December 31, 2008. However during both
periods the price has fluctuated significantly. If our stock price were to
decrease and remain at that level for a sustained period of time we may be
required to assess the carrying amount of goodwill and long lived assets of our
reporting units before our scheduled annual impairment test. If at that time the
estimated fair values of our reporting units are less than their respective
carrying amounts, we would need to determine whether our goodwill and long lived
assets would be impaired. Moreover, if economic conditions continue to
deteriorate and capital markets conditions continue to adversely impact the
valuation of enterprises, the estimated fair values of our reporting units could
be adversely impacted, which could result in future
impairments.





Purchase
price allocations of acquired businesses





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





§
              Assessments
      of appropriate valuation methodologies in the
    circumstances;


§
              Future
      expected cash flows from product sales, customer contracts and acquired
      developed technologies, patents and other intellectual
      property;
 32


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


§
              The
      acquired companies’ brand awareness and market
  position;


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


§
              Discount
      rates.




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





Revenue Recognition and
Deferred Revenue




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





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





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





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





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





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





Stock-Based
Compensation





On
January 1, 2006, we adopted SFAS No. 123(R).  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.


33


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, 2008, due to the uncertainty of the
realizability of those assets.





Commitments and
Contingencies





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





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





Results of
Operations




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




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




REVENUE.  Revenues
increased by 183%, or $6,442,778, from $3,511,908, for the year ended December
31, 2007 to $9,954,686 for the year ended December 31, 2008.  Revenues
from the historical Intelli-Check business increased 12% to $3,950,627 and
Mobilisa’s revenues contributed $6,004,059.  Total booked orders
increased 76% in 2008 to $8.1 million from $4.6 million in 2007.  As
of December 31, 2008, our backlog, which represents non-cancelable sales orders
for products not shipped and services not yet performed, was approximately $10.0
million compared to $1.9 million at December 31, 2007.  This
significant increase is principally a result of $8.7 million added by
Mobilisa.  Period to period comparisons may not be indicative of
future operating results, since we still face long sales cycles, particularly in
the government sector, and, therefore, we cannot predict with certainty in which
period the opportunities currently in the pipeline will develop into sales or if
they will develop at all.  Approximately $6.8 million of the current
backlog could be recognized over one to three years.  Mobilisa has a
significant amount of multi-year research and development contracts with the US
government that will be recognized as the research is performed.  In
the commercial ID market, the actual recognition periods are determined
depending upon the release dates by the customer.





GROSS
PROFIT.  Gross profit increased by $5,145,967 or 243% from
$2,120,967 for the year ended December 31, 2007 to $7,266,934 for the year ended
December 31, 2008.  Our gross profit, as a percentage of revenues,
increased to 73% in the year ended December 31, 2008 compared to the 60%
reported for the year ended December 31, 2007.  The gross profit
percentage increase in 2008 was a result of a change in product
mix.  The increase in margin was principally a result of the impact of
the high margined Mobilisa revenues during the year including research and
development contracts where the related costs are included in research and
development costs.  In addition, in 2008 there were higher software
upgrade fees, software development fees and enterprise license fees in our
historical business.


34


OPERATING
EXPENSES.  Excluding the goodwill and intangible asset
impairment charges, operating expenses, which consist of selling, general and
administrative and research and development expenses, increased 66% to
$8,205,438 for the year ended December 31, 2008 from $4,955,818 for the year
ended December 31, 2007.  Expenses in 2008 include $3,573,099 of
Mobilisa operating expenses as well as merger related intangible amortization
costs of $1,286,917 that are not included in the comparative expenses in
2007.  On a comparative basis Intelli-Check’s historical operating
costs decreased by $1,610,396.  Selling expenses were reduced by
$833,454, general and administrative expenses were reduced by $543,043 and
research and development costs were reduced by $233,899.  These
reductions were principally a result of merger related savings, including
reductions in headcount, reductions in sales and marketing expenses and lower
legal and consulting fees.  The 2007 period also included a $152,000
death benefit paid to the spouse of the former CEO.  As we experience
sales growth, we expect that we will incur additional operating expenses to
support this growth.  Research and development expenses may also
increase as we integrate additional products and technologies with our patented
ID-Check technology and enter into additional research and development
contracts.





The
Company completed its annual impairment testing of goodwill and other intangible
assets in accordance with Statement of Financial Accounting Standards (SFAS) 142
"Goodwill and Other Intangible Assets" and SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets."  As a result of a
substantial decrease in the market price of the Company's common stock,
reflecting the very difficult overall market conditions of recent months, the
Company reassessed the carrying value of its goodwill and intangible assets as
of December 31, 2008 and concluded that both of these were
impaired.  The Company recorded non-cash impairment charges to
goodwill and intangible assets of $32,171,659 in the fourth quarter of 2008
related to the Mobilisa reporting unit.





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





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





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





NET
LOSS.  Excluding the impact of the non-cash goodwill and
intangible assets impairment charge, as a result of the factors noted above, our
net loss decreased 67% from $2,673,218 for the year ended December 31, 2007 to
$890,045 for the year ended December 31, 2008. Total net loss for 2008, after
the impairment charge, was $33,061,704.




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.  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.





GROSS
PROFIT.  Gross profit 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.


35


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.





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.





Liquidity and Capital
Resources





Previously, 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.  Mobilisa principally self funded its business though cash
generated by operations and to a lesser extent, through cash and guaranties
provided by its principal owners and founders.





As of December 31, 2008, the Company
had cash and cash equivalents of $3,400,948, working capital (defined as current
assets minus current liabilities) of $2,233,164, total assets of $24,194,081 and
stockholders’ equity of $20,639,526.  As part of the merger, on March
14, 2008, the former shareholders of Mobilisa received shares of Intelli-Check
common stock and options and warrant to purchase 12,429,932 shares of
Intelli-Check – Mobilisa common stock. The aggregate value of the purchase
consideration was equal to $51.3 million, based on the average price of our
common stock on the two days prior to and after November 21, 2007 of $3.54 per
share.  Under purchase accounting rules, principally the entire
purchase price was allocated to identifiable intangibles ($14.4 million),
including trade name, patents, developed technology, backlog and non-contractual
customer relationships and goodwill ($37.6 million) on the balance
sheet.


36


As
previously described above, the Company recorded non-cash impairment charge to
goodwill and intangible assets of $32,171,659 in the fourth quarter of 2008
related to the Mobilisa reporting unit.





During
2008, the Company increased its cash and cash equivalents by
$1,357,965.  Cash was generated from operating activities in the
amount of $805,121 in 2008 compared to a use of cash in operations of $2,339,438
in 2007.  This was primarily a result of a lower net loss, higher
non-cash charges principally relating to merger related amortization charges,
cash generated by the collection in accounts receivable and offset by a
reduction in non-cash adjustments for stock-based expenses, reductions in
payables and accrued expenses and the payment of Mobilisa’s pre-acquisition
income tax liability.  Cash provided by investing activities in 2008
increased $8,784 to $1,881,929 compared to $1,873,145 in 2007.  The
Mobilisa acquisition brought in $335,836 in cash to the Company in 2008, which
was offset by lower net redemptions of marketable securities and short term
investments and higher net capital expenditures.  Cash provided by
financing activities increased $88,556 to $320,915 in 2008 compared to $232,359
in 2007, which resulted from an increase in proceeds from the issuance of common
stock from the exercise of stock options.





Previously,
we held a portion of our Marketable Securities and Short Term Investments in
Municipal Auction Rate Securities which experienced liquidity issues during
2008.  In accordance with an agreement with the New York State
Attorney General, our broker repurchased these securities at full value
including accrued interest in November of 2008.  At year end, the
Company’s excess cash was invested in money market funds and bank certificates
of deposit.  These investments, totaling $2,217,641, have been
classified as cash equivalents as of December 31, 2008. The Company’s investing
strategy is to continue to invest in short term liquid investments with emphasis
on FDIC and SIPC insured protection.





Our
Company’s Mobilisa subsidiary has a $250,000 revolving line of credit with Bank
of America which renews annually.  Interest is payable monthly at the
bank’s prime rate (3.25% at December 31, 2008), plus 1% per annum. The facility
is secured by the assets of Mobilisa and is financially guaranteed by two
directors of the Company, who are also members of
management.  Management anticipates negotiating with Bank of America
in 2009 to remove the personal guaranties under the facility in favor of a
parent company guaranty.   The Company currently has no bank
financing or long term debt.





While
there is no tax expense recorded in the results of operations in all periods
presented, we anticipate making an income tax payment of approximately $169,000
in 2009 related to the pre-merger taxable income of Mobilisa, which is recorded
in income taxes payable on the Balance Sheet as of December 31,
2008.





We
currently anticipate that our available cash on hand and cash equivalents, as
well as cash from operations will be sufficient to meet our anticipated working
capitals and capital expenditure requirements for at least the next 12
months.  While we generated positive cash flows in 2008, we may decide
to raise additional funds in the future to respond to business contingencies
which may include the need to fund more rapid expansion, fund additional
marketing expenditures, develop new markets for our technology, enhance our
operating infrastructure, respond to competitive pressures, or acquire
complementary businesses or necessary technologies.  There can be no
assurance that the Company will be able to secure the additional funds when
needed or obtain such on terms satisfactory to the Company, if at
all.





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





In March 2001, we 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.    These 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 had extended the expiration for these rights
through June 30, 2008 and the Board of Directors allowed these rights to expire
as of that date.  None of these rights were exercised in the years
ended December 31, 2008, 2007 or 2006.


37


Related Party
Transactions





Mobilisa leases office space from Eagle
Coast, LLC (“Lessor Company”) that is wholly-owned by Dr. Ludlow and Mrs.
Ludlow, who are members of management.  The Company entered into a
10-year lease for the office space ending in 2017.  The annual rent
for this facility is currently $74,986 and is subject to annual increases based
on the increase in the CPI index plus 1%.  The Lessor Company's entire
operations consist of the leased property and related bank debt.  The
Company is a guarantor of the loans for the leased property.  As of
December 31, 2008, the Company's maximum exposure to loss is
$422,000.





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





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





Net Operating Loss Carry
Forwards





As of
December 31, 2008, the Company had net operating loss carryforwards (NOL’s) for
federal income tax purposes of approximately $36.6 million.  There can
be no assurance that the Company will realize the benefit of the NOL’s. The
federal NOL’s are available to offset future taxable income and expire from 2018
to 2028 if not utilized.  The Company has not yet completed its review
to determine whether or not these NOL’s will be limited under Section 382 of the
Internal Revenue Code due to the ownership change from the acquisition of
Mobilisa, Inc.





Contractual
Obligations





Below is
a table, which presents our contractual obligations and commitments at December
31, 2008:





Payments Due by
Period





Total
                
                
                Less than
                  1 year
                
                
                1-3 years
                
                
                4-5 years
                
                
                More than
                  5 yearsOperating
      Leases
                
                $
                1,269,261
                
                
                $
                456,988
                
                
                $
                393,853
                
                
                $
                149,971
                
                
                $
                268,448Employment
      Agreements
                
                
                284,167
                
                
                
                220,000
                
                
                
                64,167
                
                
                
                -
                
                
                
                -Total
      Contractual Cash Obligation
                
                $
                1,553,428
                
                
                $
                676,988
                
                
                $
                458,020
                
                
                $
                149,971
                
                
                $
                268,448





Recently Issued Accounting
Pronouncements





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





In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” which is effective for calendar year companies on January 1,
2008. The Statement defines fair value, establishes a framework for measuring
fair value in accordance with Generally Accepted Accounting Principles, and
expands disclosures about fair value measurements. The Statement codifies the
definition of fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The standard clarifies the principle that
fair value should be based on the assumptions market participants would use when
pricing the asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. In February 2008,
the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of
FASB Statement No. 157” (“FSP FAS 157-2”), which delays the effective date
of SFAS 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 at least an annual basis, until fiscal years beginning after
November 15, 2008.  The partial adoption of SFAS 157 did not have
a material impact on the consolidated results of operations and financial
condition.


38


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 adopted the provisions of SFAS No. 159
as of January 1, 2008 and has elected not to adopt the fair value option of SFAS
No. 159,  as of that date.  The adoption did not have a
material impact on the consolidated results of operations and financial
condition.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R),
“Business Combinations.” SFAS 141R replaces SFAS No. 141, “Business
Combinations.” SFAS 141R establishes principles and requirements for how an
acquirer, a) recognizes and measures the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, b) recognizes and
measures the goodwill acquired and c) determines what information to disclose.
SFAS 141R also requires that all acquisition-related costs, including
restructuring, be recognized separately from the acquisition. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This Statement eliminates adjustments to goodwill for
changes in deferred tax assets and uncertain tax positions after the acquisition
accounting measurement period (limited to one year from acquisition), including
for acquisitions prior to adoption of SFAS 141R. SFAS 141R does not affect the
accounting of the acquisition of Mobilisa and its adoption is not expected to
have a material impact on the consolidated results of operations and financial
condition.





