10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2006

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

For the transition period from                  to                

Commission file number 0-20270

SAFLINK CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	95-4346070
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
12413 Willows Road NE Suite 300 Kirkland, WA	98034
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (425) 278-1100

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

None

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

Common Stock, $.01 par value per share

(Title of Class)

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  x  No  ¨

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 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, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer x

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2006, was approximately $28,562,376.

There were 122,891,503 shares of the registrant’s common stock outstanding as of March 27, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Item 5 of this report and the information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the registrant’s 2007 annual meeting of stockholders.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A.	Qualitative and Quantitative Disclosure About Market Risk	41
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	41
Item 9A.	Controls and Procedures	42
Item 9B.	Other Information	42
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
Item 13.	Certain Relationships and Related Transactions and Director Independence	42
Item 14.	Principal Accountant Fees and Services	42
PART IV
Item 15.	Exhibits and Financial Statement Schedules	43
SIGNATURES		46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-6

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PART I

Item 1. Business

Certain statements in this Annual Report on Form 10-K constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect our current expectations concerning future results and events. Words such as “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “will,” “may,” “shall” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of our company (or entities in which we have interests), or industry results, to differ materially from historical results or future results, performance or achievements expressed or implied by such forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this Annual Report on Form 10-K. These forward-looking statements include, without limitation, statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our products and services and product development, our intentions and strategies regarding customers and customer relationships, our relationships with the software development community, our intent to continue to invest resources in research and development, our intent to develop relationships and strategic alliances, our beliefs regarding the future success of our products and services, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs regarding trademark and copyright protections, our beliefs and expectations regarding infringement claims, our beliefs regarding the development of industry standards, our expectations and beliefs regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding future growth and financial performance, our expectations regarding licensing arrangements and our revenue, our expectations and beliefs regarding revenue and revenue growth, our expectations regarding our strategies and long-term strategic relationships, our expectations regarding defects in products, our expectations regarding fluctuations in revenue and operating results, our beliefs and expectations regarding our existing facilities and the availability of additional space in the future, our intent to use all available funds for the development and the operation of our business and not to declare or pay any common stock cash dividends, our expectations regarding software development costs, our beliefs and expectations regarding our results of operations and financial position, our beliefs regarding estimates in valuing in-process research and development, our intentions and expectations regarding deferred tax assets, our beliefs and expectations regarding liquidity and capital resources and that cash flow from existing operations, existing cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for the foreseeable future, and our expectations regarding the impact of recent accounting pronouncements and revenue recognition matters. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated. These risks and uncertainties include without limitation those identified in Item 1A of this Annual Report on Form 10-K below. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.

As used in this Annual Report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,” “the Company,” and “Saflink” refer to Saflink Corporation, a Delaware corporation, and its subsidiaries.

Overview

Historically, Saflink Corporation has taken a broad approach to monetizing its investments in identity assurance management technologies. Our involvement in biometric standards activities and participation in government pilot programs led to a broad portfolio of “strong authentication” products that were marketed to the Federal government and commercial enterprises. Revenue from these products was generated using a combination of direct sales and third-party distribution. Our direct sales force sold to regulated industries, government agencies and large systems integrators. Sales to other customers were generally handled by our reseller channel.

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Despite a robust family of products and a broad portfolio of intellectual property, management became increasingly concerned with the level of investment required to maintain this approach to sales and the length of time it was taking to achieve the desired result. Management believed that many of our product lines showed the potential for sustainable growth if given enough time. But, as we entered the last half of 2006, it became evident to management and our board of directors that some trade-offs were necessary to ensure that we had enough time and capital to take advantage of those items we believed showed the greatest potential.

Faced with this dilemma, our management and board of directors acted quickly, taking a series of steps to reduce expense and attempt to maximize the company’s chances for success in key markets and programs. Those steps included:

• Management changes. In late September 2006, our board of directors appointed Steven M. Oyer, a long-time member of our board of directors, as Interim Chief Executive Officer and moved Glenn Argenbright from the position of Chief Executive Officer to president and general manager of our Registered Traveler Solutions Group.

• A substantial reduction in our workforce. In mid-October 2006, we reduced our headcount by 62% and instituted a hiring freeze, which substantially reduced our monthly cash usage.

• A consolidation of our facilities. With fewer employees, we had been able to sharply reduce our facility lease obligations. Our facility leases in Washington, Virginia, South Carolina, California, and Alberta (Canada) have been assigned or terminated or the locations have been sublet to subtenants, which further reduced our monthly cash usage.

• The elimination of non-essential lines of business. Lines of business that did not represent opportunities for substantial growth were eliminated. The Fortezza reader technology was sold as part of a transaction to eliminate a $2.4 million commercial lease obligation related to our facility in California. We also disbanded our professional services organization in Virginia and announced End-Of-Life (EOL) for our NetSign Common Access Card (CAC) desktop smartcard middleware product.

• A renewed, sharper focus. We narrowed our focus and intend to concentrate our efforts in two key areas: the Transportation Security Administration’s Registered Traveler program; and those products and assets we consider our core technologies. We believe this narrowed focus will help us maximize our ability to leverage previous investments in intellectual property and minimize our costs and extend the timeline for success. We also believe this concentration can provide the greatest potential to maximize shareholder value. We restructured our business into two divisions, which reflect our shift in focus:

• Registered Traveler Solutions Group—The mission of our Registered Traveler Solutions Group is to combine our reputation and intellectual property in identity assurance management with our founding membership in the FLO Alliance to offer a premier solution for the Registered Traveler program.

• Core Technologies Group—The mission of our Core Technologies Group is to seek partnerships with companies who can combine their own investment in marketing, production, distribution and support with our products and intellectual property to offer solutions to the market that are mutually beneficial.

Registered Traveler Solutions Group

The Transportation Security Administration’s (TSA) Registered Traveler program is designed to provide expedited security screening for airline passengers who volunteer biometric and biographic information to a TSA-approved Registered Traveler vendor and successfully complete a security threat assessment. We believe that, through our founding membership in the FLO Alliance, we will be a leading Registered Traveler program vendor and service provider to airports and air carriers.

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We have drawn on our significant expertise and demonstrated success in implementation of biometrically-enabled credentials and security applications in government identity programs to develop the enrollment, identity management and authentication subsystems we believe are necessary for the deployment of a successful Registered Traveler solution.

We have also assembled and lead the Fast Lane Option (FLO) Alliance, a consortium of companies with extensive expertise in credentialing, security, access control, travel services, political lobbying, and corporate and consumer marketing. Through the FLO Alliance, we believe that we have developed a solution that addresses the requirements of every phase of the Registered Traveler program, including the credentialing process and subsequent operational use of the credential in the civil aviation passenger screening environment. Our agreements with the members of the FLO Alliance currently consist of letters of understanding to enter into discussions regarding the obligations of the respective parties and financial terms of the relationships and we intend to negotiate definitive agreements with the companies in the FLO Alliance to facilitate the implementation of the Registered Traveler solution.

Market research with the traveling public has demonstrated that frequent travelers may be willing to pay for the convenience of being able to avoid long lines at airport security, and would be willing to disclose personal information in exchange for a more convenient and expedited travel experience. In testimony before the Senate Committee on Commerce, Science and Transportation, the executive director and chief operating officer of the National Business Travel Association (NBTA) stated that in a joint survey conducted by the NBTA and the Travel Industry of America, 92% of business travelers indicated a desire to participate in the Registered Traveler program.

We expect to launch our Registered Traveler solution with a stand-alone smartcard credential, which we call the FLO card, for use at security checkpoints of participating airports. However, we are working to add payment functionality to the FLO card for either debit/credit or stored value transactions and plan to utilize our consumer credit partners to aggressively market the FLO card through the consumer credit market. In the future, we hope to combine the FLO card with the credit/debit card to help to address issues such as credit card fraud and secure banking transactions.

We believe the principal source of revenue for our Registered Traveler Solutions Group will be a portion of the annual fees travelers will pay to participate in the program. We have not determined what annual fee participating travelers would be required to pay, but we anticipate that the annual fee will be approximately $100 per traveler. Analysts have estimated the number of potential participating travelers to be ten million and the total Registered Traveler market to potentially range in size from $1—$3 billion. In addition to the large number of potential participants, we believe the market opportunity is further enhanced by the financial quality of the potential participants. We believe the most likely participants are business travelers who use credit/debit cards as their principal form of payment, have higher credit limits, possess high credit ratings, pay many of their travel expenses through a company expense account, and have more disposable income.

We believe another source of revenue will be our portion of payments the FLO Alliance may receive under affiliate agreements with companies interested in marketing into the Registered Traveler channel. These companies may include those providing car and limousine services, office supplies, printing services, baggage services, private jets, international concierge access, resort services, corporate retreats, and banking and asset management services.

In addition to the Registered Traveler market, we believe there are a number of other markets into which we may be able to expand the FLO Solution, including:

• Ferry, metro, rail, subway, cruise;

• Stadiums, events, venues; and

• E-Commerce, secure retail, identity theft prevention.

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Core Technologies Group

Through our Core Technologies Group, we plan to focus on monetizing our products, intellectual property and technology through a combination of licensing and selling these assets and developing or enhancing new products that we believe have near-term potential. For example:

• On February 1, 2007, we licensed our NetSign^® for mobile middleware with Biometric Associates, Inc. (BAI). BAI is a developer of user authentication systems. The agreement provides BAI a non-exclusive license for use of NetSign for mobile middleware in the development and subsequent sale of BAI’s baiMobile^™ product line. The license agreement included an initial payment plus royalties due quarterly over a period of four years. Royalties are based on the number of seats sold by BAI that include our middleware.

• On February 27, 2007, we sold our rights in our SAFsolution and SAFmodule software programs to IdentiPHI, LLC for an initial payment of $778,000 plus deferred payments due quarterly over a period of three years. The deferred payments are based on a percentage of IdentiPHI’s gross margin over the next three years that includes the SAFsolution or SAFmodule source code.

Our Core Technologies Group is focused on additional software licensing transactions and strategies to monetize our intellectual property portfolio. In particular, the Core Technologies Group will concentrate business development efforts on the following product lines:

• jForté—our premier high assurance token. The jForté token, available as a smart card, USB fob or as an SOIC package, is designed to meet the most demanding and critical security needs encountered in enterprise smart card deployments. The jForté token is designed to deliver the security, convenience, flexibility and performance needed to satisfy the essential elements of any critical information assurance program. By combining a high level of security and performance in an open, standards-based environment, jForté provides a strong authentication solution for secure access to mission critical networks, PCs, and information systems. Interoperability and card management are addressed through the use of Java Card™ technology, a GlobalPlatform architecture and adherence to the Government Smart Card Interoperability Specification (GSC-IS). The jForté token can operate within the existing CAC issuance model and is well suited to meet the needs of the Federal Personal Identity Verification (PIV) program and other critical high assurance programs. We expect to fulfill an order for jForté in various form factors for an agency of the Federal government during the first half of 2007. We intend to continue to pursue opportunities with interested third parties in the Federal government market. We believe the Federal government market offers highest and most immediate need for high assurance token solutions. Following our mission with core technologies, we plan to search for key partners to assist with product development and marketing activities.

• SureAccess^™—our Physical Access Control System (PACS) product line. Our PACS focus historically has been the development of biometric/smartcard readers and solutions for deployment in the maritime space—offering stationary and hand-held versions for use in seaports and on board vessels. We delivered several hundred SureAccess readers to the State of Florida, whose FUPAC program is slightly more developed than the TSA’s Transportation Workers’ Identification Credential (TWIC) specification. The fixed product solution is an all-weather, smart card and biometric reader that reduces the threat of unauthorized access to critical facilities. With dynamic threat protection, the reader allows our customers to immediately strengthen access assurance requirements with multifactor authentication in response to changing threat levels. Both the fixed reader and the mobile hand-held readers have been designed to support and meet the strict requirements of the National Institute of Standards and Technologies’ (NIST) Federal Information Processing Standard (FIPS) 201, also known as the PIV program. We believe this design will support the use of these readers beyond just the specifications of the maritime space (commonly considered the TWIC program) and enable broader application in the Federal space. The SureAccess readers are based on the same Saflink contactless smartcard and biometric reader technology previously deployed by the TSA as part of TWIC Phase III. We expect the government and homeland security agencies to continue refinement of various specifications for use in

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both the TWIC and FIPS 201/PIV programs. We intend to continue developing partner relationships in an effort to expand product and marketing opportunities within the defined government programs.

• NetSign^® for mobile—our competing solution to the RIM^®Blackberry^® offering in the Department of Defense (DoD) Common Access Card (CAC) program. An application designed specifically for use with Windows Mobile^®-based devices, NetSign for mobile enables CAC users to perform many of the same security functions available with their desktop smart card middleware. These functions extend security based on public key infrastructure (PKI) to Windows Mobile devices—including the capability to digitally sign and encrypt/decrypt emails and documents, logon to secure web sites and utilize other CAC-enabled applications. We believe the demand for mobile security solutions will grow as DoD CAC users migrate away from Blackberry devices to Windows Mobile-based devices and as PKI-enabled smart cards are issued to Federal employees as trusted IDs under the FIPS 201/PIV program. We entered into a non-exclusive license agreement with BAI in the first quarter of 2007 and we believe key partners such as BAI and others offer the greatest market opportunity for us. We are pursuing partners that can integrate the NetSign for mobile application into their own hardware and software product solutions—expanding the market reach of the product in this growing space.

• miValet^™—our identity-centric computing solution designed specifically for security-conscious workers who use more than one computer. Addressing the need for solutions to help businesses and individuals manage information, miValet allows employees to access personal and corporate files from multiple computers securely and simply from almost anywhere using industry-standard hardware. For the individual or employee, simplified access to information and files regardless of their location can provide improved personal productivity, easier collaboration and greater efficiency. Among the benefits to the business or enterprise can be increased employee productivity, reduced risk of employees losing files and corporate information via unsecure data transfers, and lower capital costs for employee laptops and desktops. We are exploring business relationships in key market segments related to data backup and recovery, online storage and managed information to support distribution, marketing and service needs for the solution.

Patents and Trademarks

We hold two issued patents relating to a system and method of authenticating users in a network environment. We license this patent family to an entity under a royalty-bearing, non-exclusive license agreement and are actively seeking to enforce our rights under this patent family through similar licensing agreements. In addition, we hold five issued patents covering fingerprint imaging technology which we believe can be utilized to enhance and create strategic relationships with fingerprint technology companies, television set-top companies, and hand held computer companies. We also hold four issued patents covering methods for more secure, higher speed smart card, biometric, and reader systems which we believe can be utilized to enhance and create strategic relationships with smart card technology companies, computer manufacturers, and hand held computer companies.

In addition, we have published and unpublished pending patent applications related to our software, hardware, and systems. However, we cannot be sure that we will be granted any pending patents, that any patent previously granted will prove enforceable, or that any competitive advantage will exist for us because of these patents or patent applications.

We also rely on unpatented know-how, trade secrets and continuing research and development. We may not have any protection from other parties who independently develop the same know-how and trade secrets. Protection of our proprietary products and services is important to our business, and our failure or inability to maintain this type of protection could have a material adverse affect on our business, financial condition, results of operations and prospects. Moreover, while we do not believe that the production and sale of our proposed products or services infringe on rights of third parties, if we are incorrect in this regard, our failure to obtain needed licenses from these third parties could have a material adverse effect on our ability either to complete the development of certain products or services or to produce and market these products or services. Failure to obtain any of these types of licenses could adversely impact our business, condition (financial or otherwise), results of operations and prospects.