In
December 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 adoption of
SFAS 160 is not expected to have a material impact on the consolidated results
of operations and financial condition.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities,” which changes the disclosure
requirements for derivative instruments and hedging activities.  SFAS
No. 161 requires enhanced disclosures about (a) how and why and entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows.  This
statement’s disclosure requirements are effective for fiscal years and interim
periods beginning after November 15, 2008.  The adoption of SFAS 161
is not expected to have a material impact on the consolidated results of
operations and financial condition.





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 adoption of EITF Issue No. 07-3 did not have a material
impact on the consolidated results of operations and financial
condition.


39


In April
2008, the FASB issued Staff Position FSP 142-3, "Determination of the Useful
Life of Intangible Assets" (FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement No. 142,
"Goodwill and Other Intangible Assets." FSP 142-3 is effective for financial
statements issued after December 15, 2008. The adoption of FSP 142-3 is not
expected to have a material impact on the consolidated results of operations and
financial condition.





In May
2008, the FASB issued FASB Staff Position No. APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 requires that
issuers of certain convertible debt instruments that may be settled in cash upon
conversion to separately account for the liability and equity components in a
manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods.  The accounting for
these types of instruments under APB 14-1 is intended to appropriately reflect
the underlying economics by capturing the value of the conversion options as
borrowing costs; therefore, recognizing their potential dilutive effects on
earnings per share. The effective date of APB 14-1 is for financial statements
issued for fiscal years and interim periods beginning after December 15, 2008
and does not permit earlier application. However, the transition guidance
requires retrospective application to all periods presented and does not
grandfather existing instruments.  The adoption of APB14-1 is not
expected to have a material impact on the consolidated results of operations and
financial condition.





In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities" ("EITF 03-6-1"). EITF 03-6-1 applies to the calculation of earnings
per share for share-based payment awards with rights to dividends or dividend
equivalents under Statement No. 128, Earnings Per Share. Unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents will be considered participating securities and will be included in
the computation of earnings per share pursuant to the two-class method. The
effective date of EITF 03-6-1 is for financial statements issued for fiscal
years beginning after December 15, 2008, and all interim periods within those
years. Early adoption is not permitted. Once effective, all prior period
earnings per share data presented will be adjusted
retrospectively.  The adoption of EITF 03-6-1 is not expected to have
a material impact on the consolidated results of operations and financial
condition.





In
October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“FSP 157-3”). FSP 157-3 clarified the application of
FAS 157. FSP 157-3 demonstrated how the fair value of a financial
asset is determined when the market for that financial asset is inactive.
FSP 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of this standard
did not have an impact on the consolidated financial statements.





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.


40


Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk





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





Item
      8.
            Financial
      Statements and Supplementary Data





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





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





There
have been no changes in or disagreements with the Company’s principal
independent registered public accounting firm for the two-year period ended
December 31, 2008.





Item
      9A.
            Controls
      and Procedures




Evaluation
of Disclosure Controls and Procedures




Our Chief
Executive Officer and our Chief Financial Officer evaluated, with the
participation of our management, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Annual Report on Form
10-K.  As of December 31, 2008, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures,
as defined in Securities Exchange Act Rule 13a-15(e), were
effective.




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




Changes
in Internal Control Over Financial Reporting




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




Annual
Report of Management on Internal Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 15d-15(f) under the Exchange Act)
for the Company. Management, with the participation of our principal executive
officer and our principal financial officer, evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2008 (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, 2008.




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.


41





PART
III




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




As of
March 25, 2009, the Company's directors and executive officers were as
follows:




Name
            
            Age
            
            PositionDr.
      Nelson Ludlow
            
            47
            
            Chief
      Executive Officer and DirectorSteven
      D. Williams
            
            46
            
            Chief
      Operating OfficerRussell
      T. Embry
            
            45
            
            Senior
      Vice President and Chief Technology OfficerBonnie
      Ludlow
            
            54
            
            Senior
      Vice President & DirectorJohn
      Lange
            
            40
            
            General
      CounselPeter
      J. Mundy
            
            52
            
            Vice
      President Finance, Chief Financial Officer, Treasurer &
      SecretaryJohn
      W. Paxton
            
            72
            
            Chairman
      of the Board and DirectorLt.
      General Emil R. Bedard
            
            65
            
            DirectorJeffrey
      Levy
            
            67
            
            DirectorJohn
      E. Maxwell
            
            54
            
            DirectorArthur
      L. Money
            
            69
            
            DirectorGuy
      L. Smith
            
            59
            
            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 25 years experience in software development for the military and
corporate sectors. From 1982 to 1988, while in the Air Force, Dr. Ludlow served
as a mathematician, a pilot, an intelligence officer at the National Air
Intelligence Center, Technical Director for Artificial Intelligence at USAF Rome
Laboratory, Assistant Professor of Computer Science at the Naval Postgraduate
School, and the Director of Technology and Services for Radar Evaluation
Squadron. In the corporate sector, Dr. Ludlow served as the Director of C2
Modeling for SAIC, Chief Scientist for the ORINCON Corporation and Chief
Technology Officer for Ameranth Wireless—all in San Diego.  He holds a
PhD in Artificial Intelligence from the University of Edinburgh, Scotland and
completed Post-Doctoral work in Computer Science at the University of Cambridge,
England. Additional degrees include a Bachelor of Science Degree from Washington
State University in Math and Physical Sciences, as well as a Master of Science
degree in Computer Science from Wright State University in Dayton,
Ohio.




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


42


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





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





John Lange joined Intellicheck
Mobilisa in April of 2008 as General Counsel, bringing more than 14 years of
legal practice experience. From 2006 until joining Intelli-Check Mobilisa, Mr.
Lange was the Chief Legal Officer at Card Player Media, LLC, the leading poker
media company in the world. While there, he drafted and negotiated deals with
some of the largest players in the industry, and was a member of the senior
leadership team in regard to strategic business issues. Prior to Card Player,
Mr. Lange was a partner at Preston Gates & Ellis (now K&L Gates), where
he served as outside counsel to technology companies such as Microsoft and
T-Mobile focusing on development, technology licensing, and strategic business
agreements.





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





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


43


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.





Jeffrey Levy served as
Chairman of the Board from March 14, 2008 until October 19, 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 is currently Chairman of the Governance and Nominating
Committee.  He has previously served on the 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 E. (Jay) Maxwell was
appointed a member of Intellicheck Mobilisa’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 Intellicheck Mobilisa’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 Advisory Board (Chairman) and the
NSA Advisory Board (Chairman). 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.


44


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





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





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




Section 16(a) Beneficial
Ownership Reporting Compliance





The
Securities and Exchange Commission has adopted rules relating to the filing of
ownership reports under Section 16(a) of the Securities Exchange Act of
1934.  One such rule requires disclosure of filings, which under the
Commission’s rules, are not deemed to be timely.  Based on a review of
the filings received, Intellicheck Mobilisa is not aware of any non-timely
filings for fiscal year 2008, except that Form 3 was not timely filed for Emil
R. Bedard, Bonnie L. Ludlow, Nelson D. Ludlow, John W. Paxton and Steven D.
Williams.


45


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.icmobil.com.





Item
11.  Executive Compensation





INTELLICHECK
MOBILISA EXECUTIVE COMPENSATION





COMPENSATION DISCUSSION AND
ANALYSIS





Overview





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





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





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





Compensation
Program Objectives and Philosophy





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





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




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




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





Generally, the compensation of
Intellicheck Mobilisa’s executive officers is composed of a base salary, an
annual incentive compensation award and equity awards in the form of stock
options. In setting base salaries, the Compensation Committee generally reviewed
the individual contributions of the particular executive. The annual incentive
compensation awards for 2008 and 2009 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 Intellicheck Mobilisa’s
common stock over time.


46


Intellicheck Mobilisa generally intends
to qualify executive compensation for deductibility without limitation under
Section 162(m) of the Internal Revenue Code. Section 162(m) provides
that, for purposes of the regular income tax and the alternative minimum tax,
the otherwise allowable deduction for compensation paid or accrued with respect
to a covered employee of a publicly-held corporation (other than certain exempt
performance-based compensation) is limited to no more than $1.0 million per
year. The non-exempt compensation paid to any of our executive officers for
fiscal 2007 as calculated for purposes of Section 162(m) did not exceed the
$1.0 million limit.





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





Compensation
Process.     For each of Intellicheck Mobilisa’s
named executive officers, the Compensation Committee reviews and approves all
elements of compensation, taking into consideration recommendations from
Intellicheck Mobilisa’s CEO (for compensation other than his own), as well as
competitive 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 2008, the aggregate
of the compensation paid to Intellicheck Mobilisa’s Chief Executive Officer and
other executive officers was 75% cash and 25% non-cash option
awards.





Executive Officer
Bonuses.   No bonus awards were granted to any executive
officers in 2008.





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





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





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


47


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





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





INTELLICHECK MOBILISA
SUMMARY COMPENSATION TABLE





The following table sets forth
compensation paid to executive officers whose compensation was in excess of
$100,000 for any of the three fiscal years ended December 31,
2008.  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)
                                                  
                                                  
                                                  Total
                                                    ($)Nelson
      Ludlow (3)
                                                  
                                                  2008
                                                  
                                                  
                                                  169,583
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  66,120
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  235,703Chief
      Executive Officer
                                                  
                                                  2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Steven
      D. Williams (3)
                                                  
                                                  2008
                                                  
                                                  
                                                  155,417
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  29,750
                                                  
                                                  
                                                  
                                                  4,663
                                                  (7)
                                                  
                                                  
                                                  189,830Chief
      Operating Officer
                                                  
                                                  2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Jeffrey
      Levy (4)
                                                  
                                                  2008
                                                  
                                                  
                                                  39,667
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  39,667Former
      Interim Chairman &
                                                  
                                                  2007
                                                  
                                                  
                                                  99,167
                                                  
                                                  
                                                  
                                                  50,000
                                                  
                                                  
                                                  
                                                  80,140
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  229,405Chief
      Executive Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Russell
      T. Embry
                                                  
                                                  2008
                                                  
                                                  
                                                  179,413
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  59,250
                                                  
                                                  
                                                  
                                                  170
                                                  (8)
                                                  
                                                  
                                                  238,833Senior
      Vice President
                                                  
                                                  2007
                                                  
                                                  
                                                  170,652
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  33,706
                                                  
                                                  
                                                  
                                                  2,040
                                                  (8)
                                                  
                                                  
                                                  206,398&
      Chief Technology Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  166,480
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,040
                                                  (8)
                                                  
                                                  
                                                  168,520John
      Lange (5)
                                                  
                                                  2008
                                                  
                                                  
                                                  117,979
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  59,250
                                                  
                                                  
                                                  
                                                  3,281
                                                  (7)
                                                  
                                                  
                                                  180,510General
      Counsel
                                                  
                                                  2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Bonnie
      Ludlow (3)
                                                  
                                                  2008
                                                  
                                                  
                                                  55,417
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  29,750
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  85,167Senior
      Vice President
                                                  
                                                  2007
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Peter
      J. Mundy (6)
                                                  
                                                  2008
                                                  
                                                  
                                                  156,330
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  74,971
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  231,301Vice
      President Finance
                                                  
                                                  2007
                                                  
                                                  
                                                  105,961
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  98,317
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  204,278&
      Chief Financial Officer
                                                  
                                                  2006
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -


48




(1)
                            The
      amounts reported in the “Option Awards” column reflect the dollar amount
      of expense recognized for financial statement reporting purposes for the
      fiscal years ended December 31, 2008, 2007 and 2006, in accordance
      with SFAS 123R.(2)
                            No
      other compensation in excess of $10,000, including perquisites, was paid
      to any of Intellicheck Mobilisa’s named executive
  officers.(3)
                            Represents
      amounts paid after March 14, 2008, the date of the Mobilisa
      acquisition.(4)
                            Mr.
      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 March 14, 2008, Mr. Levy was no longer our
      Interim CEO.(5)
                            Mr.
      Lange started with Intellicheck Mobilisa as of April 14,
    2008.(6)
                            Mr.
      Mundy started with Intellicheck Mobilisa as of March 26,
    2007.(7)
                            Represents
      matching contribution under Mobilisa’s 401(K) Plan.(8)
                            Amount
      represents car allowances.  Currently there is no one under a
      car allowance
program.





Severance
Arrangements





Mr. Peter Mundy, Intellicheck
Mobilisa’s Chief Financial Officer, has a severance arrangement with
Intellicheck Mobilisa, which provides that if Intellicheck Mobilisa 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
$80,000 (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.





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





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


49


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





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





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.





A total of 1,814,155 shares of
Intellicheck Mobilisa’s Common Stock are available for issuance or delivery
under the existing Stock Option and Equity Incentive Plans. The number of shares
of the Company’s Common Stock issued or reserved pursuant to the Plans will be
adjusted at the discretion of the Board of Directors or the Compensation
Committee as a result of stock splits, stock dividends and similar changes in
the Company’s Common Stock.


50


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





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




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





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




GRANTS OF PLAN-BASED AWARDS
TABLE





The following table summarizes options
granted during the year ended December 31, 2008 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
                              DateNelson
      Ludlow
                            
                            03/20/08
                            
                            03/14/08
                            
                            
                            25,000
                            
                            
                            
                            3.63
                            
                            
                            
                            66,120
                            (2)
                            03/20/18Steven
      D. Williams
                            
                            07/17/08
                            
                            07/01/08
                            
                            
                            25,000
                            
                            
                            
                            2.36
                            
                            
                            
                            29,750
                            (3)
                            07/17/13Russell
      T. Embry
                            
                            07/17/08
                            
                            07/01/08
                            
                            
                            25,000
                            
                            
                            
                            2.36
                            
                            
                            
                            29,750
                            (3)
                            07/17/1308/21/08
                            
                            08/14/08
                            
                            
                            25,000
                            
                            
                            
                            2.35
                            
                            
                            
                            29,500
                            (3)
                            08/21/13John
      Lange
                            
                            07/17/08
                            
                            07/01/08
                            
                            
                            25,000
                            
                            
                            
                            2.36
                            
                            
                            
                            29,750
                            (3)
                            07/17/1308/21/08
                            
                            08/14/08
                            
                            
                            25,000
                            
                            
                            
                            2.35
                            
                            
                            
                            29,500
                            (3)
                            08/21/13Bonnie
      Ludlow
                            
                            07/17/08
                            
                            07/01/08
                            
                            
                            25,000
                            
                            
                            
                            2.60
                            
                            
                            
                            29,750
                            (3)
                            07/17/13Peter
      J. Mundy
                            
                            02/21/08
                            
                            02/07/08
                            
                            
                            10,000
                            
                            
                            
                            3.07
                            
                            
                            
                            15,721
                            (2)
                            02/21/1307/17/08
                            
                            07/01/08
                            
                            
                            25,000
                            
                            
                            
                            2.36
                            
                            
                            
                            29,750
                            (3)
                            07/17/1308/21/08
                            
                            08/14/08
                            
                            
                            25,000
                            
                            
                            
                            2.35
                            
                            
                            
                            29,500
                            (3)
                            08/21/13


51




(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, 2008, in accordance with SFAS
      123R.(2)
            
            Vest
      immediately.(3)
            
            Vest
      ratably over a 12 month period.




The
following table summarizes unexercised options as of year-end December 31, 2008
for the named executive officers:




OUTSTANDING EQUITY AWARDS AT
FISCAL YEAR END TABLE




No.
      of Securities
                                              
                                              
                                              Option
                                              
                                              OptionUnderlying
      Unexercised
                                              
                                              
                                              Exercise
                                              
                                              ExpirationOptions
      / WarrantsName
                                              
                                              Exercisable
                                              
                                              
                                              Unexercisable
                                              
                                              
                                              Price
      ($)
                                              
                                              DateNelson
      Ludlow
                                              
                                              
                                              25,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3.63
                                              
                                              03/20/18Steven
      D. Williams
                                              
                                              
                                              218,200
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              0.46
                                              
                                              03/14/1316,365
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              0.92
                                              
                                              03/14/1312,500
                                              
                                              
                                              
                                              12,500
                                              (1)
                                              
                                              
                                              2.36
                                              
                                              07/17/13Russell
      T. Embry
                                              
                                              
                                              6,250
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7.44
                                              
                                              05/05/095,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4.37
                                              
                                              12/03/095,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              4.37
                                              
                                              06/03/105,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3.18
                                              
                                              11/17/105,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              6.65
                                              
                                              05/17/125,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              6.65
                                              
                                              11/17/1212,500
                                              
                                              
                                              
                                              12,500
                                              (1)
                                              
                                              
                                              2.36
                                              
                                              07/17/1310,417
                                              
                                              
                                              
                                              14,583
                                              (2)
                                              
                                              
                                              2.35
                                              
                                              08/21/13John
      Lange
                                              
                                              
                                              12,500
                                              
                                              
                                              
                                              12,500
                                              (1)
                                              
                                              
                                              2.36
                                              
                                              07/17/1310,417
                                              
                                              
                                              
                                              14,583
                                              (2)
                                              
                                              
                                              2.35
                                              
                                              08/21/13Bonnie
      Ludlow
                                              
                                              
                                              12,500
                                              
                                              
                                              
                                              12,500
                                              (1)
                                              
                                              
                                              2.60
                                              
                                              07/17/13Peter
      J. Mundy
                                              
                                              
                                              12,500
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7.00
                                              
                                              04/19/126,250
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7.00
                                              
                                              10/19/126,250
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7.00
                                              
                                              04/19/1310,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              3.07
                                              
                                              02/21/1312,500
                                              
                                              
                                              
                                              12,500
                                              (1)
                                              
                                              
                                              2.36
                                              
                                              07/17/1310,417
                                              
                                              
                                              
                                              14,583
                                              (2)
                                              
                                              
                                              2.35
                                              
                                              08/21/13


52




(1)
            These
      shares vest ratably over a twelve month period beginning July
      2008.





(2)
            These
      shares vest ratably over a twelve month period beginning August
      2008.





The
following table summarizes options exercised and stock awards vested during the
year-ended December 31, 2008 for the named executive officers:




OPTION EXERCISES AND STOCK
VESTED TABLE





Stock Options
                
                
                Stock AwardsName
                
                No. of Shares
                  Acquired
                  Upon Exercise
                  (#)
                
                
                Value
                  Received
                  Upon Exercise
                  ($)
                
                
                No. of Shares
                  Acquired Upon
                  Vesting (#)
                
                
                Value Received
                  Upon Vesting ($)Nelson
      Ludlow
                
                
                21,820
                
                
                
                45,058
                (1)
                
                
                -
                
                
                
                -Bonnie
      Ludlow
                
                
                21,820
                
                
                
                45,058
                (1)
                
                
                -
                
                
                
                -




(1)
            Mr.
      Ludlow and Mrs. Ludlow each exercised 10,910 shares at an exercise price
      of $0.23 per share and 10,910 shares at an exercise price of $0.46 per
      share on June 24, 2008, when the closing price of the Company’s Common
      Stock was $2.41.




Pension
Benefits




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





Nonqualified
Deferred Compensation




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





Compensation
of Directors




The table below sets forth certain
information concerning compensation of Intellicheck Mobilisa’s non-employee
directors who served in 2008.





Name and Principal Position
                
                Fees
      Paid
                  in
      Cash
                  ($)
                
                
                Option
                  Awards
                  ($)
                
                
                Stock
                  Awards
                  ($)
                
                
                All
      Other
                  Compensation
                  ($) (9)
                
                
                Total
                  ($)John
      W. Paxton, Chairman
                
                
                3,500
                
                
                
                -
                
                
                
                49,091
                (1)
                
                
                -
                
                
                
                52,591General
      Emil Bedard, Director
                
                
                9,750
                
                
                
                -
                
                
                
                44,080
                (2)
                
                
                -
                
                
                
                53,830Jeffrey
      Levy, Director
                
                
                6,500
                
                
                
                -
                
                
                
                80,238
                (3)
                
                
                -
                
                
                
                86,738John
      E. Maxwell, Director
                
                
                10,000
                
                
                
                43,998
                (4)
                
                
                -
                
                
                
                -
                
                
                
                53,998Arthur
      L. Money, Director
                
                
                8,000
                
                
                
                43,998
                (5)
                
                
                -
                
                
                
                -
                
                
                
                51,998Guy
      L. Smith, Director
                
                
                7,000
                
                
                
                40,998
                (6)
                
                
                -
                
                
                
                -
                
                
                
                47,998Robert
      J. Blackwell, Former Director
                
                
                3,750
                (7)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,750Edwin
      Winiarz, Former Director
                
                
                3,750
                (8)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,750


53





(1)
            Fair
      value of 26,599 restricted shares granted at market price of $1.77 per
      share.  Of these shares, 24,904 vest ratably over a twelve month
      period.  As of December 31, 2008, Mr. Paxton had aggregate
      options to purchase 307,300 shares of common stock and holds 26,599 shares
      of restricted common stock.(2)
            Fair
      value of 24,904 restricted shares granted at market price of $1.77 per
      share.  These shares vest ratably over a twelve month
      period.  As of December 31, 2008, General Bedard had aggregate
      options to purchase 328,400 shares of common stock and holds 24,904 shares
      of restricted common stock.(3)
            Fair
      value of 45,332 restricted shares granted 08/01/08 at market price of
      $1.77 per share.  These shares vest ratably over a twelve month
      period.  As of December 31, 2008, Mr. Levy had aggregate
      outstanding options to purchase 90,350 shares of common stock and holds
      46,284 shares of restricted common stock.(4)
            Fair
      value of 46,633 options granted 08/01/08 at an exercise price of $1.77 per
      share.  These options vest ratably over a twelve month
      period.  As of December 31, 2008, Mr. Maxwell had aggregate
      outstanding options to purchase 95,783 shares of Common Stock and holds
      8,254 shares of restricted common stock.(5)
            Fair
      value of 46,633 options granted 08/01/08 at an exercise price of $1.77 per
      share.  These options vest ratably over a twelve month
      period.  As of December 31, 2008, Mr. Money had aggregate
      outstanding options to purchase 206,683 shares of Common Stock and holds
      3,175 shares of restricted common stock.(6)
            Fair
      value of 43,453 options granted 08/01/08 at an exercise price of $1.77 per
      share.  Of these options, 40,274 vest ratably over a twelve
      month period. As of December 31, 2008, Mr. Smith had aggregate outstanding
      options to purchase 129,665 shares of common stock.(7)
            As
      a result of the acquisition of Mobilisa, Mr. Blackwell resigned from the
      Board of Directors on March 14, 2008.(8)
            As
      of December 31, 2008, Mr. Winiarz had aggregate outstanding options to
      purchase 120,000 shares of common stock.  As a result of the
      acquisition of Mobilisa, Mr. Winiarz resigned from the Board of Directors
      on March 14, 2008.  These options were extended for a period of
      one year from the date of acquisition.(9)
            No
      other compensation, including perquisites in excess of $10,000, was paid
      to any of the directors.





During 2008, 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 Intellicheck Mobilisa’s
Common Stock in lieu of stock options or a number of stock options equal to that
of the stock grant at the director’s option. In addition, the Board further
recommended that non-employee directors, who are members of a committee, should
be granted the choice of restricted shares of Intellicheck Mobilisa’s Common
Stock in lieu of stock options or a number of stock options equal to that of the
stock grant at the director’s option. The number of restricted shares as
proposed would be determined by the Board at each annual board meeting. This
plan was included in Intellicheck Mobilisa’s proxy statement for a vote by
Intellicheck Mobilisa’s stockholders at the 2008 Annual Meeting of
Stockholders.




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





BENEFICIAL
OWNERSHIP OF SECURITIES





The following table sets forth
information with respect to the beneficial ownership of the Company’s common
stock as of March 25, 2009, after the consummation of the acquisition of
Mobilisa, by each person who is known by Intellicheck Mobilisa to beneficially
own more than 5% of Intellicheck Mobilisa’s common stock, each officer, each
director and all officers and directors as a group.





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





The
applicable percentage of ownership is based on 25,392,451 shares
outstanding.