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We license certain patents or other intellectual property from other companies. The competitive nature of our industry makes any patents and patent applications of our licensors important to us. However, we cannot be sure that any of the patent applications of these licensors will be granted, that patents previously granted will prove enforceable, or that any of these patents or patent applications will lead to any competitive advantage for us.

We have registered certain service marks and trademarks with the United States Patent and Trademark Office. However, we have not registered certain other trademarks and trade names which we use with the United States Patent and Trademark Office nor in any foreign government trademark offices. With respect to unregistered trademarks, we generally accompany the use of these trademarks with our name to indicate the origin of the products to which they are applied, to distinguish them from the products of competitors and to build goodwill in these trademarks.

Employees

As of December 31, 2006, we had 20 full-time employees. From time to time, we utilize consultants or contractors for specific assignments. None of our employees are represented by a labor union and we have never experienced a work stoppage. We believe that our relationship with our employees is good.

Item 1A. Risk Factors

Factors That May Affect Future Results

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our business, operating results, financial performance, and share price may be materially adversely affected by a number of factors, including but not limited to the following risk factors, any one of which could cause actual results to vary materially from anticipated results or from those expressed in any forward-looking statements made by us in this annual report on Form 10-K or in other reports, press releases or other statements issued from time to time. Additional factors that may cause such a difference are set forth elsewhere in this annual report on Form 10-K.

We have accumulated significant losses and may not be able to generate significant revenue or any net income in the future, which would negatively impact our ability to run our business.

We have accumulated net losses of approximately $281.9 million from our inception through December 31, 2006. We have continued to accumulate losses after December 31, 2006, to date and we may be unable to generate significant revenue or net income in the future. We have funded our operations primarily through the issuance of equity and debt securities to investors and may not be able to generate a positive cash flow in the future. If we are unable to generate sufficient cash flow from operations, we will need to seek additional funds through the issuance of additional equity or debt securities or other sources of financing. We may not be able to secure such additional financing on favorable terms, or at all. Any additional financings will likely cause substantial dilution to existing stockholders. If we are unable to obtain necessary additional financing, we may be required to reduce the scope of, or cease, our operations.

We have not generated any significant sales of our products within the competitive commercial market, nor have we demonstrated sales techniques or promotional activities that have proven to be successful on a consistent basis, which makes it difficult to evaluate our business performance or our future prospects.

We are in an emerging, complex and competitive commercial market for digital commerce and communications security solutions. Potential customers in our target markets are becoming increasingly aware of the need for security products and services in the digital economy to conduct their business. Historically, only enterprises that had substantial resources developed or purchased security solutions for delivery of digital content over the Internet or through other means. Also, there is a perception that security in delivering digital content is costly and difficult to implement. Therefore, we will not succeed unless we can educate our target markets about

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the need for security in delivering digital content and convince potential customers of our ability to provide this security in a cost-effective and easy-to-use manner. Even if we convince our target markets about the importance of and need for such security, there can be no assurance that it will result in the sale of our products. We may be unable to establish sales and marketing operations at levels necessary for us to grow this portion of our business, especially if we are unsuccessful at selling our products into vertical markets. We may not be able to support the promotional programs required by selling simultaneously into several markets. If we are unable to develop an efficient sales system, or if our products or components do not achieve wide market acceptance, then our operating results will suffer and our earnings per share will be adversely affected.

A significant number of shares of our common stock are or will be eligible for sale in the open market, which could reduce the market price for our common stock and make it difficult for us to raise capital.

As of March 27, 2007, 122,891,503 shares of our common stock were outstanding. In addition, there were a total of 36,364,758 shares of our common stock issuable upon exercise or conversion of outstanding options, warrants, and convertible debt. These convertible securities to acquire shares of common stock are held by our employees and certain other persons at various exercise or conversion prices, 926,471 of which have exercise or conversion prices below the market price for our common stock of $0.09 as of March 27, 2007. Options to acquire 8,151,998 shares of our common stock were outstanding as of March 27, 2007, and our existing stock incentive plan had 3,168,830 shares available for future issuance as of that date.

We may, in our discretion, elect to pay the monthly redemption amounts and interest due on the debentures we issued in June 2006 in cash or in shares of our common stock. To date, we have elected to pay all redemption amounts and interest due in shares of our common stock and, accordingly, we have issued 33,983,297 shares of our common stock for the December 2006, January 2007, February 2007, and March 2007 redemption and interest payments and the April 2006 pre-redemption issuance.

The issuance of large numbers of additional shares of our common stock to pay the principal and interest of our convertible debt or upon the exercise or conversion of outstanding options, warrants or convertible debt would cause substantial dilution to existing stockholders and could decrease the market price of our common stock due to the sale of a large number of shares of common stock in the market, or the perception that these sales could occur. These sales, or the perception of possible sales, could also impair our ability to raise capital in the future.

If we do not generate significant revenue from our participation in large government security initiatives or increase the level of our participation in these initiatives, our business performance and future prospects may suffer.

We play various roles in certain large government security initiatives, including pursuing various opportunities in connection with the Transportation Security Administration’s (TSA) Registered Traveler program. However, our Registered Traveler business has never generated revenue. Our primary focus in the Registered Traveler business has been the development of a solution designed to meet the needs of the Registered Traveler program through the FLO Alliance, a consortium of companies with expertise in credentialing, security, access control, travel services, political lobbying, and corporate and consumer marketing. Although Huntsville International Airport recently agreed to work exclusively with the FLO Alliance to develop and implement a Registered Traveler program, the FLO Alliance has not entered into any agreement to be a Registered Traveler service provider and its solution has not been implemented in any airport to date. In addition, we have participated on the TSA’s Transportation Worker Identification Credential (TWIC) program, where our credentialing solutions accounted for a significant portion of the technology deployment for the prototype or limited deployment phase of the initiative. We have invested a substantial amount of time and resources in our efforts to participate in these and other government security initiatives, but we have not generated significant revenue from our participation in these security initiatives to date. If we are not able to generate significant revenue from our participation in these or other government programs, or if we incur substantial additional

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expenses related to government programs before we earn associated revenue, we may not have adequate resources to continue to operate or to compete effectively in the government or the commercial marketplace.

Our Registered Traveler business will be highly dependent on the FLO Alliance and could be materially harmed if we cannot negotiate definitive agreements with our alliance partners or if our relationships with our alliance partners were to weaken.

Our Registered Traveler business depends on the other members of the FLO Alliance for many elements of our Registered Traveler solution. Our arrangements and relationships with the members of the FLO Alliance will be critical to our ability to provide a Registered Traveler solution. The FLO Alliance is a consortium of companies with experience in credentialing, security, access control, travel services, political lobbying, and corporate and consumer marketing. Our agreements with the members of the FLO Alliance currently consist of letters of understanding to enter into discussions regarding the obligations of the respective parties and financial terms of the relationships, but the letters of understanding do not specifically obligate any of the companies in the FLO Alliance to concrete obligations relating to the implementation of a Registered Traveler solution. The success of the FLO Alliance will depend on our ability to negotiate definitive arrangements with respect to the obligations of the various members of the alliance and the performance of these third parties’ obligations or their ability to meet their obligations under these arrangements are outside our control. If we are unable to negotiate formal arrangements with these parties or they do not meet or satisfy their obligations under these arrangements, the performance and success of the FLO Alliance and our ability to implement a Registered Traveler solution may be significantly impaired.

Our financial results and ability to generate revenue from the Registered Traveler program in the future depend on our ability to negotiate arrangements with the FLO Alliance providing us with an acceptable portion of the annual fees travelers pay to participate in the Registered Traveler program.

We believe our principal source of revenue under the Registered Traveler program will be a portion of the annual fees travelers will pay to participate in the Registered Traveler program. We have not determined what annual fee participating travelers would be required to pay, but we anticipate that the annual fee will be approximately $100 per traveler. The TSA has announced that the fee for its portion of the Registered Traveler program, which covers the cost of the TSA’s security threat assessment, will be $28. Following the deduction of TSA’s portion of the annual fee from the anticipated annual fee, the FLO Alliance would receive $72 per traveler to cover services provided by all members of the FLO Alliance, including the registration and enrollment of travelers and the issuance of Registered Traveler cards and related customer service. If we are unable to negotiate favorable arrangements with members of the FLO Alliance providing us with an acceptable portion of the annual fees travelers pay to participate in the Registered Traveler Program, our financial results, and future prospects and ability to generate revenue could be harmed.

If the market for our products and services does not experience significant growth or if our biometric, token and smart card products do not achieve broad acceptance in this market, our ability to generate significant revenue in the future would be limited and our business would suffer.

A substantial portion of our product and service revenue are derived from the sale of biometric, token and smart card products and services. Biometric, token and smart card solutions have not gained widespread acceptance. It is difficult to predict the future growth rate of this market, if any, or the ultimate size of the biometric, token and smart card technology market. The expansion of the market for our products and services depends on a number of factors such as:

• the cost, performance and reliability of our products and services compared to the products and services of our competitors;

• customers’ perception of the benefits of biometric, token and smart card solutions;

• public perceptions of the intrusiveness of these solutions and the manner in which organizations use the biometric information collected;

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• public perceptions regarding the confidentiality of private information;

• customers’ satisfaction with our products and services; and

• marketing efforts and publicity regarding our products and services.

Even if biometric, token and smart card solutions gain wide market acceptance, our products and services may not adequately address market requirements and may not gain wide market acceptance. If biometric or smart card solutions or our products and services do not gain wide market acceptance, our business and our financial results will suffer.

As our current services and product offerings evolve, we may derive a material portion of our revenue from royalties, which is inherently risky.

Because a material portion of our future revenue may be derived from license royalties, our future success depends on:

• our ability to secure broad patent coverage for our new technologies and enter into license agreements with potential licensees; and

• the ability of our licensees to develop and commercialize successful products that incorporate our technologies.

We face risks inherent in a royalty-based business model, many of which are outside of our control, such as the following:

• the rate of adoption of our technologies by, and the incorporation of our technologies into products of, OEMs;

• the willingness of our licensees and others to make investments to support our licensed technologies, and the amount and timing of those investments;

• actions by our licensees that could severely harm our ability to use our proprietary rights;

• the pricing and demand for products incorporating our licensed technologies;

• our ability to structure, negotiate and enforce agreements for the determination and payment of royalties; and

• competition we may face with respect to our licensees competing with our business.

It is difficult to predict when we will enter into additional license agreements, if at all. The time it takes to establish a new licensing arrangement can be lengthy. We may also incur delays or deferrals in the execution of license agreements as we develop new technologies. The timing of our receipt of royalty payments and the timing of how we recognize license revenue under license agreements may fluctuate and significantly impact our quarterly or annual operating results. Because we may recognize a significant portion of license fee revenue in the quarter that the license is signed, the timing of signing license agreements may significantly impact our quarterly or annual operating results. Under our license agreements, we also may receive ongoing royalty payments, and these may fluctuate significantly from period to period based on sales of products incorporating our licensed technologies.

Our success depends on significant growth in the emerging Registered Traveler market and on broad acceptance of our Registered Traveler products and services in this market.

Because we believe a significant source of revenue will be a portion of the annual fees travelers will pay to participate in the Registered Traveler program, our success will depend largely on the expansion of markets for Registered Traveler related products domestically and internationally. The Registered Traveler market is new and unproven and our ability to generate revenue will depend on the size of the market and the market’s acceptance of our products and services. We cannot accurately predict the future growth of this industry or the ultimate size

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of the Registered Traveler market. Even if the Registered Traveler products and related technology gain market acceptance, our products may not achieve sufficient market acceptance or the market may not be sufficiently large to ensure our viability.

We may not be able to compete successfully in the Registered Traveler market against current and potential competitors.

We and the FLO Alliance will face intense competition in both the Registered Traveler and travel services markets. Many of our current and potential competitors, such as Verified Identity Pass and Unisys, have longer operating histories, greater name recognition and substantially greater financial, technical and marketing resources than we have. Verified Identity Pass is currently the only service provider operating a Registered Traveler program at a U.S. airport and has substantial name recognition. We may not be able to compete effectively with these competitors. In addition, as the market evolves there may be competitors that can respond more rapidly to changes in the market. Our competitors may also be able to adapt more quickly to new or emerging technologies and standards or changes in customer requirements or devote greater resources to the promotion and sale of their products. If we are unable to compete successfully with existing and potential competitors in the Registered Traveler market, our ability to implement our Registered Traveler solution and our business will suffer.

We may not be able to find attractive acquisition candidates as part of our growth strategy and, even if we do, we may not be able to integrate acquired companies.

In order to expand our Registered Traveler product offerings, we may need to acquire additional businesses, assets or securities of companies that we believe would provide a strategic fit with our business, such as companies involved in screening, remote check in, offsite baggage handling, and credentialing. We may not be able to identify acquisition targets and, if identified, we may not be able to complete transactions with these targets. Any business we acquire would need to be integrated with our existing operations. In addition, we could incur unknown or contingent liabilities of acquired companies. Difficulties in integrating the operations and personnel of any acquired companies could disrupt our business operations, divert management’s time and attention and impair relationships with and risk the possible loss of key employees and customers of the acquired business. Our failure to identify acquisition targets or to manage the integration of any acquisition could disrupt our business operations harm our financial condition.

If we are unable to keep up with rapid technological change in the biometric technology, smart card, and Registered Traveler markets, we may not be able to compete with our product and service offerings.

Our future success will depend upon our ability to keep pace with the developing Registered Traveler market and to integrate new technology into our Registered Traveler solution and introduce new products and product enhancements to address the changing needs of the marketplace. Various technical problems and resource constraints may impede the development, production, distribution and marketing of our Registered Traveler products and services. More advanced or alternate technology employed by competitors and unavailable to us could give our competitors a significant advantage. It is possible that products and services developed by our competitors will significantly limit the potential market for our Registered Traveler products and services or render our products and services obsolete.

If Registered Traveler is not accepted by consumers and businesses as a viable retail offering, our ability to continue as a business would be severely jeopardized.

The Registered Traveler program has not been widely adopted and is in its infancy. The program may not achieve wide acceptance by airports, airlines and travelers for a number of reasons, including that the Registered Traveler program may not:

• be seen as providing tangible and widely anticipated benefits to passengers;

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• attract significant numbers of registrants;

• be seen as generating a pronounced improvement in overall security;

• overcome vendor interoperability issues;

• diminish system-wide passenger wait times; or

• satisfactorily confront and resolve passenger privacy issues.

In addition, the current concerns and frustration of travelers over the increased difficulty of air travel may decline and businesses may not wish to invest in technology like our solution that uses biological identifiers to secure and simplify the security screening process. Because we are targeting the Registered Traveler program to grow our business, a failure to accept or a decline in the use of the Registered Traveler program will severely harm our business.

If we lose our current or future license rights to use the biometric, encryption, and scanning technologies of third parties, our ability to compete with products that already include this technology will be substantially impaired and may be entirely precluded.

Third party biometric identification and authentication software, encryption algorithms, and document scanning and processing technologies play a key role in the Registered Traveler business. We anticipate that these technologies will also play a key role in the future development of our enrollment and authentication kiosks. Our rights under any third party agreements may be terminated if we fail to pay required fees, including minimum specified payments, or if we otherwise breach these agreements. If we lose our rights to use these technologies, our business would likely suffer.