54





Name
                
                Shares
                  Beneficially
                  Owned
                
                
                PercentDr.
      Nelson Ludlow (1)
                
                
                4,216,726
                
                
                
                16.66Bonnie
      Ludlow (2)
                
                
                8,041,101
                
                
                
                31.66John
      W. Paxton (3)
                
                
                350,695
                
                
                
                1.4L.
      Gen. Emil R. Bedard (4)
                
                
                457,143
                
                
                
                1.8Jeffrey
      Levy (5)
                
                
                156,879
                
                
                
                *Russell
      T. Embry (6)
                
                
                75,000
                
                
                
                *Peter
      J. Mundy (7)
                
                
                82,550
                
                
                
                *John
      E. Maxwell (8)
                
                
                96,465
                
                
                
                *Arthur
      L. Money (9)
                
                
                206,548
                
                
                
                *Guy
      L. Smith (10)
                
                
                137,880
                
                
                
                *John
      Lange (11)
                
                
                48,250
                
                
                
                *Steven
      D. Williams (12)
                
                
                261,082
                
                
                
                1.0All
      Executive Officers & Directors as a group (12 persons)
      (13)
                
                
                14,130,319
                
                
                
                52.11





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





(1)
              Includes
      25,000 shares issuable upon exercise of stock options exercisable within
      60 days.(2)
              Includes
      22,917 shares issuable upon exercise of stock options exercisable within
      60 days.(3)
              Includes
      330,695 shares issuable upon exercise of stock options exercisable and
      restricted stock vesting within 60 days; excludes the right to purchase
      218,200 shares pursuant to a Right to Call Agreement with Bonnie Ludlow, a
      director of the Company, entered into in April 2007.(4)
              Includes
      349,153 shares issuable upon exercise of stock options exercisable and
      restricted stock vesting within 60 days.(5)
              Includes
      128,127 shares issuable upon exercise of stock options exercisable and
      restricted stock vesting within 60 days.(6)
              Includes
      75,000 shares issuable upon exercise of stock options exercisable within
      60 days.(7)
              Includes
      78,750 shares issuable upon exercise of stock options exercisable within
      60 days.(8)
              Includes
      88,011 shares issuable upon exercise of stock options exercisable within
      60 days.(9)
              Includes
      198,911 shares issuable upon exercise of stock options exercisable within
      60 days.(10)
              Includes
      122,423 shares issuable upon exercise of stock options exercisable within
      60 days.(11)
              Includes
      43,750 shares issuable upon exercise of stock options exercisable within
      60 days.(12)
              Includes
      257,482 shares issuable upon exercise of stock options exercisable within
      60 days; excludes the right to purchase 310,935 shares pursuant to a Right
      to Call Agreement with Bonnie Ludlow, a director of the Company, entered
      into in April 2007.(13)
              Includes
      1,720,219 shares issuable upon exercise of stock options and rights
      exercisable within 60
days.


55


Equity Compensation Plan
Information





The following table sets forth
information regarding Intellicheck Mobilisa’s Equity Compensation Plans as of
December 31, 2008:





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
                        
                        
                        2,840,301
                        
                        
                        
                        1.95
                        
                        
                        
                        1,835,509Equity
      compensation plans not approved by security holders
                        
                        
                        57,500
                        
                        
                        
                        6.08
                        
                        
                        NoneTotal
                        
                        
                        2,897,801
                        
                        
                        
                        2.03
                        
                        
                        
                        1,835,509





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 three persons.  These
options have a weighted average exercise price per share equal to $6.08 and
options to purchase 57,500 shares of common stock are currently
exercisable.




Item
      13.
            Certain Relationships,
      Related Transactions and Director
  Independence





Intellicheck
Mobilisa





Since the beginning of 2007,
Intellicheck Mobilisa did not have any transactions with related persons as
described under Item 404(a) of Regulation S-K. The Governance Committee reviews
transactions with firms associated with directors and nominees for director.
Intellicheck Mobilisa’s management also monitors such transactions on an ongoing
basis. Executive officers and directors are governed by Intellicheck Mobilisa’s
Code of Business Conduct and Ethics which provides that waivers may only be
granted by the Board of Directors and must be promptly disclosed to
stockholders. No such waivers were granted nor applied for in 2008. Intellicheck
Mobilisa’s Corporate Governance Guidelines require that all directors recuse
themselves from any discussion or decision affecting their personal, business or
professional interests.




Mobilisa




The majority owners, who are members of
management, lent money to Mobilisa from time to time. The loans bore no interest
and were payable upon demand. As of December 31, 2008, 2007 and 2006,
amounts owed to related parties were $0, $0, and $27,403,
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, 2008, 2007, and 2006, total rental payments
for this office space was $74,976, $63,546, and $55,375.  In 2008,
Mobilisa entered into a 10-year lease for the office space ending in
2017.





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


56


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





The 
board  of  directors  has  established  a 
corporate  governance  and nominating committee, which is comprised of
Mr. Levy, chairperson, Mr. 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. Maxwell,  chairperson,  Mr. Bedard and Mr.
Paxton.  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, 2008 and December 31, 2007, Intellicheck
Mobilisa’s principal independent auditor was Amper, Politziner & Mattia,
LLP, the services of which were provided in the following categories and
amount:





Audit
Fees





The
aggregate fees billed by Amper, Politziner and Mattia, LLP for professional
services rendered for the audit of Intellicheck Mobilisa’s annual financial
statements for the fiscal years ended December 31, 2008 and 2007 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 $183,000 and $105,000,
respectively.





Audit Related
Fees





Other
than the fees described under the caption “Audit Fees” above, Amper, Politziner
and Mattia, LLP did not bill any fees for services rendered to Intellicheck
Mobilisa during fiscal year 2008 or 2007 for assurance and related services in
connection with the audit or review of the company’s financial
statements.





Tax Fees





Amper,
Politziner and Mattia, LLP billed Intellicheck Mobilisa for tax related services
for the fiscal years ended December 31, 2008 and 2007 amounts totaling $8,428
and $5,000, respectively.





All Other
Fees





The
aggregate fees billed by Amper, Politziner and Mattia, LLP for professional
services rendered in connection with the Company’s Proxy and Registration
Statements on Forms S-3 and S-8 to register certain shares relating to the
Mobilisa merger and certain shares under the 2006 Stock Option Plan amounted to
$8,357 in 2008 and the Company’s Registration Statement on Form S-8 to register
certain shares under the 2003 and 2006 Stock Option Plans amounted to $3,700 in
2007.


57


Pre-approval of
Services





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




PART IV




Item
      15.
            Exhibits
      andFinancial Statement
      Schedules





(a)(1)
              Financial
      StatementsConsolidated
      Balance Sheets as of December 31, 2008 and 2007Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2006,
      2007 and 2008Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006(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)*


58





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, LLP31.1**
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley
      Act of 200231.2**
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley
      Act of 200232**
              
              Certification
      of Chief Executive Officer and Chief Financial pursuant to Section 906 of
      The Sarbanes-Oxley Act of
2002





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


**Filed
herewith.


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


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


(3)
            Incorporated
      by reference to 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 on 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.


(13)
            Incorporated
      by reference to Registrant’s Current Report on Form 10-K filed March 27,
      2008.




59




SIGNATURES




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







Date:
                March
      30, 2009
                INTELLICHECK
      MOBILISA, INC.By:
                /s/ Nelson LudlowDr.
      Nelson LudlowChief
      Executive Officer and
Director




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.







INTELLICHECK
      MOBILISA, INC.Date:
                March
      30, 2009
                By:
                /s/ Nelson LudlowDr.
      Nelson LudlowChief
      Executive Officer and Director(Principal
      Executive Officer)Date:
                March
      30, 2009
                /s/ Peter J. MundyPeter
      J. Mundy,Vice
      President of Finance and Chief Financial Officer(Principal
      Financial and Accounting Officer)Date:
                March
      30, 2009
                /s/ John W. PaxtonJohn
      W. Paxton, Chairman and DirectorDate:
                March
      30, 2009
                /s/ Jeffrey LevyJeffrey
      Levy, DirectorDate:
                March
      30, 2009
                /s/ Emil R. BedardLt.
      Gen. Emil R. Bedard, DirectorDate:
                March
      30, 2009
                /s/ Bonnie LudlowBonnie
      Ludlow, DirectorDate:
                March
      30, 2009
                /s/ John E.
      MaxwellJohn
      E. Maxwell, DirectorDate:
                March
      30, 2009
                /s/ Arthur L. MoneyArthur
      L. Money, DirectorDate:
                March
      30, 2009
                /s/ Guy L. SmithGuy
      L. Smith, Director





EXHIBIT
INDEX





Exhibit No.
              
              Description23.1
              
              Consent
      of Amper, Politziner and Mattia, LLP31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley
      Act of 200231.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley
      Act of 200232
              
              Certification
      of Chief Executive Officer and Chief Financial pursuant to Section 906 of
      The Sarbanes-Oxley Act of
2002





FINANCIAL
STATEMENTS





INDEX





PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  
                  F-1FINANCIAL
      STATEMENTS:Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  
                  F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007
      and 2006
                  
                  F-3Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2006,
      2007 and 2008
                  
                  F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007
      and 2006
                  
                  F-5NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  F-6
      – F-23Schedule
      II – Valuation and Qualifying Accounts
                  
                  F-24







Report of Independent
Registered Public Accounting Firm





To the
Board of Directors and Stockholders of


Intelli-Check
- Mobilisa, Inc.





We have
audited the accompanying balance sheets of Intelli-Check - Mobilisa, Inc. (the
“Company”) as of December 31, 2008 and 2007, and the related statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008.  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 - Mobilisa, Inc. as
of December 31, 2008 and 2007, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America.





We have
also audited the financial statement schedule listed in the index at item
15(a)(2), schedule II for each of the three years ended December 31,
2008.  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,
      LLPNew
      York, New YorkMarch
      30, 2009


F-1


INTELLI-CHECK
- MOBILISA, INC.





CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2008 and 2007





2008
                              
                              
                              2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                              
                              $
                              3,400,948
                              
                              
                              $
                              392,983Marketable
      securities and short-term investments, at fair value
                              
                              
                              -
                              
                              
                              
                              1,650,000Accounts
      receivable, net of allowance of $22,038 and $10,000for
      2008 and 2007, respectively
                              
                              
                              1,392,285
                              
                              
                              
                              1,076,732Inventory
                              
                              
                              39,350
                              
                              
                              
                              62,784Other
      current assets
                              
                              
                              230,901
                              
                              
                              
                              543,571Total
      current assets
                              
                              
                              5,063,484
                              
                              
                              
                              3,726,070PROPERTY
      AND EQUIPMENT, net
                              
                              
                              464,790
                              
                              
                              
                              81,464GOODWILL
                              
                              
                              11,736,660
                              
                              
                              
                              -INTANGIBLE
      ASSETS, net
                              
                              
                              6,877,752
                              
                              
                              
                              23,961DEFERRED
      ACQUISITION COSTS
                              
                              
                              -
                              
                              
                              
                              208,000OTHER  ASSETS
                              
                              
                              51,395
                              
                              
                              
                              34,916Total
      assets
                              
                              $
                              24,194,081
                              
                              
                              $
                              4,074,411LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                              
                              $
                              144,062
                              
                              
                              $
                              150,099Accrued
      expenses
                              
                              
                              616,999
                              
                              
                              
                              533,609Deferred
      revenue, current portion
                              
                              
                              1,900,528
                              
                              
                              
                              1,278,869Income
      taxes payable
                              
                              
                              168,732
                              
                              
                              
                              -Total
      current liabilities
                              
                              
                              2,830,321
                              
                              
                              
                              1,962,577OTHER
      LIABILITIESDeferred
      revenues, long-term portion
                              
                              
                              724,234
                              
                              
                              
                              91,681Total
      liabilities
                              
                              
                              3,554,555
                              
                              
                              
                              2,054,258COMMITMENTS
      AND CONTINGENCIES (Note 11)STOCKHOLDERS’
      EQUITY:Common
      stock – $.001 par value; 40,000,000 shares authorized; 25,335,175
      and12,281,728
      shares issued and outstanding as of 2008 and 2007,
      respectively
                              
                              
                              25,335
                              
                              
                              
                              12,282Additional
      paid-in capital
                              
                              
                              98,336,965
                              
                              
                              
                              46,668,941Accumulated
      deficit
                              
                              
                              (77,722,774
                              )
                              
                              
                              (44,661,070
                              )Total
      stockholders’ equity
                              
                              
                              20,639,526
                              
                              
                              
                              2,020,153Total
      liabilities and stockholders’ equity
                              
                              $
                              24,194,081
                              
                              
                              $
                              4,074,411





The
accompanying notes are an integral part of these statements.


F-2


INTELLI-CHECK
- MOBILISA, INC.





CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006





2008
                                
                                
                                2007
                                
                                
                                2006REVENUES
                                
                                $
                                9,954,686
                                
                                
                                $
                                3,511,908
                                
                                
                                $
                                3,161,854COST
      OF REVENUES
                                
                                
                                (2,687,752
                                )
                                
                                
                                (1,390,941
                                )
                                
                                
                                (1,037,341
                                )Gross
      profit
                                
                                
                                7,266,934
                                
                                
                                
                                2,120,967
                                
                                
                                
                                2,124,513OPERATING
      EXPENSESSelling
                                
                                
                                1,574,355
                                
                                
                                
                                1,534,660
                                
                                
                                
                                1,564,843General
      and administrative
                                
                                
                                4,300,953
                                
                                
                                
                                2,333,154
                                
                                
                                
                                2,664,950Research
      and development
                                
                                
                                2,330,130
                                
                                
                                
                                1,088,004
                                
                                
                                
                                997,564Goodwill
      and intangible assets impairment
                                
                                
                                32,171,659
                                
                                
                                
                                -
                                
                                
                                
                                -Total
      operating expenses
                                
                                
                                40,377,097
                                
                                
                                
                                4,955,818
                                
                                
                                
                                5,227,357Loss
      from operations
                                
                                
                                (33,110,163
                                )
                                
                                
                                (2,834,851
                                )
                                
                                
                                (3,102,844
                                )OTHER
      INCOME (EXPENSE)Interest
      income
                                
                                
                                60,589
                                
                                
                                
                                161,633
                                
                                
                                
                                222,874Other
      expense
                                
                                
                                (12,130
                                )
                                
                                
                                -
                                
                                
                                
                                -48,459
                                
                                
                                
                                161,633
                                
                                
                                
                                222,874Net
      loss
                                
                                $
                                (33,061,704
                                )
                                
                                $
                                (2,673,218
                                )
                                
                                $
                                (2,879,970
                                )PER
      SHARE INFORMATION:Net
      loss per common share -Basic
      and diluted
                                
                                $
                                (1.47
                                )
                                
                                $
                                (0.22
                                )
                                
                                $
                                (0.24
                                )Weighted
      average common shares used in computingper
      share amounts -Basic
      and diluted
                                
                                
                                22,453,635
                                
                                
                                
                                12,262,958
                                
                                
                                
                                12,145,866





The
accompanying notes are an integral part of these statements.


F-3


INTELLI-CHECK
- MOBILISA, INC.





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


FOR THE
YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008





AdditionalCommon Stock
                                
                                
                                Paid-in
                                
                                
                                Deferred
                                
                                
                                AccumulatedShares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Compensation
                                
                                
                                Deficit
                                
                                
                                TotalBALANCE,
      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 directors’ compensation
                                
                                
                                20,000
                                
                                
                                
                                20
                                
                                
                                
                                125,980
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                126,000Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (2,673,218
                                )
                                
                                
                                (2,673,218
                                )BALANCE,
      December 31, 2007
                                
                                
                                12,281,728
                                
                                
                                
                                12,282
                                
                                
                                
                                46,668,941
                                
                                
                                
                                -
                                
                                
                                
                                (44,661,070
                                )
                                
                                
                                2,020,153Stock
      based compensation expense (employees and directors)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                322,272
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                322,272Issuance
      of common stock for the acquisition of Mobilisa, Inc.
                                
                                
                                12,281,650
                                
                                
                                
                                12,282
                                
                                
                                
                                50,951,604
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                50,963,886Exercise
      of stock options
                                
                                
                                673,826
                                
                                
                                
                                673
                                
                                
                                
                                320,242
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                320,915Issuance
      of stock as directors’ compensation
                                
                                
                                97,971
                                
                                
                                
                                98
                                
                                
                                
                                73,906
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                74,004Net
      loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (33,061,704
                                )
                                
                                
                                (33,061,704
                                )BALANCE,
      December 31, 2008
                                
                                
                                25,335,175
                                
                                
                                $
                                25,335
                                
                                
                                $
                                98,336,965
                                
                                
                                $
                                -
                                
                                
                                $
                                (77,722,774
                                )
                                
                                $
                                20,639,526





The
accompanying notes are an integral part of these statements.


F-4


INTELLI-CHECK
- MOBILISA, INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006




2008
                
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (33,061,704
                )
                
                $
                (2,673,218
                )
                
                $
                (2,879,970
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities-Depreciation
      and amortization
                
                
                1,414,429
                
                
                
                38,336
                
                
                
                36,760Non
      cash stock based compensation expense
                
                
                396,276
                
                
                
                523,927
                
                
                
                826,356Provision
      for doubtful accounts
                
                
                68,800
                
                
                
                -
                
                
                
                -Goodwill
      and intangible assets impairment charge
                
                
                32,171,659
                
                
                
                -
                
                
                
                -Recovery
      of amortization of deferred compensation
                
                
                -
                
                
                
                -
                
                
                
                (53,317
                )Amortization
      of deferred compensation
                
                
                -
                
                
                
                -
                
                
                
                129,756Loss
      on sale of property and equipment
                
                
                12,130
                
                
                
                -
                
                
                
                -Changes
      in assets and liabilities:Decrease
      (increase) in accounts receivable
                
                
                999,368
                
                
                
                (484,756
                )
                
                
                (183,434
                )Decrease
      in inventory
                
                
                85,928
                
                
                
                57,139
                
                
                
                10,788Decrease
      (increase) in other current assets
                
                
                342,637
                
                
                
                (36,190
                )
                
                
                (92,832
                )Increase
      in other assets
                
                
                (148,135
                )
                
                
                -
                
                
                
                -(Decrease)
      increase in accounts payable and accrued expenses
                
                
                (503,990
                )
                
                
                150,615
                
                
                
                (228,170
                )(Decrease)
      increase in deferred revenue
                
                
                (495,883
                )
                
                
                241,503
                
                
                
                342,408(Decrease)
      increase in other current liabilities
                
                
                -
                
                
                
                (75,000
                )
                
                
                75,000Decrease
      in income taxes payable
                
                
                (476,394
                )
                
                
                -
                
                
                
                -Increase
      in other liabilities
                
                
                -
                
                
                
                18,206
                
                
                
                10,480Net
      cash provided by (used in) operating activities
                
                
                805,121
                
                
                
                (2,239,438
                )
                
                
                (2,006,175
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (111,707
                )
                
                
                (27,988
                )
                
                
                (23,908
                )Proceeds
      from sale of property and equipment
                
                
                7,800
                
                
                
                -
                
                
                
                -Investment
      in marketable securities and short-term investments
                
                
                -
                
                
                
                (3,237,000
                )
                
                
                (6,384,957
                )Sales
      of marketable securities and short-term investments
                
                
                1,650,000
                
                
                
                5,346,133
                
                
                
                7,889,132Deferred
      acquisition costs
                
                
                -
                
                
                
                (208,000
                )
                
                
                -Cash
      of Mobilisa, Inc., at date of acquisition
                
                
                335,836
                
                
                
                -
                
                
                
                -Net
      cash provided by investing activities
                
                
                1,881,929
                
                
                
                1,873,145
                
                
                
                1,480,267CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from issuance of common stock
                
                
                320,915
                
                
                
                232,359
                
                
                
                524,575Net
      cash provided by financing activities
                
                
                320,915
                
                
                
                232,359
                
                
                
                524,575Net
      increase (decrease) in cash and cash equivalents
                
                
                3,007,965
                
                
                
                (133,934
                )
                
                
                (1,333
                )CASH
      AND CASH EQUIVALENTS, beginning of year
                
                
                392,983
                
                
                
                526,917
                
                
                
                528,250CASH
      AND CASH EQUIVALENTS, end of year
                
                $
                3,400,948
                
                
                $
                392,983
                
                
                $
                526,917SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:On
      March 14, 2008, the Company acquired all the common stock of Mobilisa,
      Inc. by issuing common stock and options in the amount of
      $50,963,886.Income
      taxes paid
                
                $
                476,394
                
                
                $
                -
                
                
                $
                -




The
accompanying notes are an integral part of these statements.


F-5


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





1.     NATURE OF
BUSINESS





Business





Intelli-Check
- Mobilisa, Inc. (the “Company” or “Intelli-Check”) is a leading technology
company in developing and marketing wireless technology and identity systems for
various applications including: mobile and handheld wireless devices for the
government, military and commercial markets. Products include the Defense ID
systems, an advanced ID card access-control product that is currently protecting
over 50 military and federal locations and ID-Check a technology that instantly
reads, analyzes, and verifies encoded data in magnetic stripes and barcodes on
government-issue IDs from approximately 60 jurisdictions in the U.S. and Canada
to determine if the content and format are valid.  Wireless products
include Wireless Over Water (WOW), Floating Area Network (FAN), AIRchitect and
Wireless Buoys.  Creating improved communications across water,
wireless solutions have capabilities for security, environmental protection and
mobile networking.





Principles of
Consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Mobilisa, Inc. (“Mobilisa”).  The acquisition
of Mobilisa was completed on March 14, 2008, and therefore Mobilisa’s results of
operations are included in the financial statements for the period March 15,
2008 through December 31, 2008.  All intercompany balances and
transactions have been eliminated upon consolidation.





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,
2008 and 2007, cash equivalents included money market funds and bank CD’s (with
maturities at date of purchase of three months or less) of $2,217,641 and
$356,803, respectively.





Marketable
Securities





The
Company classifies its investments in marketable securities as
available-for-sale securities and accounts for them in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” (“SFAS No. 115”).
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 0.7%. 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 money market funds and bank certificates of
deposit.  Realized gains and losses
on available-for-sale securities are calculated using the specific
identification method. During the year ended December 31, 2008 and 2007,
realized gains and losses on available-for-sale securities were insignificant.At December 31, 2008 all marketable securities had maturity dates of less
than three months and were classified as cash equivalents.





Allowance for Doubtful
Accounts





The
Company records its allowance for doubtful accounts based upon its assessment of
various factors.  The Company considers historical experience, the age
of the accounts receivable balances, credit quality of the Company’s customers,
current economic conditions and other factors that may affect customers’ ability
to pay.




F-6


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





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, goodwill and
intangible assets.





The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of these assets may not be
fully recoverable in accordance with SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets” and SFAS 142 “Goodwill and Other Intangible
Assets.”  To determine recoverability of its long-lived assets, the
Company evaluates the probability that future undiscounted net cash flows,
without interest charges, will be less than the carrying amount of the
assets.  Impairment is measured at fair value. The Company recognized
an impairment on long-lived assets during the year ended December 31, 2008, as
discussed below. No impairments were recognized during the years ended December
31, 2007 and 2006.





Property and
Equipment





Property
and equipment are recorded at cost and are depreciated over their estimated
useful lives ranging from two to ten-years using the straight-line
method.  Leasehold improvements are amortized utilizing the
straight-line method over the lesser of the term of the lease or estimated
useful life of the asset.





Goodwill





Goodwill
represents the excess of acquisition cost over the fair value of net assets
acquired in business combinations.  Pursuant to SFAS No. 142,
“Goodwill and Other Intangible Assets,” the Company tests goodwill for
impairment on an annual basis, or between annual tests, in certain
circumstances, such as the incurrence of operating losses or a significant
decline in earnings associated with the asset. The Company evaluates goodwill
for impairment using the two-step process as prescribed in
SFAS No. 142. The first step is to compare the fair value of the
reporting unit to the carrying amount of the reporting unit. If the carrying
amount exceeds the fair value, a second step must be followed to calculate
impairment. The Company performs the initial step by comparing the carrying
value to the estimated fair value of the reporting units, which is determined by
considering future discounted cash flows, market transactions and multiples,
among other factors. Based upon these tests, the Company determined the fair
value of the Mobilisa reporting unit was less than its carrying amount resulting
in a goodwill impairment at December 31, 2008, the date of the goodwill
impairment test.  See Note 4.





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.   Acquired intangible assets include trade names,
patents, developed technology and backlog described more fully in Note 3. The
Company uses the straight line method to amortize these assets over their
estimated useful lives.  The Company records an impairment charge
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable from estimated undiscounted future cash flows
from the use of these assets.  When such impairment is indicated, the
related assets are written down to estimated fair value.  See Note 4
for impairment recognized in 2008.





Costs of Computer Software
Developed or Obtained for Internal Use





The
Company accounts for certain software costs under Statement of Position 98-1,
“Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use” (“SOP 98-1”), which provides guidance for determining whether
computer software is internal-use software and guidance on accounting for the
proceeds of computer software originally developed or obtained for internal use
and then subsequently sold to the public.  It also provides guidance
on capitalization of the costs incurred for computer software developed or
obtained for internal use.


F-7


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





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, 2008, 2007 and
2006.





Deferred Acquisition
Costs





In 2007,
the Company deferred certain legal and proxy related charges related to the
business combination with Mobilisa, Inc. (See Note 3).  These costs
were capitalized as part of the purchase price when the transaction was
completed in 2008.