Government regulation and legal uncertainties associated with the Registered Traveler program could hurt our business and future prospects.

The Registered Traveler program is currently subject to oversight by the TSA. Although private industry has been tasked with the responsibility of crafting specifications and guidelines for this program, it is possible that a number of laws and regulations may be adopted with respect to Registered Traveler, covering issues such as user privacy, pricing, and characteristics and quality of products and services. Furthermore, the growth and development of the market for Registered Traveler may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business in this space. Any such new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business, results of operations and financial condition.

If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.

Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We rely primarily on trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, our technology is not patented, and we may be unable or may not seek to obtain patent protection for our technology. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual property. If one or more of these employees leave us to work for

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one of our competitors, then they may disseminate this proprietary information, which may as a result damage our competitive position. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed.

We depend heavily on our network infrastructure and its failure could result in unanticipated expenses and prevent users from effectively utilizing our services, which could negatively impact our ability to attract and retain users.

Our success will depend upon the capacity, reliability and security of our network infrastructure. We must continue to expand and adapt our network infrastructure as the number of users and the amount of information at risk increases, and to meet changing customer requirements. The expansion and adaptation of our network infrastructure will require substantial financial, operational and management resources. There can be no assurance that we will be able to expand or adapt our infrastructure to meet additional demand or our customers’ changing requirements on a timely basis, at a commercially reasonable cost, or at all. If we fail to expand its network infrastructure on a timely basis or adapt it either to changing customer requirements or to evolving industry standards, our business could be significantly impacted.

In addition, our operations are dependent upon our ability to protect our network infrastructure against damage from fire, earthquakes, floods, mudslides, power loss, telecommunications failures and similar events. Despite precautions taken by us, the occurrence of a natural disaster or other unanticipated problem at our network operations center, co-locations centers (sites at which we will locate routers, switches and other computer equipment which make up the backbone of our network infrastructure) could cause, interruptions in the services we provide. The failure of our telecommunications providers to provide the data communications capacity required by us as a result of a natural disaster, operational disruption or for any other reason could also cause interruptions in the services we provide. Any damage or failure that causes interruptions in our operations could have a material adverse effect on our business, financial condition and results of operations.

We rely on industry leading encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. Despite the implementation of intense security measures, there can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms used by us to protect customer data. If any such compromise of our security were to occur, it could have a material adverse effect on our business, results of operations and financial condition.

Any acquisition we make in the future could disrupt our business and harm our financial condition.

To date, most of our revenue growth has been created by acquisitions. In any future acquisitions or business combinations, we are subject to numerous risks and uncertainties, including:

• dilution of our current stockholders’ percentage ownership as a result of the issuance of stock;

• incurrence or assumption of debt;

• assumption of unknown liabilities; or

• incurrence of expenses related to the future impairment of goodwill and the amortization of other intangible assets.

We may not be able to successfully complete the integration of the businesses, products or technologies or personnel in the businesses or assets that we might acquire in the future, and any failure to do so could disrupt our business and seriously harm our financial condition.

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We have depended on a limited number of customers for a substantial percentage of our revenue, and due to the non-recurring nature of these sales, our revenue in any quarter may not be indicative of future revenue.

Two customers accounted for 13% and 11% of our revenue, for the twelve months ended December 31, 2006, while two customers accounted for 16% and 10% of our revenue for the twelve months ended December 31, 2005. A substantial reduction in revenue from any of our significant customers would adversely affect our business unless we were able to replace the revenue received from those customers. As a result of this concentration of revenue from a limited number of customers, our revenue has experienced wide fluctuations, and we may continue to experience wide fluctuations in the future. Many of our sales are not recurring sales, and quarterly and annual sales levels could fluctuate and sales in any period may not be indicative of sales in future periods.

Doing business with the United States government entails many risks that could adversely affect us by decreasing the profitability of government contracts we are able to obtain and interfering with our ability to obtain future government contracts.

Government sales accounted for 73% of our total sales for the twelve months ended December 31, 2006, and 84% of our total sales for the twelve months ended December 31, 2005. Our sales to the U.S. government are subject to risks that include:

• early termination of contracts;

• disallowance of costs upon audit; and

• the need to participate in competitive bidding and proposal processes, which are costly and time consuming and may result in unprofitable contracts.

In addition, the government may be in a position to obtain greater rights with respect to our intellectual property than we would grant to other entities. Government agencies also have the power, based on financial difficulties or investigations of their contractors, to deem contractors unsuitable for new contract awards. Because we will engage in the government contracting business, we will be subject to audits and may be subject to investigation by governmental entities. Failure to comply with the terms of any government contracts could result in substantial civil and criminal fines and penalties, as well as suspension from future government contracts for a significant period of time, any of which could adversely affect our business by requiring us to spend money to pay the fines and penalties and prohibiting us from earning revenues from government contracts during the suspension period.

Furthermore, government programs can experience delays or cancellation of funding, which can be unpredictable. For example, the U.S. military’s involvement in Iraq has caused the diversion of some Department of Defense funding away from certain projects in which we participate, thereby delaying orders under certain of our government contracts. This makes it difficult to forecast our revenues on a quarter-by-quarter basis.

The lengthy and variable sales cycle of some of our products makes it difficult to predict operating results.

Certain of our products have lengthy sales cycles while customers complete in-depth evaluations of the products and receive approvals for purchase. In addition, new product introduction often centers on key trade shows and failure to deliver a product prior to such an event can seriously delay introduction of a product. As a result of the lengthy sales cycles, we may incur substantial expenses before we earn associated revenues because a significant portion of our operating expenses is relatively fixed and based on expected revenues. The lengthy sales cycles make forecasting the volume and timing of orders difficult. In addition, the delays inherent in lengthy sales cycles raise additional risks that customers may cancel or change their minds. If customer cancellations or product delays occur, we could lose anticipated sales.

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A security breach of our internal systems or those of our customers due to computer hackers or cyber terrorists could harm our business by adversely affecting the market’s perception of our products and services.

Since we provide security for Internet and other digital communication networks, we may become a target for attacks by computer hackers. The ripple effects throughout the economy of terrorist threats and attacks and military activities may have a prolonged effect on our potential commercial customers, or on their ability to purchase our products and services. Additionally, because we provide security products to the United States government, we may be targeted by cyber terrorist groups for activities threatened against United States-based targets.

We will not succeed unless the marketplace is confident that we provide effective security protection for Internet and other digital communication networks. Networks protected by our products may be vulnerable to electronic break-ins. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques. Although we have never experienced any act of sabotage or unauthorized access by a third party of our internal network to date, if an actual or perceived breach of security for Internet and other digital communication networks occurs in our internal systems or those of our end-user customers, it could adversely affect the market’s perception of our products and services. This could cause us to lose customers, resellers, alliance partners or other business partners.

Our financial and operating results often vary significantly from quarter to quarter and may be adversely affected by a number of factors.

Our financial and operating results have fluctuated in the past and our financial and operating results could fluctuate in the future from quarter to quarter for the following reasons:

• reduced demand for our products and services;

• price reductions, new competitors, or the introduction of enhanced products or services from new or existing competitors;

• changes in the mix of products and services we or our distributors sell;

• contract cancellations, delays or amendments by customers;

• the lack of government demand for our products and services or the lack of government funds appropriated to purchase our products and services;

• unforeseen legal expenses, including litigation costs;

• expenses related to acquisitions;

• impairments of goodwill and intangible assets;

• other financial charges;

• the lack of availability or increase in cost of key components and subassemblies; and

• the inability to successfully manufacture in volume, and reduce the price of, certain of our products that may contain complex designs and components.

Particularly important is our need to invest in planned technical development programs to maintain and enhance our competitiveness, and to develop and launch new products and services. Improving the manageability and likelihood of success of such programs requires the development of budgets, plans and schedules for the execution of these programs and the adherence to such budgets, plans and schedules. The majority of such program costs are payroll and related staff expenses, and secondarily materials, subcontractors and promotional expenses. These costs will be very difficult to adjust in response to short-term fluctuations in our revenue, compounding the difficulty of achieving profitability.

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We may be exposed to significant liability for actual or perceived failure to provide required products or services.

Products as complex as those we offer may contain undetected errors or may fail when first introduced or when new versions are released. Despite our product testing efforts and testing by current and potential customers, it is possible that errors will be found in new products or enhancements 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, or claims by customers against us, or could cause us to incur additional costs, any of which could adversely affect our business. Because our customers rely on our products for critical security applications, we may be exposed to claims for damages allegedly caused to an enterprise as a result of an actual or perceived failure of our products. An actual or perceived breach of enterprise network or information security systems of one of our customers, regardless of whether the breach is attributable to our products or solutions, could adversely affect our business reputation. Furthermore, our failure or inability to meet a customer’s expectations in the performance of our services, or to do so in the time frame required by the customer, regardless of our responsibility for the failure, could result in a claim for substantial damages against us by the customer, discourage customers from engaging us for these services, and damage our business reputation.

Government regulations affecting security of Internet and other digital communication networks could limit the market for our products and services.

The United States government and foreign governments have imposed controls, export license requirements and restrictions on the import or export of some technologies, including encryption technology. Any additional governmental regulation of imports or exports or failure to obtain required export approval of encryption technologies could delay or prevent the acceptance and use of encryption products and public networks for secure communications and could limit the market for our products and services. In addition, some foreign competitors are subject to less rigorous controls on exporting their encryption technologies. As a result, they may be able to compete more effectively than us in the United States and in international security markets for Internet and other digital communication networks. In addition, governmental agencies such as the Federal Communications Commission periodically issue regulations governing the conduct of business in telecommunications markets that may adversely affect the telecommunications industry and us.

If we fail to attract and retain qualified senior executive and key technical personnel, our business will not be able to expand.

We will be dependent on the continued availability of the services of our employees, many of whom are individually keys to our future success, and the availability of new employees to implement our business plans. Although our compensation program is intended to attract and retain the employees required for us to be successful, there can be no assurance that we will be able to retain the services of all of our key employees or a sufficient number to execute our plans, nor can there be any assurance that we will be able to continue to attract new employees as required.

Our personnel may voluntarily terminate their relationship with us at any time, and competition for qualified personnel, especially engineers, is intense. The process of locating additional personnel with the combination of skills and attributes required to carry out our strategy could be lengthy, costly and disruptive.

If we lose the services of key personnel, or fail to replace the services of key personnel who depart, we could experience a severe negative impact on our financial results and stock price. In addition, there is intense competition for highly qualified engineering and marketing personnel in the locations where we will principally operate. The loss of the services of any key engineering, marketing or other personnel or our failure to attract, integrate, motivate and retain additional key employees could adversely affect on our business and financial results and stock price.

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Provisions in our certificate of incorporation may prevent or adversely affect the value of a takeover of our company even if a takeover would be beneficial to stockholders.

Our certificate of incorporation authorizes our board of directors to issue up to 1,000,000 shares of preferred stock, the issuance of which could adversely affect our common stockholders. We can issue shares of preferred stock without stockholder approval and upon terms and conditions, and having those types of rights, privileges and preferences, as our board of directors determines. Specifically, the potential issuance of preferred stock may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, voting control of our company even if the acquisition would benefit stockholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease our current principal executive offices, consisting of approximately 19,456 square feet, in Kirkland, Washington, under a lease that expires in August 2011.

We also leased approximately 8,100 square feet of office space, under a lease that was set to expire in March 2007, in Edmonton, Alberta, Canada. In December 2006, we vacated the Edmonton facility and terminated the lease with the landlord. As part of the lease termination, we were relieved of our obligation to pay rent for the remaining lease term, which included January, February and March 2007.

In Reston, Virginia, we lease 6,083 square feet of office space under a lease that expires in April 2009. In February 2007, we entered into a sublease agreement with another entity to sublease the entire Reston facility through our lease termination date. The differences in rental rates between the original lease and the sublease are minimal and did not have a material effect on our financial statements.

We also leased a facility consisting of 4,484 square feet in Charleston, South Carolina, which was set to expire in February 2007. In January 2007, we had vacated the Charleston facility and terminated the lease with the landlord. As part of the termination settlement, we were relieved of our obligation to pay rent for the remaining lease term, which included January and February 2007.

In connection with our acquisition of SSP-Litronic in August 2004, we assumed the leases for properties in Irvine, California and Reston, Virginia. In Irvine, we leased 20,702 square feet of office space that served as the principal office for Litronic. The lessor of this facility was KRDS, Inc., an entity that is majority-owned by three former employees of Litronic, one of whom is Kris Shah, the former president of Litronic, and a former member of our board of directors. In December 2006, as part of an asset purchase agreement between RDSK, Inc., KRDS, Inc. and Saflink and Litronic, this lease was terminated and the facility was vacated.

In Reston, we lease 5,130 square feet of office space under a lease that expires in February 2009. In April 2006, we entered into a sublease agreement with another entity to sublease the entire Reston facility through our lease expiration date. The differences in rental rates between the original lease and the sublease are minimal and did not have a material effect on our financial statements.

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We believe that our facilities are adequate to satisfy our projected requirements for the foreseeable future, and that additional space will be available if needed. The following is a summary of our current property leases:

Property Description	Location	Square Feet	Lease Expiration Date
Saflink executive offices	Kirkland, Washington	19,456	8/31/2011
Saflink Reston office (sublet as of February 2007)	Reston, Virginia	6,083	4/30/2009
Litronic Reston office (sublet as of April 2006)	Reston, Virginia	5,130	2/28/2009

Item 3. Legal Proceedings

G2 Resources, Inc. and Classical Financial Services, LLC filed complaints in January 1998 against Pulsar Data Systems, Inc., a wholly-owned subsidiary of Litronic, Inc., which is in turn our wholly-owned subsidiary. The complaints alleged that Pulsar breached a contract by failing to make payments to G2 in connection with services allegedly provided by G2. In April 2001, the court dismissed the complaint for lack of prosecution activity for more than twelve months. G2 re-filed the action in May 2001. In 2002, the court moved the case into the same division handling other matters related to G2 and Classical, and stayed any further action in this case pending the resolution of matters between G2 and Classical. In 2005, G2 amended its complaint to add Litronic, Inc. as a defendant.

We are also involved in various claims and legal actions arising in the ordinary course of business. In our opinion, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

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

Our annual meeting of stockholders was held on October 27, 2006. Our stockholders considered four proposals. The first proposal was to elect eight directors to hold office until our annual meeting of stockholders in 2007 and until their successors are elected and qualified, and each candidate received the following votes:

	For	Withheld
Glenn L. Argenbright	58,922,943	4,911,985
Frank J. Cilluffo	58,931,113	4,900,815
Lincoln D. Faurer	59,143,719	4,688,209
Gordon E. Fornell	58,994,529	4,837,399
Asa Hutchinson	58,498,808	5,333,120
Richard P. Kiphart	59,071,211	4,760,717
Trevor Nielson	58,645,257	5,186,671
Steven M. Oyer	53,863,554	1,367,855

All of the foregoing candidates were elected. On October 13, 2006, Kris Shah resigned as a member of our board of directors and declined to stand for reelection. As a result, a vacancy on the board of directors occurred prior to the annual meeting and we did not designate a substitute nominee.

The second proposal was to approve the issuance of more than 19.999% of our common stock in connection with our June 12, 2006 financing. This proposal received the following votes:

For	Against	Abstain	Broker Non-Votes
16,000,876	6,912,279	106,893	—

The foregoing proposal was approved. Approval of this proposal required the affirmative vote of a majority of the votes cast affirmatively or negatively on the proposal. Abstentions and broker non-votes were each counted as present for purposes of determining the presence of a quorum but did not have any effect on the outcome of the proposal.