Revenue
Recognition





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





The
Company recognizes revenues from licensing of its patented software to
customers. The Company’s licensed software requires continuing service or post
contract customer support and performance; accordingly, a portion of the revenue
is deferred based on its fair value and recognized ratably over the period in
which the future service, support and performance are provided, which is
generally one to three years.  Royalties from the licensing of the
Company’s technology are recognized as revenues in the period they are
earned.   For the years ended December 31, 2008, 2007 and 2006,
the Company received $8,962, $21,878 and $28,503 respectively, in royalty
fees.





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





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





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





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





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.


F-8


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





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, 2008
and 2007, 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, 2008 and 2007, the carrying value of the
Company’s financial instruments approximated fair value, due to their short-term
nature.





Business Concentrations and
Credit Risk





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





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





During
the year ended December 31, 2008 and 2007, the Company made sales to one and two
customers that accounted for approximately 29.5% and 33.6% of total revenues,
respectively.  In 2008 the revenues result from a research contract
with the U.S. government and in 2007 from sales to two large
banks.  These customers represented 45.4% and 36.1% of total accounts
receivable in 2008 and 2007, respectively.





As of
December 31, 2008, the Company had three suppliers for the production of its
input devices.  The Company has modified its software to operate in
windows based systems and can integrate with different hardware platforms that
are readily available in the marketplace.  The Company does not
maintain a manufacturing facility of its own and is not dependent on maintaining
its production relationships due to the flexibility of its software to run on
multiple existing platforms.





Net Loss and Net Loss Per
Share





The
Company computes net loss per common share in accordance with SFAS No. 128,
“Earnings Per Share.”  Under the provisions of SFAS No. 128, basic net
loss per common share (“Basic EPS”) is computed by dividing net loss by the
weighted average number of common shares outstanding.  Diluted net
loss per common share (“Diluted EPS”) is computed by dividing net loss by the
weighted average number of common shares and dilutive common share equivalents
then outstanding.  SFAS No. 128 requires the presentation of both
Basic EPS and Diluted EPS on the face of the statements of
operations.


F-9


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





Diluted
EPS for the years ended December 31, 2008, 2007 and 2006, does not include the
impact of stock options and warrants then outstanding, as the effect of their
inclusion would be antidilutive.





The
following table summarizes the equivalent number of common shares assuming the
related securities that were outstanding as of December 31, 2008, 2007 and 2006
had been converted:





2008
                
                
                2007
                
                
                2006Stock
      options
                
                
                2,897,801
                
                
                
                1,460,217
                
                
                
                2,470,055Warrants
                
                
                765,551
                
                
                
                922,636
                
                
                
                938,636Total
                
                
                3,663,352
                
                
                
                2,382,853
                
                
                
                3,408,691





Stock-Based
Compensation





The
Company accounts for the issuance of equity awards to employees in accordance
with SFAS No. 123(R), which 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 all
companies to apply a fair value based measurement method in accounting for all
share based payment transactions with employees.  Period compensation
costs are included in selling, general and administrative and research and
development expenses.





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





Options
granted to consultants and other non-employees are accounted for in accordance
with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."  Accordingly, such options are recorded at fair value at the
date of grant and subsequently adjusted to fair value at the end of each
reporting period until such options vest, and the fair value of the
options, as adjusted, is amortized to consulting expense over the related
vesting period.





Comprehensive
Loss





The
Company’s comprehensive net loss is equal to its net loss for the years ended
December 31, 2008, 2007 and 2006.





Segment
Information





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





Use of
Estimates





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


F-10


INTELLI-CHECK
- MOBILISA, 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.





In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements,” which is effective for calendar year companies on January 1,
2008. The Statement defines fair value, establishes a framework for measuring
fair value in accordance with Generally Accepted Accounting Principles, and
expands disclosures about fair value measurements. The Statement codifies the
definition of fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The standard clarifies the principle that
fair value should be based on the assumptions market participants would use when
pricing the asset or liability and establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. In February 2008,
the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of
FASB Statement No. 157” (“FSP FAS 157-2”), which delays the effective date
of SFAS 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 at least an annual basis, until fiscal years beginning after
November 15, 2008.  The partial adoption of SFAS 157 did not have
a material impact on the 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 adopted the provisions of SFAS No. 159
as of January 1, 2008 and has elected not to adopt the fair value option of SFAS
No. 159,  as of that date.  The adoption did not have a
material impact on the consolidated results of operations and financial
condition.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141R),
“Business Combinations.” SFAS 141R replaces SFAS No. 141, “Business
Combinations.” SFAS 141R establishes principles and requirements for how an
acquirer, a) recognizes and measures the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, b) recognizes and
measures the goodwill acquired and c) determines what information to disclose.
SFAS 141R also requires that all acquisition-related costs, including
restructuring, be recognized separately from the acquisition. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. This Statement eliminates adjustments to goodwill for
changes in deferred tax assets and uncertain tax positions after the acquisition
accounting measurement period (limited to one year from acquisition), including
for acquisitions prior to adoption of SFAS 141R. SFAS 141R does not affect the
accounting of the acquisition of Mobilisa and its adoption is not expected to
have a material impact on the consolidated results of operations and financial
condition.





In
December 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 adoption of
SFAS 160 is not expected to have a material impact on the consolidated results
of operations and financial condition.


F-11


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities,” which changes the disclosure
requirements for derivative instruments and hedging activities.  SFAS
No. 161 requires enhanced disclosures about (a) how and why and entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows.  This
statement’s disclosure requirements are effective for fiscal years and interim
periods beginning after November 15, 2008.  The adoption of SFAS 161
is not expected to have a material impact on the consolidated results of
operations and financial condition.





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 adoption of EITF Issue No. 07-3 did not have a material
impact on the consolidated results of operations and financial
condition.





In April
2008, the FASB issued Staff Position FSP 142-3, "Determination of the Useful
Life of Intangible Assets" (FSP 142-3). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement No. 142,
"Goodwill and Other Intangible Assets." FSP 142-3 is effective for financial
statements issued after December 15, 2008. The adoption of FSP 142-3 is not
expected to have a material impact on the consolidated results of operations and
financial condition.





In May
2008, the FASB issued FASB Staff Position No. APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 requires that
issuers of certain convertible debt instruments that may be settled in cash upon
conversion to separately account for the liability and equity components in a
manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods.  The accounting for
these types of instruments under APB 14-1 is intended to appropriately reflect
the underlying economics by capturing the value of the conversion options as
borrowing costs; therefore, recognizing their potential dilutive effects on
earnings per share. The effective date of APB 14-1 is for financial statements
issued for fiscal years and interim periods beginning after December 15, 2008
and does not permit earlier application. However, the transition guidance
requires retrospective application to all periods presented and does not
grandfather existing instruments.  The adoption of APB14-1 is not
expected to have a material impact on the consolidated results of operations and
financial condition.





In June
2008, the FASB issued FASB Staff Position EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities" ("EITF 03-6-1"). EITF 03-6-1 applies to the calculation of earnings
per share for share-based payment awards with rights to dividends or dividend
equivalents under Statement No. 128, Earnings Per Share. Unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents will be considered participating securities and will be included in
the computation of earnings per share pursuant to the two-class method. The
effective date of EITF 03-6-1 is for financial statements issued for fiscal
years beginning after December 15, 2008, and all interim periods within those
years. Early adoption is not permitted. Once effective, all prior period
earnings per share data presented will be adjusted
retrospectively.  The adoption of EITF 03-6-1 is not expected to have
a material impact on the consolidated results of operations and financial
condition.





In
October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active” (“FSP 157-3”). FSP 157-3 clarified the application of
FAS 157. FSP 157-3 demonstrated how the fair value of a financial
asset is determined when the market for that financial asset is inactive.
FSP 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of this standard
did not have an impact on the consolidated financial
statements.


F-12


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





3.     ACQUISITION OF MOBILISA,
INC.





On
November 20, 2007, Intelli-Check and Mobilisa, Inc., a private company that is a
leader in identity systems and mobile and wireless technologies, entered into a
merger agreement pursuant to which a wholly-owned subsidiary of Intelli-Check
would merge with and into Mobilisa, resulting in Mobilisa becoming a
wholly-owned subsidiary. At a special meeting of stockholders held on March 14,
2008, the Company’s stockholders voted to approve the merger, as well as to
amend Intelli-Check’s certificate of incorporation to change the name of the
Company to Intelli-Check – Mobilisa, Inc., increase the authorized shares
of common stock and to increase the number of shares issuable under our 2006
Equity Incentive Plan by 3,000,000.  The headquarters of Intelli-Check
was moved to Mobilisa’s offices in Port Townsend, Washington.  The
transaction was accounted for using the purchase method of accounting. The
unaudited pro forma condensed statements of operations are presented below as if
the acquisition had been completed as of the beginning of the applicable periods
presented.








Year ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(In thousands)Revenues
                  
                  $
                  11,002
                  
                  
                  $
                  10,146
                  
                  
                  $
                  6,584Net
      loss
                  
                  $
                  (34,008
                  )
                  
                  $
                  (2,989
                  )
                  
                  $
                  (4,213
                  )Net
      loss per share
                  
                  $
                  (1.36
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.17
                  )





The
purchase price allocation included within these consolidated financial
statements is based upon an estimated purchase price of approximately
$51.3 million, consisting of an exchange ratio of 1.091 shares of
Intelli-Check common stock for each share of Mobilisa common stock, stock
options, warrants and transaction costs.  On March 14, 2008, the
Company issued 12,281,650 common shares to Mobilisa stockholders.  Under
the purchase method of accounting and the guidance of EITF 99-12
“Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination”, the fair value of the
equity consideration was determined using an average of Intelli-Check’s closing
share prices beginning two days before and ending two days after November 21,
2007, the date on which the Merger Agreement was announced, or $3.54 per
share.




Outstanding
options to purchase Mobilisa common stock were assumed by Intelli-Check and
converted into options to purchase Intelli-Check common stock, based on a
formula in the merger agreement. No cash consideration was paid for stock
options. For purpose of the valuation, the fair value of the assumed options was
estimated using the Black Scholes model. The vested portion of this fair value
is included in the purchase price.  The valuation assumptions
used were: expected dividend yield 0%, expected volatility 63%, expected
life 2.5 years and risk free interest rate 1.65%.




Purchase
Price Allocation




The
allocation of the purchase price to Mobilisa’s tangible and identifiable
intangible assets acquired and liabilities assumed was based on their estimated
fair values.





The
calculation of purchase price and goodwill and other intangible assets as of
March 14, 2008 was estimated as follows:


Fair
      value of Intelli-Check common stock issued to Mobilisa
      shareholders
                      
                      $
                      43,477,040Fair
      value of Intelli-Check common vested stock awards to be issued as
      consideration forreplacement
      of outstanding Mobilisa vested stock awards
                      
                      
                      7,486,846Transaction
      costs
                      
                      
                      357,575Total
      purchase price
                      
                      $
                      51,321,461


Purchase
      price allocated to:Tangible
      assets acquired less liabilities assumed
                        
                        $
                        (523,067
                        )Identifiable
      intangible assets
                        
                        
                        14,440,000Deferred
      tax adjustments
                        
                        
                        (210,708
                        )Goodwill
                        
                        
                        37,615,236Tangible
      assets acquired and liabilities assumed
                        
                        $
                        51,321,461




Intelli-Check
estimated the fair value of tangible assets acquired and liabilities assumed.
These estimates were based on a valuation dated as of March 14, 2008, the date
of the acquisition. At December 31, 2008, the Company finalized its allocation
of the purchase price of Mobilisa.


F-13


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





As a
component of the acquisition, the Company acquired software maintenance and
database subscription obligations and the associated deferred revenue. In
accordance with EITF Issue No 01-3 “Accounting in a Business Combinations for
Deferred Revenue of an Acquiree” the Company determined there was a legal
performance obligation.  The deferred revenue was measured at fair
value and is recognized over the remaining contractual period, generally from
one to three years.