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The third proposal was to approve an amendment to our 2000 Stock Incentive Plan to increase by 8,000,000 the maximum number of shares of our common stock that may be issued under that plan. This proposal received the following votes:

For	Against	Abstain	Broker Non-Votes
8,921,030	13,985,568	113,450	—

The foregoing proposal was not approved. Approval of this proposal required the affirmative vote of a majority of the votes cast affirmatively or negatively on the proposal. Abstention and broker non-votes were each counted as present for purposes of determining the presence of a quorum but did not have any effect on the outcome of the proposal.

The fourth proposal was to ratify the appointment of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2006. This proposal received the following votes:

For	Against	Abstain	Broker Non-Votes
59,550,241	5,263,405	18,282	—

The foregoing proposal was approved. Approval of this proposal required the affirmative vote of a majority of the votes cast affirmatively or negatively on the proposal. Abstentions and broker non-votes were each counted as present for purposes of determining the presence of a quorum but did not have any effect on the outcome of the proposal.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock was traded on the Nasdaq Capital Market under the symbol “SFLK” through March 19, 2007, and was delisted from that market effective with the open of business on March 20, 2007. Beginning March 20, 2007, our common stock began trading on the “pink sheets” and, effective March 21, 2007, our common stock began trading on the OTC Bulletin Board under the symbol “SFLK.” The following table sets forth the range of high and low close prices for our common stock as reported on the Nasdaq Capital Market for the periods indicated. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

	Common Stock Close Price
	High	Low
Fiscal year ended December 31, 2005:
First Quarter	2.72	1.75
Second Quarter	2.25	1.55
Third Quarter	1.64	1.01
Fourth Quarter	1.22	0.75
Fiscal year ended December 31, 2006:
First Quarter	1.07	0.75
Second Quarter	0.82	0.37
Third Quarter	0.45	0.23
Fourth Quarter	0.36	0.07

Record Holders

As of March 23, 2007, there were 444 record holders of our common stock. This does not include the number of beneficial owners whose stock is in nominee or street name accounts through brokers. The last sale price of our common stock as reported on the OTC Bulletin Board on March 23, 2007, was $0.094 per share.

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Nasdaq Delisting

On December 16, 2005, we received a Nasdaq staff deficiency letter indicating that we were not in compliance with the $1.00 per share minimum closing bid price requirement for continued listing on the Nasdaq Capital Market because the bid price of our common stock closed below $1.00 per share for 30 consecutive business days. Therefore, in accordance with Marketplace Rule 4310(c)(8)(D), we were provided 180 calendar days, or until June 14, 2006, to regain compliance with the minimum bid price requirement. On June 15, 2006, we were provided an additional 180 calendar days, or until December 11, 2006, to regain compliance with the minimum bid price requirement.

On December 12, 2006, we received written notification from Nasdaq indicating that we have not regained compliance with the minimum bid price requirement as set forth in Marketplace Rule 4310(c)(4) and, as a result, Nasdaq has determined to delist our securities from the Nasdaq Capital Market.

We appealed the Nasdaq’s determination to delist our securities to a listing qualifications panel, which postponed the effect of the delisting. On February 8, 2007, we had our hearing with the listing qualifications panel and on March 16, 2007, we received the panel’s determination, which was to delist our securities from the Nasdaq Capital Market effective with the open of business on March 20, 2007.

Dividend Policy

We have never paid or declared cash dividends on our common stock, and we do not intend to pay or declare cash dividends on our common stock in the foreseeable future.

Comparison of Stockholder Return

The following graph compares total stockholder return on our common stock since December 31, 2001, to two indices: the Nasdaq Composite Index and the Nasdaq Computer Index. The Nasdaq Composite Index tracks the aggregate price performance of all domestic and international common stocks listed on the Nasdaq Stock Market. The Nasdaq Computer Index tracks the aggregate price performance of Nasdaq-listed companies that manufacture and distribute computers and associated electronic data processing equipment and accessories, semiconductor capital equipment, manufacturers and distributors of wafers and chips, providers of computer services and IT consultants, Internet access providers, Internet software and on-line service providers, and producers and distributors of computer software. The total return for Saflink’s stock and for each index assumes the reinvestment of dividends and is based on the returns of the component companies weighted according to their capitalizations as of the end of each annual period. During fiscal 2006, our common stock was quoted on the Nasdaq Capital Market and was a component of each of the Nasdaq Composite Index and the Nasdaq Computer Index.

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COMPARISON OF CUMULATIVE TOTAL RETURN

FOR SAFLINK CORPORATION

FROM DECEMBER 31, 2001 TO DECEMBER 29, 2006⁽¹⁾

	December 31, 2001		December 31, 2002		December 31, 2003		December 31, 2004		December 30, 2005		December 29, 2006
Saflink Corporation	$	100.00	$	335.20	$	214.40	$	222.40	$	63.20	$	10.40
Nasdaq Composite Index	$	100.00	$	68.47	$	102.72	$	111.54	$	113.07	$	123.84
Nasdaq Computer Index	$	100.00	$	63.50	$	95.35	$	98.45	$	101.15	$	107.38

Note: Historical stock price performance is not necessarily indicative of future price performance.

(1) Shows the cumulative total return on investment assuming an investment of $100 in each of Saflink common stock, the Nasdaq Composite Index and the Nasdaq Computer Index on December 31, 2001. All returns are reported as of Saflink’s fiscal year end, which is December 31 of each year, except that returns for 2005 are reported as of December 30, and returns for 2006 are reported as of December 29, the last trading day of each respective fiscal year. Saflink’s closing stock price on December 29, 2006, was $0.126 per share.

Equity Compensation Plan Information

Information relating to our equity compensation plan is incorporated by reference to the definitive proxy statement for our 2007 annual meeting of stockholders. Additional information regarding our equity compensation plan can be found in Note 8—Stock-based Compensation in our consolidated financial statements in this annual report.

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Item 6. Selected Financial Data

The following financial statement data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in the section of this annual report entitled, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historic results are not necessarily indicative of future results.

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(in thousands except per share data)
Summary Operating Data
Revenue	$	4,161		$	7,116		$	6,398		$	2,015		$	2,006
Net loss		(120,114	)		(47,037	)		(15,937	)		(10,736	)		(6,223	)
Preferred stock dividend and accretion		—			—			—			—			4,731
Modification of warrants		611			59			2,167			—			—
Net loss attributable to common stockholders		(120,725	)		(47,096	)		(18,104	)		(10,736	)		(10,954	)
Basic and diluted loss per common share		(1.36	)		(0.56	)		(0.36	)		(0.42	)		(0.73	)
Weighted average number of common shares		89,035			84,125			50,125			25,505			14,919
	As of December 31,
	2006			2005			2004			2003			2002
	(in thousands)
Summary Balance Sheet Data
Total assets	$	3,454		$	114,102		$	146,222		$	12,848		$	8,618
Total liabilities		8,805			5,683			7,027			1,747			1,355
Working capital (deficit)		(6,321	)		11,770			19,261			6,711			7,064
Current portion of convertible debt, net of discounts		4,619			—			—			—			—
Note payable to related party		1,250			1,250			1,250			—			—
Stockholders’ equity (deficit)		(5,351	)		108,419			139,195			11,101			7,263

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. All statements other than statements of historical fact made in this annual report are forward-looking. Forward-looking statements reflect management’s current expectations and are subject to risks and uncertainties discussed below, and identified in Item 1A of this annual report on Form 10-K that could cause actual results to differ materially from historical results or those anticipated.

Overview

Historically, Saflink Corporation has taken a broad approach to monetizing its investments in identity assurance management technologies. Our involvement in biometric standards activities and participation in government pilot programs led to a broad portfolio of “strong authentication” products that were marketed to the Federal government and commercial enterprises. Revenue from these products was generated using a combination of direct sales and third-party distribution. Our direct sales force sold to regulated industries, government agencies and large systems integrators. Sales to other customers were generally handled by our reseller channel.

Despite a robust family of products and a broad portfolio of intellectual property, management became increasingly concerned with the level of investment required to maintain this approach to sales and the length of time it was taking to achieve the desired result. Management believed that many of our product lines showed the potential for exponential growth if given enough time. But, as we entered the last half of 2006, it became evident to management and our board of directors that some trade-offs were necessary to ensure that we had enough time

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and capital to take advantage of those items with the greatest potential. Faced with this dilemma, our management and board of directors acted quickly, taking a series of steps to reduce expense and attempt to maximize the company’s chances for success in key markets and programs. Those steps included management changes, a substantial reduction of our work force, a consolidation of facilities and narrowed focus for the business. As a result, we restructured the business in order to focus on two key areas, including:

• Registered Traveler Solutions Group—The mission of our Registered Traveler Solutions Group is to combine the company’s reputation and intellectual property in identity assurance management with its founding membership in the FLO Alliance to offer a premier solution for the Registered Traveler program.

• Core Technologies Group—The mission of our Core Technologies Group is to seek partnerships with companies that can combine their own investment in marketing, production, distribution and support with our products and intellectual property to offer solutions to the market that are mutually beneficial.

Following these restructuring activities in the Fall of 2006, several events took place as part of our new strategy. As part of our work force reduction, we had significantly reduced our headcount in our Irvine, California office, ceased rental payments, and began negotiations with our landlord to terminate our lease for that facility. In December 2006, as a result of our negotiations to terminate our Irvine lease, we sold certain assets related to Litronic, to RDSK, Inc. In exchange for the assets, RDSK agreed to assume certain liabilities related to the assets and KRDS, Inc., the landlord of our Irvine, California facility, agreed to terminate and cancel the lease agreement for our Irvine facility. RDSK and KRDS are entities that are majority-owned by three former employees of Litronic, one of whom is Kris Shah, a former member of our board of directors and the former president of Litronic. The assets we sold to RDSK included the furniture, equipment and inventory located at the Irvine facility, as well as the material contracts and intellectual property used in the Litronic business, including the Argus reader product line and the Fortezza support contract. RDSK also assumed certain liabilities related to the Litronic business, including liabilities under the assumed contracts and warranty obligations.

On February 1, 2007, we licensed our NetSign^® for mobile middleware with Biometric Associates, Inc. (BAI). The agreement provides BAI a non-exclusive license for use of NetSign for mobile middleware in the development and subsequent sale of its products that utilize our middleware. The license agreement included an initial payment plus royalties due quarterly over a period of four years. Royalties are based on the number of seats sold by BAI that include our middleware.

In February 2007, we sold our rights in our SAFsolution and SAFmodule software programs to IdentiPHI, LLC for an initial payment of $778,000 plus deferred payments due quarterly over a period of three years. The amount of the deferred payments will be equal to a percentage of the provider’s gross margin on sales that include the software programs’ source code. The deferred payments are based on a percentage of IdentiPHI’s gross margin over the next three years that includes the SAFsolution or SAFmodule source code.

With many restructuring activities completed, we have new risks and challenges facing us. Historically, our primary source of revenue has been the sale of our software and hardware products and consulting services combined with the resale of software applications and hardware products sourced or assembled from third parties. We believe our primary source of revenue over the next year will be royalties based on the source code sale and the licensing agreement, as well as our portion of subscription fees related to the Registered Traveler program.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that

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affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of commitments and contingencies. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

In fiscal 2006 we derived revenue from license fees for software products, selling our manufactured hardware, reselling third party hardware and software applications, and fees for services related to these software and hardware products, including maintenance services, installation and integration consulting services. We must exercise judgment and use estimates to determine the amount of revenue to be recognized each period.

We recognize revenue in accordance with the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” and related interpretations, including Technical Practice Aids. We recognize revenue from software arrangements by making a determination of the fair value of each element based on objective evidence that is specific to the vendor, such as software products, upgrades, enhancements, post-contract customer support, installation, integration and/or training. In multiple element arrangements in which fair value exists for undelivered elements, the fair value of the undelivered elements is deferred and the residual arrangement fee is assigned to the delivered elements. If evidence of fair value for any of the undelivered elements does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist, or until all elements of the arrangement are delivered.

We recognize revenue from biometric software and data security license fees upon delivery, net of an allowance for estimated returns, provided persuasive evidence of an arrangement exists, collection is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. Our judgment in determining the collectibility of amounts due from our customers impacts the timing of revenue recognition. Credit worthiness and collectibility are assessed, and when a customer is not deemed credit worthy, revenue is recognized when payment is received. We also assess whether fees are fixed or determinable prior to recognizing revenue. We must make interpretations of our customer contracts and use estimates and judgments in determining if the fees associated with a license arrangement are fixed or determinable. If customers receive pilot or test versions of products, we recognize revenue from these arrangements upon customer acceptance of permanent license rights. If our software is sold through a reseller, we recognize revenue when the reseller delivers its product to the end-user. Certain software delivered under a license requires a separate annual maintenance contract that governs the conditions of post-contract customer support. Post-contract customer support services can be purchased under a separate contract on the same terms and at the same pricing, whether purchased at the time of sale or at a later date. We recognize revenue from these separate maintenance support contracts ratably over the maintenance period. If software maintenance is included under the terms of the software license agreement, then the value of such maintenance is deferred and recognized ratably over the initial license period. The value of such deferred maintenance revenue is established by the price at which the customer may purchase a renewal maintenance contract.

We recognize revenue from hardware that we manufacture generally upon shipment, unless contract terms call for a later date, net of an allowance for estimated returns, provided persuasive evidence of an arrangement exists, collection is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. Revenue from some data security hardware products contains embedded software. However, the embedded software is considered incidental to the hardware product sale. We also act as a reseller of third party hardware and software applications. Generally, we recognize such revenue upon shipment of the hardware or software application, unless contract terms call for a later date, provided that all other conditions above have been met.

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Service revenue includes payments under support and upgrade contracts and consulting fees. We recognize support and upgrade revenue ratably over the term of the contract, which typically is twelve months. Consulting revenue primarily relates to installation, integration and training services performed on a time-and-materials or fixed-fee basis under separate service arrangements. Fees from consulting are recognized as services are performed. If a transaction includes both license and service elements, license fees are recognized separately upon delivery of the licensed software, provided services do not include significant customization or modification of the software product, the licenses are not subject to acceptance criteria, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. If the services do include significant customization or modification of the software product or if the services are under a fixed-fee contract, we recognize the revenue in accordance with the relevant guidance from the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).

We recognize revenue for these types of arrangements as services are rendered using the percentage-of-completion method with progress-to-complete usually measured using labor hour or labor cost inputs. We believe that these input measures more accurately reflect our progress on projects accounted for under SOP 81-1, as opposed to output measures, which are generally difficult to establish for the projects in which we are engaged. We periodically review cost estimates on percentage-of-completion contracts and record adjustments in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, availability of qualified personnel and project requirement and/or scope changes. Billings on uncompleted contracts may be less than or greater than the revenues recognized and are recorded as either unbilled receivable (an asset) or deferred revenue (a liability) in the consolidated financial statements.

In applying these criteria to revenue transactions, we must exercise judgment and use estimates to determine the amount of software, hardware, maintenance and professional services revenue to be recognized each period. Our revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

Goodwill and Other Intangible Assets with Indefinite Useful Lives

We use our judgment when we apply the impairment rules to determine when an impairment test of our goodwill and intangible assets is necessary. Goodwill represents the excess of costs over fair value of assets of businesses acquired. We have applied the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), since adoption on January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized.

We assess the impairment of goodwill on an annual basis or whenever events or changes in circumstances indicate that the fair value of the reporting unit to which goodwill relates is less than the carrying value. Factors we consider important which could trigger an impairment review include the following:

• poor economic performance relative to historical or projected future operating results;

• significant negative industry, economic or company specific trends;

• changes in the manner of its use of the assets or the plans for its business; and

• loss of key personnel.

If we were to determine that the fair value of a reporting unit was less than its carrying value, including goodwill, based upon the annual test or the existence of one or more of the above indicators of impairment, we

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would measure impairment based on a comparison of the implied fair value of reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of reporting unit goodwill. To the extent the carrying amount of reporting unit goodwill is greater than the implied fair value of reporting unit goodwill, we would record an impairment charge for the difference.

We also assess the impairment of intangible assets with indefinite useful lives on at least an annual basis, or more frequently if any of the above factors exist that might cause impairment to the carrying value. We compare the fair value of the intangible asset, which is determined based on a discounted cash flow valuation method, with the carrying value of the intangible asset. If we were to determine that the fair value of an intangible asset was less than its carrying value, based upon the discounted cash flow valuation, we would recognize impairment loss in the amount of the difference between fair value and the carrying value of the asset. Changes to the assumptions we use to determine when an impairment test in necessary could result in an impairment charge in future periods.

As of December 31, 2006, all goodwill was considered to be impaired and we recorded an impairment charge in our statement of operations.

Impairment of Long-Lived Assets

We use our judgment when we apply the impairment rules to determine when an impairment test of long-lived assets is necessary. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Asset” (SFAS No. 144), we review long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, we would recognize an impairment charge in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Intangible asset values were estimated using a discounted cash flow approach that used estimated future revenues, costs and discount rates. The useful lives of these assets were estimated using our own historical experience, as well as analyzing other companies in the same or related industries. Factors we used to determine appropriate estimates of useful lives include, but are not limited to, the expected use of the assets, any legal, regulatory, or contractual provisions that may affect the useful lives, the effects of competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the assets. These estimates have a significant effect on our financial statements

As of December 31, 2006, all amortizable intangible assets had been either sold or considered to be impaired and we recorded an impairment charge in our statement of operations.

Stock-Based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, and applied the provision of Staff Accounting Bulletin No. 107, “Share-Based Payment,” using the modified-prospective transition method. Under this transition method, stock-based compensation expense is recognized in the consolidated financial statements for grants of stock options. Compensation expense recognized includes the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion

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vesting in the period for options granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Further, as required under SFAS 123R, forfeitures are estimated for share-based awards that are not expected to vest. Results for prior periods have not been restated, as provided for under the modified-prospective transition method.

Prior to January 1, 2006, we had elected to apply the disclosure-only provisions of SFAS No. 123. Accordingly, we accounted for stock-based compensation transactions with employees using the intrinsic value method prescribed in APB No. 25 “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation,” and interpretation of APB no. 25, issued in March 2000, to account for its stock options. Under this method, compensation expense is recognized only if the current market price of the underlying stock exceeded the exercise price on the date of the grant.

We accounted for non-employee stock-based compensation in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

Valuation of Outstanding Warrants

We make estimates and use our judgment in determining the value of outstanding warrants. In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS No. 150), we classified certain warrants to purchase shares of our common stock as a liability because they contain characteristics of debt. We value the outstanding warrants using a Black-Scholes model and use estimates for an expected dividend yield, a risk-free interest rate, and price volatility of our common stock. Each interim period and year-end, as long as the warrants are outstanding and contain characteristics of debt, the warrants will be revalued and any difference from the previous valuation date will be recognized as a change in fair value of outstanding warrants in our statement of operations. Significant changes in the assumptions we use to value the outstanding warrants could materially impact our results of operations.

Results of Operating Activities

We believe that period-to-period comparisons of our operating results may not be a meaningful basis to predict our future performance. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets. We may not be able to successfully address these risks and difficulties.

We review financial information on a consolidated basis and, therefore, have operated as a single segment for all periods discussed.

We incurred a net loss attributable to common stockholders of $120.7 million for the year ended December 31, 2006, as compared to a net loss attributable to common stockholders of $47.1 million for the year ended December 31, 2005. The net loss for 2006 included impairment losses on goodwill, intangible assets and furniture and equipment of $75.9 million, $15.5 million, and $716,000, respectively. Also included in the net loss for 2006 was a $2.8 million restructuring charge related to facility consolidations and workforce reductions. The net loss for 2005 included impairment losses on goodwill and intangible assets of $19.3 million and $1.5 million, respectively. The increased net loss during 2006 when compared to 2005 was primarily due the increased impairment losses on goodwill, intangible assets and restructuring costs.

The following discussion presents certain changes in our revenue and operating expenses which have occurred between fiscal years 2006 and 2005, and between fiscal years 2005 and 2004, and should be read in conjunction with our consolidated financial statements, including the notes thereto, included elsewhere in this annual report on Form 10-K.

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Year Ended December 31, 2006, Compared to Year Ended December 31, 2005

Revenue

Revenue of $4.2 million for the year ended December 31, 2006, decreased 41% compared to revenue of $7.1 million for the year ended December 31, 2005. Revenue of $3.4 million came from product sales and $762,000 from services during 2006. Product revenue decreased 31%, or $1.5 million, in 2006, when compared to the $4.9 million recorded in 2005. Service revenue decreased 65%, or $1.4 million, compared to the $2.2 million recorded in 2005.

Product revenue consisted of license fees for our software products, sales of our manufactured hardware and the reselling of third party hardware and software products and applications. During 2006, software license revenue decreased by $215,000, hardware revenue decreased by $1.1 million and revenue related to third party products decreased by $199,000. The decrease in hardware revenue was primarily due to a reduction in Litronic-branded Argus reader sales. Due to the sale of assets to RDSK in December 2006, we no longer have any Argus reader sales. Third party product revenue decreased in 2006, primarily due to increased availability and lower prices for biometric fingerprint readers, which increased competition for sales of these products.

Service revenue consisted of payments for maintenance and support contracts, as well as labor fees related to government and commercial projects and programs. The service revenue decrease in 2006, when compared to 2005, was primarily related to a reduction of work performed on several government projects, primarily as a subcontractor to larger system integrators. This was due to the completion of certain contracts in 2005 and a reduced emphasis on obtaining service contracts during 2006. As of December 31, 2006, we were not engaged as a subcontractor by any system integrators for these types of projects and do not expect significant service revenue in 2007.

During 2006, Micron PC and Lockheed Martin Corporation accounted for 13% and 11% of our revenue, respectively. Micron PC revenue was primarily related to the sale of Argus readers that were sold as part of the RDSK transaction in December 2006. Revenue for Lockheed Martin was primarily earned as a subcontractor to Lockheed Martin on a maintenance and support contract that was also assigned to RDSK as part of the December 2006 transaction. Sales to the federal government accounted for 73% and 84% of our total revenue in 2006 and 2005, respectively.

Cost of Revenue

Product cost of revenue consisted of software packaging and materials, the cost of our manufactured hardware and the cost of third party hardware and software applications. Service cost of revenue consists of labor and services related to government and commercial projects and software maintenance and support. Amortization of intangible assets was related to the acquisition of patents, developed technology and customer relationships through previous business combinations. Our total cost of revenue increased 216% to $19.8 million in 2006 from $6.3 million in 2005. Cost of revenue in 2006 included impairment losses on intangible assets totaling $15.5 million, while no impairment loss was included in cost of revenue in 2005.

We periodically review the carrying values of our long-lived assets to determine whether such assets have been impaired. An impairment loss must be recorded pursuant to SFAS No. 144 when the undiscounted net cash flows expected to be realized from the use of such assets are less than their carrying value. We believed that our decision in the third quarter of 2006 to refocus our resources toward specific product offerings and revenue opportunities constituted a triggering event under SFAS 144. In addition, we continued to incur losses from operations and actual sales and growth rates during the third quarter of 2006 were significantly lower than expected. In reviewing the our long-lived assets for impairment at that time, we compared the carrying value of our primary long-lived assets—amortizable intangible assets and furniture and equipment (asset group) to undiscounted cash flows expected from the use of the asset group. As a result of continuing operating losses and lower sales and growth rates in the first nine months of 2006 compared to forecasts, the carrying value of the

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asset group exceeded undiscounted cash flows expected from the use of this asset group. Consequently, we measured the fair value our long-lived assets as of September 30, 2006, based on a discounted cash flow model and the orderly liquidation method, and recorded an impairment charge of $14.6 million that was allocated to the asset group on a pro rata basis. The pro rata allocation resulted in a $13.9 million impairment charge of intangible assets that was recorded as a cost of revenue and a $716,000 impairment charge related to furniture and equipment, which were recorded as an operating expense in our statement of operations for 2006.

We also believed that our restructuring efforts during the fourth quarter of 2006, which included facility consolidations, the reduction of headcount by 47 employees, or 62% of our workforce, and the sales of certain assets and product lines constituted a triggering event under SFAS 144. In reviewing our long-lived assets for impairment during the fourth quarter of 2006, we compared the carrying value of our primary long-lived assets—amortizable intangible assets and furniture and equipment (asset group) to undiscounted cash flows expected from the use of the asset group. As a result of continuing operating losses and changes in our business strategy, the carrying value of the asset group exceeded undiscounted cash flows expected from the use of this asset group. Consequently, we concluded that an impairment charge of $1.6 million should be allocated to our intangible assets and was recorded as a cost of revenue in our statement of operations for 2006. No intangible assets remain recorded as of December 31, 2006.

During 2006, software license cost of revenue decreased by $3,000, hardware cost of revenue decreased by $308,000, and cost of revenue related to third party products decreased by $173,000 and service cost of revenue decreased by $930,000. The decrease in hardware cost of revenue was directly related to the decrease in hardware revenue during 2006, but was offset by increased inventory obsolescence expense in 2006. Gross margin on hardware revenue decreased to 47% in 2006 from 55% in 2005, primarily related to increased obsolescence expense related to inventory. The decrease in cost of revenue for third party products in 2006 was directly attributable to the decrease in third party product revenue during the same period. Gross margins for software and third party products remained relatively constant in 2006 when compared to gross margins for 2005. Gross margins for service was lower in 2006 as two large contracts with higher gross margin percentages were completed in 2005.

Operating Expenses

Operating expenses increased 111% to $102.1 million in 2006 from $48.4 million in 2005. Operating expenses for 2006 included an impairment loss on goodwill and furniture and fixtures of $75.9 million and $716,000, respectively. In addition, operating expenses for 2006 included a $2.8 million restructuring charge related to the consolidation of our facilities and a significant reduction of our workforce. Excluding these impairment losses and restructuring charge, the decrease in operating expenses was primarily due to lower headcount across all departments in 2006 when compared to 2005.

The following table provides a breakdown of the dollar and percentage changes in operating expenses from 2005 to 2006:

	Changes in Operating Expenses
	(000’s)			Percent
Product development	$	(1,621	)	(17	)%
Sales and marketing		(2,651	)	(29	)
General and administrative		(673	)	(8	)
Impairment loss on goodwill		56,623		293
Impairment loss on intangible assets		(1,500	)	N/A
Impairment loss on furniture and equipment		716		N/A
Restructuring charges		2,836		N/A
	$	53,730		111	%

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Product Development

Product development expenses consisted primarily of salaries, benefits, allocated occupancy costs, supplies and equipment for software developers and architects, hardware engineers, program managers and quality assurance personnel, as well as outsourced software development costs and legal administration fees associated with our intellectual property portfolio. Product development expenses decreased 17% to $7.9 million in 2006 from $9.5 million in 2005. The decrease in product development costs was primarily due to decreased compensation and related benefits of $1.6 million, which was directly related to the reductions in headcount during 2006. Occupancy costs decreased $144,000 in 2006, which was primarily related to the subletting of our Litronic Reston, Virginia facility. These decreases were offset by a $170,000 increase in legal and professional services, which was primarily related to consulting fees and design work for our Registered Traveler Solutions Group.

During 2006, our product development headcount decreased by 65 employees primarily due to planned reductions and general attrition. As of December 31, 2006, we had 3 employees in product development.

Sales and Marketing

Sales and marketing expenses consisted primarily of salaries and commissions earned by sales and marketing personnel, trade show, advertising and promotional expenses, allocated occupancy costs, supplies, and travel and entertainment costs. Sales and marketing expenses decreased 29% to $6.5 million in 2006 from $9.2 million in 2005. The decrease in sales and marketing costs was primarily due to a decrease in compensation and related benefit costs of $1.9 million, a decrease in advertising and promotion of $112,000 and a decrease in legal and professional services expense of $250,000. The decrease in compensation and related benefits was directly related to reductions in our workforce during 2006, while the decrease in advertising and promotion was primarily related to decreased fees promoting in 2006 promoting our reseller channel. The decrease in legal and professional services was related to lower costs incurred for public sector consulting services in 2006.

During 2006, our sales and marketing headcount decreased by 24 employees primarily due to planned reductions and general attrition. As of December 31, 2006, we had 9 employees in sales and marketing.

General and Administrative

General and administrative expenses consisted primarily of salaries, benefits, allocated occupancy costs and supplies for our executive, finance, legal, human resource, information technology and administrative personnel, as well as professional services fees, including legal counsel, consulting and contractor fees, investor relations services, and tax and audit fees. General and administrative expenses decreased 8% to $8.3 million in 2006 from $8.9 million in 2005. The decrease in general and administrative costs was primarily driven by a $318,000 decrease in other expense during 2006 when compared to 2005. This decrease was primarily related to a reduction in corporate taxes and license fees in 2006 when compared to 2005, as well as a $100,000 reduction related to the settlement of our patent infringement suit with Digital Persona during the first quarter of 2006. Compensation and related benefits decreased $148,000 in 2006, which was related to our reductions in workforce during the year but was offset by increased severance expense which was also related to the planned reductions.

During 2006, our general and administrative headcount decreased by 13 employees. As of December 31, 2006, we had 8 employees in general and administrative departments.

Impairment Loss on Goodwill

We test goodwill as of November 30^th annually. However, we concluded that certain factors, such as the lack of significant revenue, restructuring initiatives that included headcount reductions and facility consolidation, and the continued decline of the price of our common stock as reported on the Nasdaq Capital Market constituted triggering events under SFAS 142 at various times during 2006. Given the volatility in historical revenue trends,

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the significant decline in market capitalization, and other indicators of calculated fair value, we determined that the best estimate of fair value as of March 31, and June 30, 2006, for the goodwill impairment test was our market capitalization. During the first quarter of 2006, we recorded a $29.7 million impairment charge on goodwill. During the process of finalizing our goodwill valuation as of March 31, 2006, we reduced this $29.7 million goodwill impairment loss by $2.3 million during the second quarter of 2006. The nature of this adjustment was related to the finalization of the estimated in-process research and development amount as of March 31, 2006. In addition, as a result our testing of goodwill as of June 30, 2006, we recorded another goodwill impairment charge of $33.0 million in the second quarter of 2006. Lastly, as a result of our annual goodwill testing as of November 30, 2006, we recorded a $15.5 million goodwill impairment loss during the fourth quarter of 2006. The impairment valuation was based on the discounted cash flow approach that used estimated future revenues and costs as well as appropriate discount rates. The estimates to determine the fair value of our identifiable assets were consistent with the plans and estimates we use to manage the business. After allocating the fair value (market capitalization) of Saflink to the calculated fair value of our identifiable intangible assets and the fair value of our other assets and liabilities, the total goodwill impairment loss for the year ended December 31, 2006, was $75.9 million, which reduced the goodwill balance to zero as of December 31, 2006.