Identifiable
intangible assets




Intelli-Check
has estimated the fair value of the acquired identifiable intangible assets,
which are subject to amortization, using the income approach. The following
table sets forth the components of these intangible assets and their estimated
useful lives as of December 31, 2008:





Estimated
                      Useful
                      Life
                    
                    Initial
                      Estimated
                      Cost
                    
                    
                    2008
                      Amortization
                      Expense
                    
                    
                    Impairment
                      Charge
                    
                    
                    Net Balance
                      as of 12/31/08Trade
      name
                    
                    20 years
                    
                    $
                    1,300,000
                    
                    
                    $
                    (51,458
                    )
                    
                    $
                    (648,542
                    )
                    
                    $
                    600,000Patents
                    
                    17
      years
                    
                    
                    1,550,000
                    
                    
                    
                    (72,181
                    )
                    
                    
                    (787,819
                    )
                    
                    
                    690,000Developed
      technology
                    
                    7
      years
                    
                    
                    5,140,000
                    
                    
                    
                    (581,310
                    )
                    
                    
                    (1,238,690
                    )
                    
                    
                    3,320,000Backlog
                    
                    3
      years
                    
                    
                    820,000
                    
                    
                    
                    (303,400
                    )
                    
                    
                    (516,600
                    )
                    
                    
                    0Non-contractual
      customer relationships
                    
                    15
      years
                    
                    
                    5,630,000
                    
                    
                    
                    (278,568
                    )
                    
                    
                    (3,101,432
                    )
                    
                    
                    2,250,000$
                    14,440,000
                    
                    
                    $
                    (1,286,917
                    )
                    
                    $
                    (6,293,083
                    )
                    
                    $
                    6,860,000





The
Company expects that amortization expense for the next five succeeding years
will be as follows:





2009
                  
                  $
                  756,5172010
                  
                  
                  756,5172011
                  
                  
                  756,5172012
                  
                  
                  756,5172013
                  
                  
                  756,517





These
amounts are subject to change based upon the review of recoverability and useful
lives that are performed at least annually.





In 2008,
the Company recorded an impairment of $6,293,083 for intangible assets. (See
Note 4)





In
addition, the following summarize the carrying amounts of intangible assets and
related amortization existing prior to the acquisition:





As of December 31, 2008
                                                      
                                                      
                                                      As of December 31, 2007Gross
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Net
                                                      
                                                      
                                                      Gross
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      NetAmortized
                                                      
                                                      Carrying
                                                      
                                                      
                                                      Accumulated
                                                      
                                                      
                                                      as of
                                                      
                                                      
                                                      Carrying
                                                      
                                                      
                                                      Accumulated
                                                      
                                                      
                                                      as ofIntangible Assets
                                                      
                                                      Amount
                                                      
                                                      
                                                      Amortization
                                                      
                                                      
                                                      12/31/2008
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Amortization
                                                      
                                                      
                                                      12/31/2007Patents
                                                      
                                                      $
                                                      105,661
                                                      
                                                      
                                                      $
                                                      87,909
                                                      
                                                      
                                                      $
                                                      17,752
                                                      
                                                      
                                                      $
                                                      105,661
                                                      
                                                      
                                                      $
                                                      81,700
                                                      
                                                      
                                                      $
                                                      23,961Copyrights
                                                      
                                                      
                                                      17,500
                                                      
                                                      
                                                      
                                                      17,500
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      17,500
                                                      
                                                      
                                                      
                                                      17,500
                                                      
                                                      
                                                      
                                                      -Total
                                                      
                                                      $
                                                      123,161
                                                      
                                                      
                                                      $
                                                      105,409
                                                      
                                                      
                                                      $
                                                      17,752
                                                      
                                                      
                                                      $
                                                      123,161
                                                      
                                                      
                                                      $
                                                      99,200
                                                      
                                                      
                                                      $
                                                      23,961





Amortization
expense for years ended December 31, 2008, 2007 and 2006 were $6,209, $6,209 and
$6,209, respectively.





As of
December 31, 2008, estimated annual amortization expense for each of the next
three years is $6,209, $6,209 and $5,334.


F-14


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





4.     GOODWILL AND INTANGIBLE
ASSETS IMPAIRMENT





At
December 31, 2008, the Company had goodwill of $37,615,236, which
represented the aggregate of the excess purchase price for the acquired business
of Mobilisa over the fair value of the net assets acquired.




The
Company performs a goodwill impairment test annually in the fourth quarter or
more frequently if events or circumstances indicate that an impairment loss may
have been incurred.





The
impairment test requires that the Company estimate and compare the fair value of
its reporting units to their carrying value, including
goodwill.  Reporting units are determined in accordance with the
guidance in SFAS 142, “Goodwill and Other Intangible Assets,” and generally are
at a level below the reportable segment.  Fair value is determined
primarily using the discounted cash flow method, although market transactions
and multiples are also considered. Such analysis requires the use of certain
future market assumptions and discount factors, which are subjective in nature.
Estimated values can be affected by many factors beyond the company’s control
such as business and economic trends, government regulation, and technological
changes.  The Company utilized a valuation advisor to assist in
performing the impairment analyses and valuations.  Estimates of fair
values were primarily based on the discounted cash flows based on the Company’s
latest plans and projections. The use of the discounted cash flow method
requires significant judgments and assumptions of future events many of which
are outside the control of the Company, including estimates of future growth
rates, income tax rates, and discount rates, among others. In addition, the use
of market transactions and multiples requires significant judgment as to whether
observed data is comparable to the reporting units being evaluated and how much
weight should be given to such data in the valuation. Management believes that
the assumptions used to determine fair value are appropriate and reasonable.
However, changes in circumstances or conditions affecting these assumptions
could have a significant impact on the fair value determination.





As of
December 31, 2008, as a result of equity market conditions and the resulting
decrease in current market multiples and the Company's stock price, the Company
compared the carrying amounts of its Mobilisa reporting unit to its estimated
fair value, and determined that the carrying amount exceeded its estimated fair
value.  The Company calculated the impairment loss by deriving the
implied fair value of the goodwill after allocating the estimated fair value of
the Mobilisa reporting unit to tangible and intangible assets.  The
goodwill impairment charge was primarily driven by the deteriorating economic
conditions that manifested themselves in the fourth quarter of 2008,
particularly as they impacted the Government ID and Wireless businesses. The
test determined that there was an impairment related to the carrying value of
goodwill and the Company recorded an impairment charge of $25,878,576 in the
fourth quarter of 2008.




The
Company considered whether long-lived assets were also impaired. As required by
SFAS No. 144, the Company compared the carrying amounts of the
identified asset groups (including goodwill as required by
SFAS No. 144) to the undiscounted cash flow of the asset groups
and determined that the Company’s intangible assets related to the Mobilisa
acquisition were also impaired by $6,293,083.




5.     FAIR VALUE
MEASUREMENTS





Effective  January
1, 2008, the Company adopted "Fair Value Measurement," ("SFAS
157"),  except  as  it  applies  to  the  nonfinancial  assets  and
nonfinancial liabilities  subject to FSP SFAS 157-2. SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability.  As
a basis for considering such assumptions, SFAS 157 establishes a three-tier
value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:





Level
      1
            Valuations
      based on quoted prices in active markets for identical assets or
      liabilities that the Company has the ability to directly
      access.





Level
      2
            Valuations
      based on quoted prices for similar assets or liabilities; valuations for
      interest-bearing securities based on non-daily quoted prices in active
      markets; quoted prices in markets that are not active; or other inputs
      that are observable or can be corroborated by observable data for
      substantially the full term of the assets or
  liabilities.


F-15


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





Level
      3
            Valuations
      based on inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or
      liabilities.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.  The Company’s financial assets are measured at fair
value on a recurring basis.




6.     PROPERTY AND
EQUIPMENT





Property
and equipment are comprised of the following as of December 31, 2008 and
2007:





2008
                    
                    
                    2007Computer
      equipment
                    
                    $
                    952,478
                    
                    
                    $
                    575,977Furniture
      and fixtures
                    
                    
                    169,428
                    
                    
                    
                    138,298Leasehold
      improvements
                    
                    
                    203,343
                    
                    
                    
                    143,253Office
      equipment
                    
                    
                    122,860
                    
                    
                    
                    46,287Vehicles
                    
                    
                    147,310
                    
                    
                    
                    -1,595,419
                    
                    
                    
                    903,815Less
      - Accumulated depreciation and amortization
                    
                    
                    1,130,629
                    
                    
                    
                    822,351$
                    464,790
                    
                    
                    $
                    81,464





Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 amounted to
$121,303, $32,127 and $30,551, respectively.





7.     CREDIT
FACILITY





The
Company’s Mobilisa subsidiary has a $250,000 revolving line of credit with Bank
of America which renews annually.  Interest is payable monthly at the
bank’s prime rate (3.25% at December 31, 2008), plus 1% per annum. The facility
is secured by the assets of Mobilisa and is guaranteed by two directors of the
Company, who are also members of management.  There were no borrowings
under this facility as of December 31, 2008.





8.     ACCRUED
EXPENSES





Accrued
expenses are comprised of the following as of December 31, 2008 and
2007:


2008
                    
                    
                    2007Professional
      fees
                    
                    $
                    125,499
                    
                    
                    $
                    250,515Payroll
      and related
                    
                    
                    432,177
                    
                    
                    
                    226,642Rent
                    
                    
                    6,841
                    
                    
                    
                    10,261Other
                    
                    
                    52,482
                    
                    
                    
                    46,191$
                    616,999
                    
                    
                    $
                    533,609





9.     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.  The
Company adopted FIN 48 and FIN 48-1 as of January 1, 2007. The adoption of
FIN 48 did not have an impact on the results of operations or financial
position.  As a result of continuing losses for tax purposes, the
Company has historically not paid income taxes and has recorded a full valuation
allowance against our net deferred tax asset. Therefore, no liability has been
recorded for unrecognized tax benefits prior to adoption of FIN 48 and there was
no adjustment from the implementation. There continues to be no liability
related to unrecognized tax benefits at December 31, 2008.  Interest
and penalties related to unrecognized tax benefits are recorded in income tax
expense. There was no accrued interest related to unrecognized tax benefits at
December 31, 2008.  The tax years 2004-2008 remain open to examination
by the major taxing jurisdictions to which the Company is
subject.


F-16


INTELLI-CHECK
- MOBILISA, 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, 2008 and 2007 are as follows:





2008
                
                
                2007Deferred
      tax assets:Net
      operating loss carryforwards
                
                $
                14,637,000
                
                
                $
                14,456,000Deferred
      revenue
                
                
                430,000
                
                
                
                -Reserves
                
                
                39,000
                
                
                
                30,000Research
      & development tax credits
                
                
                78,000
                
                
                
                81,000Total
      deferred tax assets
                
                
                15,184,000
                
                
                
                14,567,000Deferred
      tax liabilities:Intangible
      assets
                
                
                (2,521,000
                )
                
                
                -Depreciation
                
                
                (80,000
                )
                
                
                (15,000
                )Total
      deferred tax liabilities
                
                
                (2,601,000
                )
                
                
                (15,000
                )Net
      deferred tax assets
                
                
                12,583,000
                
                
                
                14,552,000Less:
      Valuation allowance
                
                
                (12,583,000
                )
                
                
                (14,552,000
                )Deferred
      tax assets, net of allowance
                
                $
                -
                
                
                $
                -





Realization
of deferred tax assets is dependent upon future earnings, if any.  The
Company has recorded a full valuation allowance against its deferred tax assets
since management believes that it is more likely than not that these assets will
not be realized.





As of
December 31, 2008 the Company had net operating loss carryforwards (NOL’s) for
federal and New York State income tax purposes of approximately $36.6
million.  There can be no assurance that the Company will realize the
benefit of the NOL’s.  The federal and state NOL’s are available to
offset future taxable income and expire from 2018 through 2028 if not
utilized.  Under Section 382 of the Internal Revenue Code, these NOL’s
may be limited due to ownership changes.





The
effective tax rate for the years ended December 31, 2008, 2007 and 2006 is
different from the tax benefit that would result from applying the statutory tax
rates primarily due to the recognition of valuation allowances.





At
December 31, 2008, income taxes payable of $168,732 represents Mobilisa’s prior
tax liability, expected to be paid in 2009.





10.   STOCKHOLDERS’
EQUITY





Series A Convertible
Preferred Stock





In
January 1997, the Board of Directors authorized the creation of a class of
Series A Convertible Preferred Stock with a par value of $.01.  The
Series A Convertible Preferred Stock is convertible into an equal number of
common shares at the holder’s option, subject to adjustment for
anti-dilution.  The holders of Series A Convertible Preferred Stock
are entitled to receive dividends as and if declared by the Board of
Directors.  In the event of liquidation or dissolution of the Company,
the holders of Series A Convertible Preferred Stock are entitled to receive all
accrued dividends, if applicable, plus the liquidation price of $1.00 per
share.  As of December 31, 2008 and 2007, there were no outstanding
shares of Series A Convertible Preferred Stock.


F-17


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





Warrants





All
warrants have been issued with an exercise price that is equal to or above the
fair market value of the Company’s common stock on the date of
grant.  As of December 31, 2008, the Company had warrants outstanding
for 765,551 shares of common stock at a weighted average exercise price of
$5.14, which will expire between January 21, 2009 and March 14,
2013.





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.