During 2005, we concluded that the price of our common stock, as reported on the Nasdaq Capital Market, was depressed long enough to constitute a triggering event under SFAS No. 142 and accordingly, we performed an interim impairment test of goodwill and other intangible assets as of September 30, 2005. Based on the results of the impairment test, we recorded a goodwill impairment charge of $19.3 million at September 30, 2005, since our carrying amount was greater than our fair value and the carrying value of our goodwill exceeded the implied fair value of that goodwill. The impairment valuation was based on a discounted cash flow approach that used estimated future revenues and costs as well as appropriate discount rates. The estimates that were used were consistent with the plans and estimates we used to manage the business at that time. We also performed our annual goodwill impairment test as of November 30, 2005, and concluded that there was no further impairment to goodwill as of that date.

Impairment Loss on Intangible Assets

In February 2005, we decided to discontinue use of two tradenames that were acquired in connection with the Litronic acquisition. We estimated the fair value of these two tradenames to be zero, and as such, recorded a $900,000 impairment loss on intangible assets during the first quarter of 2005. Related to the impairment charge for tradenames during the first quarter, we recorded a $324,000 non-cash tax benefit. In October 2005, in connection with the preliminary impairment results under SFAS No. 142, we estimated the fair value of the indefinite-lived intangible asset tradenames to be $100,000 at September 30, 2005, and accordingly, recorded a $600,000 impairment loss on intangible assets during the three months ended September 30, 2005. Related to this impairment loss on the intangible asset tradenames, we recorded a $216,000 non-cash tax benefit. Upon final results of the impairment test as of September 30, 2005, we determined that no further adjustment to the tradenames impairment charge was necessary. Tradenames have no basis for tax purposes, but do have a book carrying value. To the extent that we cannot reasonably estimate the amount of deferred tax liabilities related to tradenames that will reverse during the net operating loss carry forward period, the deferred tax liabilities cannot be offset against deferred tax assets for purposes of determining the valuation allowance. Due to our decision to discontinue use of two tradenames and the impairment charges which reduced the carrying value of tradenames from $1.6 million to $100,000, the deferred tax liability related to tradenames was also reduced by $540,000 during the twelve months ended December 31, 2005.

There was no impairment loss on intangible assets recorded as an operating expense in our statement of operations for 2006.

Impairment Loss on Furniture and Equipment

As part of our impairment testing of long-lived assets described in the Cost of Revenue section above, we recorded a $716,000 impairment charge related to furniture and equipment, which was recorded as an operating expense in our statement of operations for 2006.

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Restructuring

As part of our restructuring activities in October 2006, we reduced our workforce by 47 employees, or approximately 62%, reassessed our facility requirements, and took action to significantly reduce our cash burn. Related to these activities, we recorded restructuring costs of $775,000 in severance payments to the effected employees and the termination of $2.4 million of leased facility in our statement of operations during 2006.

When we failed to pay our October lease payment for our Irvine, California facility and were notified by our landlord, KRDS, Inc., that it considered us in breach of our lease agreement, we accrued a $2.4 million restructuring liability and corresponding restructuring expense in October 2006, which reflected the amount required to terminate the lease with the landlord per the terms of the lease. The $2.4 million reflected the net present value of all future rent payments under the lease at a specified discount rate per the terms of the lease and was recorded as a restructuring charge in our statement of operations. Upon completion of the asset purchase agreement with RDSK and KRDS, which resulted in the exchange of certain assets and liabilities in settlement of the lease termination payable, we reduced the lease termination payable by the recorded value of the net assets relinquished, resulting in an approximate $200,000 reduction in the restructuring charge.

Operating Expenses Analysis by Functional Activity

The following table provides an analysis of the 2006 over 2005 change in total operating expenses by functional category:

	Changes in Operating Expenses
	(000s)			Percent
Compensation and related benefits		(3,660	)	(22	)%
Legal and professional services		(177	)	(4	)
Travel and entertainment		(290	)	(32	)
Advertising and promotion		(108	)	(14	)
Occupancy, telephone and internet		(359	)	(17	)
Depreciation		22		4
Amortization		3		2
Impairment loss on goodwill		56,623		293
Impairment loss on intangible assets		(1,500	)	(100	)
Impairment loss on furniture and equipment		716		NA
Restructuring charges		2,836		NA
Other		(376	)	(19	)
	$	53,730		111	%

Interest Expense

Interest expense for 2006 and 2005, was $2.7 million and $138,000, respectively. Interest expense during 2006 and 2005 included interest accrued from the financing of certain insurance policies over a nine month period and interest expense related to the convertible notes assumed in the Litronic acquisition. As of December 31, 2006 and 2005, we had one convertible note outstanding with a related party with a face value of $1.25 million, an annual interest rate of 10% and a maturity date of December 31, 2006. Although the unpaid principal and accrued interest under the promissory note was due and payable on December 31, 2006, we did not pay the balance due but intend to pay the outstanding balance to the related party upon request. Until that time, we will continue to accrue and pay interest at 10% on the outstanding balance. Interest expense during 2006 included $2.6 million in non-cash expense related to our issuance of 8% convertible debentures and warrants in June 2006, which was calculated using the effective interest method and is described below.

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On June 12, 2006, we raised $7.4 million in net proceeds through a private placement of 8% convertible debentures. The principal amount of the debentures is redeemable at the rate of 1/12 of the original principal amount per month plus accrued but unpaid interest on the debentures commencing December 1, 2006. We may, in our discretion, elect to pay the interest due on the debentures and the monthly redemption amount in cash or in shares of our common stock. We elected to pay the December 2006, January 2007, February 2007, and March 2007 redemption amount and interest due in shares of our common stock. We also notified the debenture holders of our election to pay the April 2007 redemption amount in shares of our common stock and issued 1.5 million shares of our common stock as the pre-redemption amount per the terms of the debentures.

The following table summarizes interest expense for the year ended December 31, 2006, related to our convertible debentures issued in June 2006 (in thousands):

Nominal interest expense (8% stated rate)	$	349
Amortization of debt discount		1,886
Amortization of capitalized financing costs		401
Difference between fair market value of common shares issued for redemption and interest and the calculated redemption conversion price and interest conversion price		(45	)
Total interest expense related to convertible debentures	$	2,591

Other Income, Net

Other income, net for 2006 and 2005, was $275,000 and $450,000, respectively. Other income primarily consisted of interest earned on money market balances. The decrease was due to decreased average cash balances during 2006 as compared to 2005.

Income Tax Provision

We recorded net income tax benefits of $140,000 and $488,000, for the years ended December 31, 2006 and 2005, respectively. During the fourth quarter of 2006, we recorded a $37,000 non-cash tax benefit related to the $100,000 impairment charge related to tradenames.

Tradenames have no basis for tax purposes, but did have book carrying value. To the extent that we could not reasonably estimate the amount of deferred tax liabilities related to tradenames that might have reversed during the net operating loss carry forward period, the deferred tax liabilities cannot be offset against deferred tax assets for purposes of determining the valuation allowance. As of December 31, 2006, our tradename balance was reduced to zero. Also, during the fourth quarter of 2006 and in connection with our impairment loss on goodwill, we recorded a $155,000 non-cash income tax benefit to reduce our deferred tax liability to zero. For both 2006 and 2005, we recorded $52,000 in income tax expense that represents the income tax effect of goodwill amortization created by an acquisition in December 2003. For tax purposes the goodwill is amortized over 15 years whereas for book purposes the goodwill is not amortized, but instead tested at least annually for impairment. As of December 31, 2006, as a result of our impairment testing, our goodwill and tradename balance were both reduced to zero and, accordingly, we no longer have a deferred tax liability.

Year Ended December 31, 2005, Compared to Year Ended December 31, 2004

Revenue and Cost of Revenue

Revenue of $7.1 million for the year ended December 31, 2005, increased 11% compared to revenue of $6.4 million for the year ended December 31, 2004. Revenue of $4.9 million came from product sales and $2.2 million from services during 2005. Product revenue increased 8%, or $349,000, in 2005, when compared to 2004, while service revenue increased 20%, or $369,000.

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Product revenue consisted of license fees for our software products, sales of our manufactured hardware and the reselling of third party hardware and software products and applications. During 2005, software license revenue increased by $25,000, hardware revenue increased by $1.4 million and revenue related to third party products decreased by $1.1 million. The increase in hardware revenue was primarily due to having a full twelve months of Litronic reader sales during 2005 as compared to only five months of combined operations in 2004. Third party product revenue decreased in 2005, primarily due to increased availability and lower prices for biometric fingerprint readers, which increased competition for sales of these products.

Service revenue consisted of payments for maintenance and support contracts, as well as labor fees related to government and commercial projects and programs. The service revenue increase in 2005, when compared to 2004, was primarily related to work performed on several government projects, primarily as a subcontractor to larger system integrators.

During 2005, Lockheed Martin Corporation accounted for 16% of our revenue, which was primarily earned as a subcontractor to Lockheed Martin on two completed government projects, and BearingPoint, Inc. accounted for 10% of our 2005 revenue, which was related to another completed government project. Sales to the government accounted for 84% and 72% of our revenue in 2005 and 2004, respectively.

Product cost of revenue consisted of software packaging and materials, the cost of our manufactured hardware and the cost of third party hardware and software applications. Service cost of revenue consisted of labor and services related to government and commercial projects and software maintenance and support. Amortization of intangible assets is related to the acquisition of patents, developed technology and customer relationships from previous business combinations. Our total cost of revenue increased 38% to $6.3 million in 2005 from $4.6 million in 2004. This increase was directly related to the $1.5 million increase in amortization of intangible assets related to the Litronic acquisition. Gross margin percentage, excluding the effect of amortization of intangible assets, increased slightly in 2005 to 49%, when compared to the gross margin of 48% for 2004.

During 2005, software license cost of revenue decreased by $10,000, hardware cost of revenue increased by $825,000, and cost of revenue related to third party products decreased by $828,000, while service cost of revenue increased by $271,000. The increase in hardware cost of revenue is directly related to the increase in hardware revenue during 2005. Gross margin on hardware revenue decreased to 55% in 2005 from 64% in 2004, and was primarily related to increased obsolescence expense related to inventory that was acquired during the asset purchase from BSG in December 2003. The decrease in cost of revenue for third party products in 2005 was directly attributable to the decrease in third party product revenue during the same period. Gross margins for software, third party products and service remained relatively constant in 2005 when compared to gross margins for 2004.

Operating Expenses

Operating expenses increased 146% to $48.4 million in 2005 from $19.7 million in 2004. Operating expenses for 2005 included an impairment loss on goodwill and intangible assets of $19.3 million and $1.5 million, respectively. Excluding these impairment losses, the increase in operating expenses was primarily due to our assumption of leases for two new facilities and our addition of approximately 80 new employees at the time of the Litronic acquisition.

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The following table provides a breakdown of the dollar and percentage changes in operating expenses from 2004 to 2005:

	Changes in Operating Expenses
	(000’s)		Percent
Product development	$	3,754	66	%
Sales and marketing		1,736	23
General and administrative		2,430	37
Impairment loss on goodwill		19,300	N/A
Impairment loss on intangible assets		1,500	N/A
	$	28,720	146	%

Product Development

Product development expenses consisted primarily of salaries, benefits, allocated occupancy costs, supplies and equipment for software developers and architects, hardware engineers, program managers and quality assurance personnel, as well as outsourced software development costs and legal administration fees associated with our intellectual property portfolio. Product development expenses increased 66% to $9.5 million in 2005 from $5.7 million in 2004. The increase in product development costs was primarily due to increased compensation and related benefits of $3.1 million and increased occupancy costs of $479,000, both of which were primarily due to having a full twelve months of Litronic operations during 2005 as compared to only five months of combined operations in 2004. Legal and professional services increased $379,000 in 2005, which was related to the outsourcing of some software development to a third party. These increases were offset by a $135,000 decrease in other expenses which was primarily related to a decrease in research and development materials and equipment purchased during 2005 as we focused our efforts on software development.

During 2005, our product development headcount decreased by a net 20 employees primarily due to company reductions and general attrition. As of December 31, 2005, we had 68 employees in product development.

Sales and Marketing

Sales and marketing expenses consisted primarily of salaries and commissions earned by sales and marketing personnel, trade show, advertising and promotional expenses, allocated occupancy costs, supplies, and travel and entertainment costs. Sales and marketing expenses increased 23% to $9.2 million in 2005 from $7.5 million in 2004. The increase in sales and marketing costs was primarily due to increases in compensation and related benefit costs of $1.3 million and occupancy expenses of $161,000, both of which were primarily due to having a full twelve months of Litronic operations during 2005 as compared to only five months of combined operations in 2004. Legal and professional services increased $333,000 during 2005, primarily driven by consulting related to our government sales and marketing efforts. Advertising and promotion decreased by $117,000 in 2005, primarily due to a reduction in the number of tradeshows in which we presented our products and solutions during 2005.

During 2005, our sales and marketing headcount decreased by 23 employees primarily due to company reductions and general attrition. As of December 31, 2005, we had 33 employees in sales and marketing.

General and Administrative

General and administrative expenses consisted primarily of salaries, benefits, allocated occupancy costs and supplies for our executive, finance, legal, human resource, information technology and administrative personnel,

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as well as professional services fees, including legal counsel, consulting work for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, investor relations services and tax and audit fees. General and administrative expenses increased 37% to $8.9 million in 2005 from $6.5 million in 2004. The increase in general and administrative costs was primarily driven by a $1.2 million increase in legal and professional service fees during 2005 when compared to 2004. This increase was primarily driven by expenses related to consulting work for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In connection with the Section 404 requirements, our audit fees also increased substantially during 2005. In addition, legal fees related to general corporate activities and the enforcement of our intellectual property rights also increased during 2005, as well as fees paid to members of our board of directors for their services. Also adding to the overall increase in general and administrative expense was an increase in compensation and related benefits of $702,000, an increase in depreciation expense of $140,000 and an increase in other expenses of $296,000, all of which resulted from more resources required to support the larger combined company after the Litronic acquisition. The increase in other expense was primarily due to increased corporate taxes and insurance premiums for the combined company.

During 2005, our general and administrative headcount decreased by three employees. As of December 31, 2005, we had 21 employees in general and administrative departments.

Impairment Loss on Goodwill

We test goodwill as of November 30 annually. However, we concluded that the price of our common stock, as reported on the Nasdaq Capital Market, was depressed long enough to constitute a triggering event under SFAS No. 142 and accordingly, we performed an interim impairment test of goodwill and other intangible assets as of September 30, 2005. Based on the preliminary results of the impairment test, we recorded a goodwill impairment charge of $19.3 million at September 30, 2005, since the carrying amount of Saflink was greater than its fair value and the carrying value of our goodwill exceeded the implied fair value of that goodwill. The impairment valuation was based on a discounted cash flow approach that used estimated future revenues and costs as well as appropriate discount rates. The estimates that were used are consistent with the plans and estimates we use to manage the business. We also performed our annual goodwill impairment test as of November 30, 2005, and concluded that there was no further impairment to goodwill as of that date.

Impairment Loss on Intangible Assets

In February 2005, we decided to discontinue use of two tradenames that were acquired in connection with the Litronic acquisition. We estimated the fair value of these two tradenames to be zero, and as such, recorded a $900,000 impairment loss on intangible assets during the first quarter of 2005. Related to the impairment charge for tradenames during the first quarter, we recorded a $324,000 non-cash tax benefit. In October 2005, in connection with the preliminary impairment results under SFAS No. 142, we estimated the fair value of the indefinite-lived intangible asset tradenames to be $100,000 at September 30, 2005, and accordingly, recorded a $600,000 impairment loss on intangible assets during the three months ended September 30, 2005. Related to this impairment loss on the intangible asset tradenames, we recorded a $216,000 non-cash tax benefit. Upon final results of the impairment test as of September 30, 2005, we determined that no further adjustment to the tradenames impairment charge was necessary. Tradenames have no basis for tax purposes, but do have a book carrying value. To the extent that we cannot reasonably estimate the amount of deferred tax liabilities related to tradenames that will reverse during the net operating loss carry forward period, the deferred tax liabilities cannot be offset against deferred tax assets for purposes of determining the valuation allowance. Due to our decision to discontinue use of two tradenames and the impairment charges which reduced the carrying value of tradenames from $1.6 million to $100,000, the deferred tax liability related to tradenames was also reduced by $540,000 during the twelve months ended December 31, 2005.

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Operating Expenses Analysis by Functional Activity

The following table provides an analysis of the 2005 over 2004 change in total operating expenses by functional category:

	Changes in Operating Expenses
	(000s)			Percent
Compensation and related benefits	$	5,090		44	%
Legal and professional services		1,904		73
Travel and entertainment		(43	)	(5	)
Advertising and promotion		(118	)	(13	)
Occupancy, telephone and internet		668		45
Depreciation		219		69
Amortization		58		60
Impairment loss on goodwill		19,300		N/A
Impairment loss on intangible assets		1,500		N/A
Other		142		8
	$	28,720		146	%

Interest Expense

Interest expense for 2005 and 2004, was $138,000 and $59,000, respectively. Interest expense during 2005 and 2004 consisted of interest accrued from the financing of certain insurance policies over a nine month period and interest expense related to the convertible notes assumed in the Litronic acquisition. We had one convertible note outstanding with a related party as of December 31, 2005, with a face value of $1,250,000, an annual interest rate of 10% and a maturity date of December 31, 2006.

Other Income, Net

Other income, net for 2005 and 2004, was $450,000 and $204,000, respectively. Other income primarily consisted of interest earned on money market balances. The increase was due to increased average cash balances and higher interest rates yields during 2005 as compared to 2004.

Debt Extinguishment Loss on Convertible Note to Related Party

On December 31, 2005, we amended the convertible note, dated November 19, 2003, held by Richard P. Kiphart, the Co-Chairman and Lead Independent Director of our board of directors. Under the terms of the note, the unpaid principal and any unpaid and accrued interest were due and payable by us on December 31, 2005. The amendment revised the maturity date of the note such that the unpaid principal and any unpaid and accrued interest are due and payable by us on the earlier of (i) December 31, 2006, and (ii) upon demand on or after the date of the closing of any strategic or financing transaction that generates at least $20,000,000 of additional working capital for us. In addition, the amendment revised the conversion rate at which, under certain circumstances, the unpaid principal and any unpaid and accrued interest under the promissory note convert into shares of our common stock from $1.67 to $0.71. We applied the guidance of EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments and EITF 05-7, Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues and determined that the change in fair value of the conversion rate resulted in a substantial change in the terms of the convertible note and therefore determined that a debt extinguishment had occurred. The fair value of this modification was determined by using a Black-Scholes model immediately before and after the modification, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 4.4%, volatility of 69%, and an estimated life of one year after the modification, the remaining contractual life of the convertible note and no estimated life prior to the

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modification. The fair value of the common stock used in the calculation was $0.79, the last sale price of our common stock as reported on the Nasdaq Capital Market on December 30, 2005. We estimated the fair value of the modification to be $455,000 and we recorded it as a debt extinguishment loss. This charge increased loss before income taxes.

Change in Fair Value of Outstanding Warrants

Change in fair value of outstanding warrants for 2005 resulted in a net gain of $172,000. The Litronic acquisition triggered certain redemption provisions in connection with our Series A warrants. We estimated the cash redemption value to be $765,000 as of August 2, 2004, the date we notified the warrant holders of the acquisition, and it is fixed as long as the warrants are outstanding or until expiration in June 2006. On August 6, 2004, the closing date of the Litronic acquisition, these warrants were reclassified as a liability because the warrants then contained characteristics of a debt instrument. For each interim period and year-end until the warrants expire in June 2006, the remaining outstanding warrants were revalued and any difference from the previous valuation date was recognized as a change in fair value of outstanding warrants and charged or credited to change in fair value of outstanding warrants. However, at December 31, 2005, the estimated fair value of these warrants was below the cash redemption value of $765,000, and we consequently valued the warrants at the $765,000 cash redemption value. The $172,000 gain for the twelve months ended December 31, 2005, represents the change in valuation from December 31, 2004, which was estimated to be $937,000, and the estimated value of $765,000 as of December 31, 2005.

Change in fair value of outstanding warrants for 2004 resulted in a net gain of $1.8 million. The change in fair value of outstanding warrants was related to the redemption provisions in connection with our Series A warrants as well as warrants issued in connection with our February 2004 financing. The majority of the non-cash gain is related to warrants issued in connection with the February 2004 financing. Per the original registration rights agreement, if we did not meet certain criteria, we may have been required to pay liquidated damages to each stockholder until the applicable event was cured. On September 28, 2004, we amended the registration rights agreement to substitute our cash obligation to remedy any conditions that were not met, with shares of common stock instead. The gain of $1.8 million represents the change in fair value between the initial grant date, February 26, 2004, and the day the registration rights agreement was amended, September 28, 2004. The fair value of the outstanding warrants as of September 28, 2004, was reclassified to equity as the registration rights amendment eliminated the debt characteristics of these warrants.

Income Tax Provision

We recorded an income tax benefit of $488,000 for 2005 compared to an income tax expense of $52,000 for 2004. During the first quarter of 2005, we recorded a $324,000 non-cash tax benefit related to the $900,000 impairment charge related to tradenames and in September 2005, we recorded a $216,000 non-cash tax benefit also related to the impairment of tradenames. Tradenames have no basis for tax purposes, but do have book carrying value. To the extent that we cannot reasonably estimate the amount of deferred tax liabilities related to tradenames that will reverse during the net operating loss carry forward period, the deferred tax liabilities cannot be offset against deferred tax assets for purposes of determining the valuation allowance.

For both 2005 and 2004, we recorded $52,000 in income tax expense that represents the income tax effect of goodwill amortization created by the BSG acquisition in December 2003. For tax purposes the goodwill is amortized over 15 years whereas for book purposes the goodwill is not amortized, but instead tested at least annually for impairment. The effective tax rate applied to the tradenames intangible asset and goodwill amortization deductible for tax purposes was 36%.

Liquidity and Capital Resources

Our consolidated financial statements have been prepared assuming that we will continue as a going concern. As further discussed in this Liquidity and Capital Resources section, we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as a

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going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Since inception, we have been unable to generate income from operations. We have accumulated net losses of approximately $281.9 million from our inception through December 31, 2006, and we have continued to accumulate net losses since December 31, 2006. Historically, we have funded our operations primarily through the issuance of debt and equity securities to investors. We financed our operations during fiscal 2006 primarily from existing working capital at December 31, 2005, and $7.4 million in net cash proceeds from our issuance of convertible debentures and warrants in June 2006. As of December 31, 2006, our working capital (deficit) was negative $6.3 million, as compared to working capital of $11.8 million as of December 31, 2005. We had cash and cash equivalents of $1.4 million as of December 31, 2006, as compared to $15.2 million as of December 31, 2005. We invest our cash in excess of current operating requirements in a money market fund with a commercial bank.

On January 24, 2007, we borrowed $400,000 from Richard P. Kiphart, a member of our board of directors and current stockholder, and issued an unsecured promissory note to Mr. Kiphart bearing interest at the rate of 10% per annum. The note is due and payable in four equal quarterly installments beginning January 1, 2008, with accrued interest payable with each installment of principal. The note is subordinated to our 8% convertible debentures due December 12, 2007, and contains customary default provisions.

We used cash of $19.5 million for operating activities in 2006, which was $1.4 million less than the amount used in operations during 2005. The decrease in the use of cash was primarily due to decreased headcount related and occupancy expense related to the consolidation of facilities. In October 2006, we significantly reduced our operating expenses by reducing our workforce by 62%, which resulted in approximately $775,000 of cash severance payments for the effected employees.

Net cash used in investing activities was $501,000 in 2006, which consisted of $531,000 used for purchases of equipment, furniture and leasehold improvements, which was offset by $30,000 in proceeds from the sale of equipment. This is compared to cash used in investing activities of $506,000 in 2005, which consisted of $510,000 used for purchases of equipment, furniture and leasehold improvements, which was offset by $4,000 in proceeds from the sale of equipment.

Net cash provided by financing activities decreased to $6.2 million from $14.4 million in 2005. In June 2006, we received gross proceeds of $8.0 million, net of $614,000 in debt issuance costs paid, through the issuance of 8% convertible debentures and warrants to purchase 8,889,002 shares of our common stock. These proceeds were offset by $855,000 in payments as a result of the amendments of certain warrants issued in connection with our June 2005 financing.

As a result of the capital raised during 2006, the loan from Mr. Kiphart in 2007, the proceeds from the sale of Safsolution and Safmodule and our efforts to reduce our monthly cash usage, we believe we have sufficient funds to continue operations at current levels through June 2007. We do not have a credit line or other borrowing facility to fund our operations. To continue our current level of operations beyond June 30, 2007, it is expected that we will need to seek additional funds through the issuance of additional equity or debt securities or other sources of financing. We may not be able to secure additional financing on favorable terms, or at all. If we were unable to obtain the necessary additional financing, we would be required to reduce the scope of our operations, primarily through the reduction of discretionary expenses, which include personnel, benefits, marketing and other costs, or discontinue operations.

We currently occupy our headquarters in Kirkland, Washington under a lease that expires in March 2008. We lease office space in Reston, Virginia, which expires in April 2009, but have sublet that entire facility as of February 2007 through the expiration of our lease with our landlord. In connection with the Litronic acquisition, we assumed the leases of two properties in Irvine, California and Reston, Virginia. As part of the RDSK transaction, the Irvine property lease was terminated as of December 15, 2006, in exchange for assets associated with our Litronic subsidiary. Our Reston, Virginia facility lease, which is set to expire in February 2009, was also sublet as of April 2006 and continues through the expiration of our lease with our landlord.

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The following table reflects our contractual commitments for operating leases, convertible debentures principal and interest, and our convertible promissory note principal and interest as of December 31, 2006 (in thousands):

	2007		2008 to 2009	2010 to 2011	Thereafter	Total
Operating leases	$	520	896	485	—	$	1,901
Convertible debentures principal		7,200	—	—	—		7,200
Convertible debentures interest		293	—	—	—		293
Convertible promissory note principal		1,250	—	—	—		1,250
Convertible promissory note interest		188	—	—	—		188
Total	$	9,451	896	485	—	$	10,832

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN No. 48 will have a material impact on our consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement approach and a balance sheet approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Adoption of SAB No. 108 did not have a material effect on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently assessing the impact of SFAS No. 157 on our consolidated financial statements.

Item 7A. Qualitative and Quantitative Disclosure About Market Risk

Our exposure to market rate risk for changes in interest rates relates primarily to money market funds included in our investment portfolio. Investments in fixed rate earning instruments carry a degree of interest rate risk as their fair market value may be adversely impacted due to a rise in interest rates. As a result, our future investment income may fall short of expectations due to changes in interest rates. We do not use any hedging transactions or any financial instruments for trading purposes and we are not a party to any leveraged derivatives. Due to the nature of our investment portfolio, we believe that we are not subject to any material market risk exposure.

Item 8. Financial Statements and Supplementary Data

See Index to Financial Statements.

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

None.

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Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Item 9B. Other Information

Richard P. Kiphart, a member of our board of directors, holds a convertible promissory note convertible note with a face value of $1.25 million which we assumed in connection with our acquisition of Litronic. The note has an annual interest rate of 10% and a maturity date of December 31, 2006. Although the unpaid principal and accrued interest under the promissory note was due and payable on December 31, 2006, we did not pay the balance due but intend to pay the outstanding balance to Mr. Kiphart upon his request. Until that time, we will continue to accrue and pay interest at 10% on the outstanding principal.

PART III

Item 10. Director, Executive Officers and Corporate Governance

Information concerning our directors, executive officers and corporate governance is included in the definitive proxy statement for our 2007 annual meeting of stockholders, which is incorporated herein by reference.

Item 11. Executive Compensation

Information concerning our executives’ compensation is included in the definitive proxy statement for our 2007 annual meeting of stockholders, which is incorporated herein by reference.

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

Information required to be disclosed hereunder is included in the definitive proxy statement for our 2007 annual meeting of stockholders, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

Information required to be disclosed hereunder is included in the definitive proxy statement for our 2007 annual meeting of stockholders, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information required to be disclosed hereunder is included in the definitive proxy statement for our 2007 annual meeting of stockholders, which is incorporated herein by reference.

42

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as a part of this annual report on Form 10-K:

(1) Consolidated Financial Statements

The financial statements filed as a part of this report are listed in the “Index to Financial Statements.”

(2) Financial Statement Schedules

All schedules have been omitted because they are either not applicable, not material or the required information has been given in the financial statements or related notes.