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, the Company 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, the Company recognized amortization of deferred compensation
of $129,756.





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, 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
                )
                
                
                3.40Outstanding
      at December 31, 2007
                
                
                1,460,217
                
                
                
                5.47
                
                3.20
      yearsGranted
                
                
                574,719
                
                
                
                2.30Replacement
      options granted to Mobilisa employees
                
                
                2,363,381
                
                
                
                0.50Forfeited
      or expired
                
                
                (826,690
                )
                
                
                5.17Exercised
                
                
                (673,826
                )
                
                
                0.48
                
                
                
                $
                1,475,824At
      December 31, 2008
                
                
                2,897,801
                
                
                $
                2.03
                
                4.05
      years
                
                $
                1,918,870Exercisable
      at December 31, 2008
                
                
                2,467,611
                
                
                $
                1.99
                
                3.95
      years
                
                $
                1,918,870


F-18


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





Included
in the above schedule are 57,500 non-plan options, all of which are fully
vested.





The
assumptions used for the specified reporting periods and resulting estimates of
weighted average fair value per share of options granted during those periods
were as follows:





Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Risk-free
      interest rate
                  
                  3.3%
                  
                  
                  4.6%
                  
                  
                  4.7%Expected
      dividend yield
                  
                  0%
                  
                  
                  0%
                  
                  
                  0%Expected
      lives
                  
                  4.9
      years
                  
                  
                  4.6
      years
                  
                  
                  5.9
      yearsExpected
      volatility
                  
                  60%
                  
                  
                  59%
                  
                  
                  74%Forfeiture
      rate
                  
                  5%
                  
                  
                  5%
                  
                  
                  5%





Expected
volatility was calculated using the historical volatility of the Company’s stock
price over the last five years.  The expected term of the options is
estimated based on the Company’s historical exercise rate and forfeiture rates
are estimated based on employment termination experience.  The risk
free interest rate is based on U.S. Treasury yields for securities in effect at
the time of grants with terms approximating the term of the
grants.  The assumptions used in the Black-Scholes option valuation
model are highly subjective, and can materially affect the resulting
valuation.





The
following is a summary of stock options as of December 31, 2008:





Options Outstanding
                      
                      Options ExercisableRange of  Exercise Prices
                      
                      Number of
                        Options
                      
                      Weighted-
                        average
                        Remaining Life
                      
                      Weighted-average
                        Exercise
                        Price
                      
                      Number of
                        Options
                      
                      Weighted-
                        average
                        Exercise
                        Price$0.23
      to $2.00
                      
                      1,809,909
                      
                      
                      4.17
                      
                      
                      
                      $  0.60
                      
                      
                      
                      1,732,011
                      
                      
                      
                      $  0.55$2.01
      to $5.00
                      
                      585,530
                      
                      
                      4.24
                      
                      
                      
                      2.86
                      
                      
                      
                      233,238
                      
                      
                      
                      3.59$5.01
      to $7.00
                      
                      433,112
                      
                      
                      3.79
                      
                      
                      
                      5.92
                      
                      
                      
                      433,112
                      
                      
                      
                      5.92$7.01
      to $9.80
                      
                      69,250
                      
                      
                      0.86
                      
                      
                      
                      8.18
                      
                      
                      
                      69,250
                      
                      
                      
                      8.182,897,801
                      
                      
                      4.05
                      years
                      
                      
                      $  2.03
                      
                      
                      
                      2,467,611
                      
                      
                      
                      $  1.99





The
weighted-average fair value of the options granted during the years ended
December 31, 2008, 2007 and 2006 is $0.85, $3.20 and $3.99,
respectively.





As of
December 31, 2008, the Company had 1,814,155 options available for future grant
under the 1998, 1999, 2001, 2003 and 2006 Stock Option Plans.





As of
December 31, 2008, there was $577,215 of total unrecognized compensation cost,
net of estimated forfeitures, related to all unvested stock options and
restricted stock, which is expected to be recognized over a weighted average
period of approximately 2.6 years.





Stock
based compensation expense for the years ended December 31, 2008, 2007 and 2006
is as follows:


Years ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Compensation
      cost recognized:Stock
      options
                  
                  $
                  322,272
                  
                  
                  $
                  397,927
                  
                  
                  $
                  886,789Restricted
      stock
                  
                  
                  74,004
                  
                  
                  
                  126,000
                  
                  
                  
                  16,006$
                  396,276
                  
                  
                  $
                  523,927
                  
                  
                  $
                  902,795


F-19


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





Stock
based compensation in included in operating expenses as follows:





Years
      ended December 31,2008
                
                
                2007
                
                
                2006Selling
                
                $
                40,761
                
                
                $
                178,342
                
                
                $
                294,322General
      and administrative
                
                
                326,171
                
                
                
                290,277
                
                
                
                601,164Research
      and development
                
                
                29,344
                
                
                
                55,308
                
                
                
                7,309$
                396,276
                
                
                $
                523,927
                
                
                $
                902,795





The
Company did not capitalize any share-based compensation cost in 2008, 2007 and
2006.





The
Company has a net operating loss carry-forward as of December 31, 2008, 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 2008 that would have
resulted in a reclassification to reduce net cash provided by operating
activities with an offsetting increase in net cash provided by financing
activities.





During
2008 and 2006, the Company’s Board of Directors extended the expiration date of
150,000 and 56,500 stock options for the Company’s directors who resigned from
the Board for an additional 9 and 12 months, respectively.  As a
result, the Company recorded the fair value of the extension of $52,314 and
$34,350 as a non cash expense during the years ended December 31, 2008 and 2006,
respectively. These amounts were calculated in accordance with SFAS
123R.





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.





11. 
 COMMITMENTS AND
CONTINGENCIES





Operating
Leases





The
Company has entered into various leases for office space, office equipment and
storage space expiring through July 2017.  Future minimum lease
payments under these lease agreements are as follows:





Year
      Ending December 31:2009
                            
                            $
                            456,9882010
                            
                            
                            318,8672011
                            
                            
                            74,9862012
                            
                            
                            74,9862013
                            
                            
                            74,986Thereafter
                            
                            
                            268,448$
                            1,269,261





Rent
expense for the years ended December 31, 2008, 2007 and 2006 amounted to
$441,003, $217,792 and $211,825, respectively.


F-20


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





Royalty and License
Agreements





The
Company entered into an agreement with a former officer of the Company during
1996 to license certain software.  The agreement stipulated, among
other provisions, that the officer would receive royalties equal to a percentage
of the Company’s gross sales.  This agreement was terminated in May
1999 and was superseded by a new agreement which calls for payment of royalties
of .005% on gross sales from $2,000,000 to $52,000,000 and .0025% on gross sales
in excess of $52,000,000 pertaining to those patents on which Mr. Messina was
identified as an inventor.  As of December 31, 2008, 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,
2008, 2007 and 2006, the Company received $8,962, $21,878 and $28,503,
respectively, in royalty fees pursuant to this agreement.  Effective
March 12, 2006, the Company renewed the licensing agreement with CardCom for an
additional five years.  The Company also filed a patent infringement
lawsuit against Tricom Card Technologies, Inc. in July 2003, which is currently
being litigated.





Employment
Agreements





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





Severance
Arrangements





Mr. Peter
Mundy, Intelli-Check’s Chief Financial Officer, has a severance arrangement with
the Company, 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 $80,000 (equal
to six months salary).





Investment Firm
Relationships





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 year ended December 31, 2006, the Company
recorded an expense of approximately $186,000.  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 reducing
the monthly payment $6,000 for the services.  The Company terminated
this agreement as of August 31, 2008.


F-21


INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS





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. On
October 21, 2008, the Court issued an order denying our motion to disqualify
defendant’s counsel for a conflict of interest.  Except for this
order, there has been no change in the status of this lawsuit.  As of
March, 2009, the Court has not scheduled a hearing date for the remaining motion
and there is no trial date pending.





The
Company is not aware of any infringement by its products or technology on the
proprietary rights of others.





Other
than as set forth above, the Company 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.





12.   RELATED PARTY
TRANSACTIONS





Mobilisa
leases office space from a company (“Lessor Company”) that is wholly-owned by
two directors, who are members of management.  For the period
beginning March 15, 2008 through December 31, 2008, total rental payments for
this office space were $59,357.  The Company entered into a 10-year
lease for the office space ending in 2017.  The annual rent for this
facility is currently $74,986 and is subject to annual increases based on the
increase in the CPI index plus 1%.





The
Lessor Company's entire operations consist of the leased property and related
bank debt.  The Company is a guarantor of the loans for the leased
property.  As of December 31, 2008, the Company's maximum
exposure to loss is $422,000.





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





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


F-22




INTELLI-CHECK
- MOBILISA, INC.
 NOTES
TO FINANCIAL STATEMENTS
  13.  QUARTERLY FINANCIAL DATA
(UNAUDITED)
 
 The
following table sets forth unaudited financial data for each of Intelli-Check’s
last eight fiscal quarters.


Year Ended December 31, 2008
                        
                        
                        Year Ended December 31, 2007First
                          Quarter
                        
                        
                        Second
                          Quarter
                        
                        
                        Third
                          Quarter
                        
                        
                        Fourth
                          Quarter
                        
                        
                        First
                          Quarter
                        
                        
                        Second
                          Quarter
                        
                        
                        Third
                          Quarter
                        
                        
                        Fourth
                          Quarter(Dollars
      in thousands)Income
      Statement Data:Revenues
                        
                        $
                        1,153
                        
                        
                        $
                        2,710
                        
                        
                        $
                        3,539
                        
                        
                        $
                        2,553
                        
                        
                        $
                        685
                        
                        
                        $
                        739
                        
                        
                        $
                        857
                        
                        
                        $
                        1,231Gross
      profit
                        
                        
                        818
                        
                        
                        
                        2,040
                        
                        
                        
                        2,565
                        
                        
                        
                        1,844
                        
                        
                        
                        448
                        
                        
                        
                        490
                        
                        
                        
                        468
                        
                        
                        
                        715Income
      (loss) fromoperations
                        
                        
                        (482
                        )
                        
                        
                        (223
                        )
                        
                        
                        152
                        
                        
                        
                        (32,557
                        )
                        
                        
                        (678
                        )
                        
                        
                        (1,101
                        )
                        
                        
                        (645
                        )
                        
                        
                        (411
                        )Net
      income (loss)
                        
                        
                        (452
                        )
                        
                        
                        (212
                        )
                        
                        
                        152
                        
                        
                        
                        (32,549
                        )
                        
                        
                        (622
                        )
                        
                        
                        (1,058
                        )
                        
                        
                        (608
                        )
                        
                        
                        (385
                        )Net
      income (loss) per common
      share:Basic
      and diluted
                        
                        
                        (0.03
                        )
                        
                        
                        (0.01
                        )
                        
                        
                        0.01
                        
                        
                        
                        (1.29
                        )
                        
                        
                        (0.05
                        )
                        
                        
                        (0.09
                        )
                        
                        
                        (0.05
                        )
                        
                        
                        (0.03
                        )





The
fourth quarter of 2008 includes impairments on intangible assets and
goodwill of $6,293,083 and $25,878,576, respectively.  See Note 4 to
our consolidated financial statements.





Historically,
we have experienced lower sales volume in the first quarter of the
year.  Due to rounding, quarterly net income (loss) per share may not
add up to the total loss per share for the year.


F-23




INTELLI-CHECK
- MOBILISA, INC.


NOTES
TO FINANCIAL STATEMENTS




Schedule
II – Valuation and Qualifying Accounts




Year
Ended December 31, 2008, 2007 and 2006





Balance at
                
                
                
                
                
                Net Deductions
                
                
                Balance atYear ended December 31, 2008
                
                Beginning of Period
                
                
                Additions
                
                
                and Other
                
                
                End of PeriodDoubtful
      accounts and allowances
                
                $
                10,000
                
                
                $
                68,800
                
                
                $
                (56,762
                )
                
                $
                22,038Deferred
      tax assets valuation allowance
                
                $
                14,552,000
                
                
                
                
                
                
                $
                (1,969,000
                )
                
                $
                12,583,000





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





Balance at
                
                
                
                
                
                Net Deductions
                
                
                Balance atYear ended December 31, 2006
                
                Beginning of Period
                
                
                Additions
                
                
                and Other
                
                
                End of PeriodDoubtful
      accounts and allowances
                
                $
                28,467
                
                
                $
                10,000
                
                
                $
                (28,467
                )
                
                $
                10,000Deferred
      tax assets valuation allowance
                
                $
                12,759,000
                
                
                $
                855,000
                
                
                
                -
                
                
                $
                13,614,000


F-24