(b) Exhibits

	Description	Filed Herewith	Form	Incorporated by Reference
Exhibit No.				Exhibit No.	File No.	Filing Date
3.1	Restated Certificate of Incorporation of Saflink Corporation		10-K	3.1	000-20270	3/30/2004
3.2	Certificate of Amendment to Restated Certificate of Incorporation of Saflink Corporation		8-K	3.2	000-20270	8/13/2004
3.3	Second Amended and Restated Bylaws of Saflink Corporation		10-Q	3.1	000-20270	8/14/2003
3.4	Amendment to Bylaws of Saflink Corporation		10-Q	3.2	000-20270	11/15/2004
4.1	Registration Rights Agreement dated as of November 19, 2003, among SSP Solutions, Inc. and each investor named in Exhibit A thereto		8-K	10.4	000-26227	11/21/2003
4.2	Registration Rights Agreement dated as of June 8, 2005, among Saflink Corporation and the Purchasers listed therein		8-K	10.2	000-20270	6/13/2005
4.3	Form of Warrant		8-K	4.1	000-20270	7/1/2002
4.4	Amendment to Warrant of Saflink Corporation		8-K	99.1	000-20270	8/2/2004
4.5	Form of Series A-1 Warrant issued by SSP Solutions, Inc.		8-K	10.2	000-26227	11/21/2003
4.6	Form of Series A-2 Warrant issued by SSP Solutions, Inc.		8-K	10.3	000-26227	11/21/2003
4.7	Form of Secured Convertible Promissory Note dated November 19, 2003, made by SSP Solutions, Inc. in favor of Richard P. Kiphart		8-K	10.5	000-26227	11/21/2003
4.8	First Amendment to Secured Convertible Promissory Note, dated December 31, 2005, by and between Saflink Corporation and Richard P. Kiphart		10-K	4.13	000-20270	3/17/2006

43

	Description	Filed Herewith	Form	Incorporated by Reference
Exhibit No.				Exhibit No.	File No.	Filing Date
4.9	Form of 8% Convertible Debenture issued June 12, 2006		8-K	4.1	000-20270	6/15/2006
4.10	Form of Warrant issued June 12, 2006		8-K	4.1	000-20270	6/15/2006
4.11	Securities Purchase Agreement, dated as of June 12, 2006, by and among Saflink Corporation and the Purchasers		8-K	10.1	000-20270	6/15/2006
4.12	Registration Rights Agreement, dated as of June 12, 2006, by and among Saflink Corporation and the Purchasers		8-K	10.2	000-20270	6/15/2006
4.13	Promissory Note, dated January 24, 2007, by and between Saflink Corporation and Richard P. Kiphart	X
10.1	Saflink Corporation 2000 Stock Incentive Plan, as amended*	X
10.2	Form of Stock Option Agreement*		8-K	99.1	000-20270	9/7/2004
10.3	Form of Stock Purchase Agreement*		10-K	10.3	000-20270	3/31/2005
10.4	Form of Employment Agreement for executive officers (as executed by the following executive officer: Steven D. Rishel)*		10-Q	10.1	000-20270	5/15/2003
10.5	Form of Retention Agreement for executive officers (as executed by the following executive officers: Jeffrey T Dick and Steven D. Rishel)*		10-Q	10.2	000-20270	5/15/2003
10.6	Employment Agreement, Glenn L. Argenbright, as amended*		10-K	10.4	000-20270	3/30/2004
10.7	Deed of Lease dated November 10, 2003, between VA Branches, LLC and Saflink Corporation		10-K	10.8	000-20270	3/30/2004
10.8	Saflink Corporation 2005 Employee Stock Purchase Plan*		10-K	10.15	000-20270	3/17/2006
10.9	Lease Agreement dated January 15, 2004, by and between SSP Solutions, Inc. and Executive II Limited Partnership		10-K	10.17	000-20270	3/17/2006
10.10	Lease Agreement dated November 21, 2005, by and between Saflink Corporation and Mastro Willows II, LLC		10-K	10.18	000-20270	3/17/2006
10.11	Lease Agreement dated March 1, 2006, by and between Saflink Corporation and South Carolina Research Authority		10-K	10.19	000-20270	3/17/2006
10.12	Agreement of Sublease dated April 21, 2006, by and between Saflink Corporation and Concept Solutions, LLC		8-K	10.1	000-20270	4/27/2006

44

	Description	Filed Herewith	Form	Incorporated by Reference
Exhibit No.				Exhibit No.	File No.	Filing Date
10.13	Amended and Restated Retention Agreement dated April 27, 2006, by and between Saflink Corporation and Jon C. Engman*		10-Q	10.3	000-20270	5/10/2006
10.14	Executive Consulting Agreement, dated as of September 28, 2006, by and between Saflink Corporation and Capital Placement Holdings, Inc.		10-Q	10.1	000-20270	11/9/2006
10.15	Asset Purchase Agreement, dated as of December 15, 2006, by and among Saflink Corporation, Litronic, Inc., RDSK, Inc., and KRDS, Inc.	X
10.16	Saflink Corporation Severance Plan and Summary Plan Description dated January 9, 2007	X
10.17	Agreement of Sublease dated February 5, 2007, between Saflink Corporation and Abraxas Corporation	X
10.18	Software Rights Agreement, dated as of February 27, 2007, by and between Saflink Corporation and IdentiPHI, LLC	X
11	Statement re Computation of Per Share Earnings (see Note 3 of Notes to Consolidated Financial Statements)	X
21	Subsidiaries	X
23	Consent of Independent Registered Public Accounting Firm	X
24	Power of Attorney (included in the signature page of this report)	X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

* Management contract or compensatory plan or arrangement

45

SIGNATURES

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

Date: March 30, 2007

SAFLINK CORPORATION
By:	/s/    STEVEN M. OYER
	Steven M. Oyer Interim Chief Executive Officer and Director

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven M. Oyer and Jeffrey T. Dick, and each of them, with full power of substitution and resubstitution and full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/    STEVEN M. OYER         Steven M. Oyer	Interim Chief Executive Officer and Director (Principal Executive Officer)	March 30, 2007
/s/    JEFFREY T. DICK         Jeffrey T. Dick	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 30, 2007
/s/    GLENN L. ARGENBRIGHT         Glenn L. Argenbright	Director	March 30, 2007
/s/    LINCOLN D. FAURER Lincoln D. Faurer	Director	March 30, 2007
/s/    GORDON E. FORNELL         Gordon E. Fornell	Director	March 30, 2007
/s/    ASA HUTCHINSON         Asa Hutchinson	Director	March 30, 2007
/s/    TREVOR NEILSON         Trevor Neilson	Director	March 30, 2007
/s/    RICHARD P. KIPHART         Richard P. Kiphart	Director	March 30, 2007

46

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page Number
Reports of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2006 and 2005	F-2
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004	F-3
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004	F-5
Notes to Consolidated Financial Statements	F-6

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Saflink Corporation:

We have audited the accompanying consolidated balance sheets of Saflink Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Saflink Corporation and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 3 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.

/s/ KPMG LLP

Seattle, Washington

March 30, 2007

F-1

SAFLINK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	1,407		$	15,217
Trade accounts receivable, net of allowance for doubtful accounts of $11 and $55 as of December 31, 2006 and 2005, respectively		390			692
Inventory		86			563
Prepaid expenses		280			589
Other current assets		321			252
Total current assets		2,484			17,313
Furniture and equipment, net		420			1,018
Debt issuance costs		550			—
Goodwill		—			75,923
Intangible assets, net		—			19,848
Total assets	$	3,454		$	114,102
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	1,186		$	1,204
Accrued expenses		1,308			2,150
Current portion of convertible debt, net of discount		4,619			—
Note payable to related party		1,250			1,250
Other current obligation		213			765
Deferred revenue		229			174
Total current liabilities		8,805			5,543
Deferred tax liability		—			140
Total liabilities		8,805			5,683
Commitments and contingencies
Stockholders’ equity (deficit):
Common stock, $.01 par value:
Authorized—200,000 shares as of December 31, 2006 and 2005
Issued—97,495 and 88,888 shares as of December 31, 2006 and 2005, respectively		975			889
Common stock subscribed		163			—
Additional paid-in capital		275,421			269,256
Deferred stock-based compensation		—			(541	)
Accumulated deficit		(281,910	)		(161,185	)
Total stockholders’ equity (deficit)		(5,351	)		108,419
Total liabilities and stockholders’ equity (deficit)	$	3,454		$	114,102

See accompanying notes to consolidated financial statements.

F-2

SAFLINK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended December 31,
	2006			2005			2004
Revenue:
Product (including sales to related party of $0 for 2006, $0 for 2005 and $196 for 2004)	$	3,399		$	4,929		$	4,580
Service (including sales to related party of $0 for 2006, $0 for 2005 and $35 for 2004)		762			2,187			1,818
Total revenue		4,161			7,116			6,398
Cost of revenue:
Product		1,713			2,198			2,211
Service		472			1,402			1,131
Impairment loss on intangible assets		15,535			—			—
Amortization of intangible assets		2,112			2,683			1,227
Total cost of revenue		19,832			6,283			4,569
Gross profit (loss)		(15,671	)		833			1,829
Operating expenses:
Product development		7,853			9,474			5,721
Sales and marketing		6,538			9,189			7,451
General and administrative		8,251			8,924			6,495
Impairment loss on goodwill		75,923			19,300			—
Impairment loss on intangible assets		—			1,500			—
Impairment loss on furniture and equipment		716			—			—
Restructuring charges		2,836			—			—
Total operating expenses		102,117			48,387			19,667
Operating loss		(117,788	)		(47,554	)		(17,838	)
Interest expense		(2,741	)		(138	)		(59	)
Other income, net		275			450			204
Debt extinguishment loss on convertible note to related party		—			(455	)		—
Change in fair value of outstanding warrants		—			172			1,808
Loss before income taxes		(120,254	)		(47,525	)		(15,885	)
Income tax provision (benefit)		(140	)		(488	)		52
Net loss		(120,114	)		(47,037	)		(15,937	)
Modification of warrants		611			59			2,167
Net loss attributable to common stockholders	$	(120,725	)	$	(47,096	)	$	(18,104	)
Basic and diluted net loss attributable to common stockholders per common share	$	(1.36	)	$	(0.56	)	$	(0.36	)
Weighted average number of common shares outstanding		89,035			84,125			50,125

See accompanying notes to consolidated financial statements.

F-3

SAFLINK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands)

	Common stock			Preferred stock				Common stock subscribed		Additional paid-in capital			Deferred stock-based compensation			Accumulated deficit			Total stockholders’ equity (deficit)
	Shares	Amount		Shares		Amount
Balance at December 31, 2003	28,177		281	15			—		—		106,805			—			(95,985	)		11,101
Net loss attributable to common stockholders	—		—	—			—		—		—			—			(18,104	)		(18,104	)
Issuance of common stock and warrants, net of issuance costs	3,080		31	—			—		—		6,711			—			—			6,742
Issuance of restricted common stock and stock options to employees	802		8	—			—		—		2,444			(2,452	)		—			—
Issuance of common stock upon the exercise of warrants, net of issuance costs	4,477		45	—			—		—		10,791			—			—			10,836
Issuance of common stock upon exercise of stock options	748		8	—			—		—		921			—			—			929
Modification of stock options and warrants	—		—	—			—		—		2,231			—			—			2,231
Reclassification of warrants from equity to liability	—		—	—			—		—		(937	)		—			—			(937	)
Amortization of deferred stock-based compensation	—		—	—			—		—		—			795			—			795
Conversion of Series E preferred stock	2,167		22	(15	)		—		—		(22	)		—			—			—
Conversion of note payable to common stock	66		1	—			—		—		109			—			—			110
Issuance of common stock and warrants and options assumed in business acquisition	40,137		401	—			—		—		124,042			—			—			124,443
Deferred stock-based compensation from business acquisition	—		—	—			—		—		—			(184	)		—			(184	)
Fair value of conversion feature of debt assumed in business acquisition	—		—	—			—		—		1,233			—			—			1,233
Balance at December 31, 2004	79,654	$	797	—			—		—	$	254,328		$	(1,841	)	$	(114,089	)	$	139,195
Net loss attributable to common stockholders	—		—	—			—		—		—			—			(47,096	)		(47,096	)
Issuance of common stock and warrants, net of issuance costs	8,824		88	—			—		—		13,852			—			—			13,940
Issuance of stock options to employees	—		—	—			—		—		45			—			—			45
Issuance of stock options to third parties	—		—	—			—		—		28			(12	)		—			16
Issuance of common stock upon exercise of stock options	410		4	—			—		—		462			—			—			466
Modification of stock options and warrants	—		—	—			—		—		86			—			—			86
Amortization of deferred stock-based compensation	—		—	—			—		—		—			1,312			—			1,312
Debt extinguishment loss on convertible note to related party	—		—	—			—		—		455			—			—			455
Balance at December 31, 2005	88,888	$	889	—		$	—		—	$	269,256		$	(541	)	$	(161,185	)	$	108,419
Net loss attributable to common stockholders	—		—	—			—		—		—			—			(120,725	)		(120,725	)
Reclassification of deferred compensation	—		—	—			—		—		(541	)		541			—			—
Issuance of common stock upon exercise of stock options	21		—	—			—		—		17			—			—			17
Reclass of warrants from liability to equity	—		—	—			—		—		196			—			—			196
Modification of stock options and warrants	—		—	—			—		—		611			—			—			611
Warrant redemptions	—		—	—			—		—		(855	)		—			—			(855	)
Amortization of deferred stock-based compensation	—		—	—			—		—		1,128			—			—			1,128
Issuance of warrants in connection with debt financing	—		—	—			—		—		3,149			—			—			3,149
Beneficial conversion feature related to debt financing	—		—	—			—		—		1,655			—			—			1,655
Convertible debenture interest and redemption payments	8,586		86	—			—		163		805			—			—			1,054
Balance at December 31, 2006	97,495	$	975	—		$	—	$	163	$	275,421		$	—		$	(281,910	)	$	(5,351	)

See accompanying notes to consolidated financial statements.

F-4

SAFLINK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net loss	$	(120,114	)	$	(47,037	)	$	(15,937	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense		2,242			—			—
Stock-based compensation		1,128			1,400			859
Depreciation and amortization		2,828			3,374			1,646
Debt extinguishment loss on convertible note to related party		—			455			—
Loss on disposal of furniture and equipment		131			105			—
Impairment loss on intangible assets		15,535			1,500			—
Impairment loss on goodwill		75,923			19,300			—
Impairment loss on furniture and equipment		716			—			—
Non-cash restructuring charge		2,061			—			—
Change in valuation of outstanding warrants		—			(172	)		(1,808	)
Deferred taxes		(140	)		(488	)		52
Changes in operating assets and liabilities, net of business acquired:
Accounts receivable, net		302			1,045			(115	)
Inventory		278			109			46
Prepaid expenses and other current assets		240			193			(434	)
Accounts payable		(18	)		(461	)		(864	)
Accrued expenses		(668	)		(57	)		(1,353	)
Deferred revenue		55			(166	)		179
Net cash used in operating activities		(19,501	)		(20,900	)		(17,729	)
Cash flows from investing activities:
Purchases of furniture and equipment		(531	)		(510	)		(730	)
Cash acquired in business combination, net of transaction costs paid		—			—			13,262
Proceeds from the sale of furniture and equipment		30			4			—
Net cash provided by (used in) investing activities		(501	)		(506	)		12,532
Cash flows from financing activities:
Proceeds from exercises of stock options		17			466			929
Proceeds from issuance of convertible debentures, net of issuance costs		7,386			—			—
Proceeds from warrant exercises and issuance of common stock and warrants, net of issuance costs		—			13,940			19,386
Warrant redemptions		(1,211	)		—			—
Net cash provided by financing activities		6,192			14,406			20,315
Net increase (decrease) in cash and cash equivalents		(13,810	)		(7,000	)		15,118
Cash and cash equivalents at beginning of period		15,217			22,217			7,099
Cash and cash equivalents at end of period	$	1,407		$	15,217		$	22,217
Supplemental disclosure of cash flow information:
Cash paid for interest		62			157			67
Conversion of note payable to common stock		—			—			110
Conversion of Series E preferred stock		—			—			22
Warrants issued in connection with financing classified as a liability at issuance		—			—			4,070
Reclassification of warrants from liability to equity		(196	)		—			(2,262	)
Reclassification of warrants from equity to liability		—			—			937
Deferred compensation from grant of restricted common stock and options		—			—			2,452
Modification of outstanding equity instruments		611			59			2,167
Fair value of common stock issued and equity instruments assumed in business acquisition		—			—			124,443
Long-term debt assumed in business acquisition		—			—			1,360
Fair value of conversion feature of debt from a related party assumed in business acquisition		—			—			1,233
Direct acquisition costs included in accounts payable and accrued liabilities		—			—			58
Beneficial conversion feature related to convertible debentures		1,655			—			—
Non-cash additions to furniture and equipment		350			—			—
Warrants issued in connection with convertible debenture financing		3,149			—			—
Issuance of common stock in lieu of cash for convertible debenture redemption and interest payments		1,099			—			—

See accompanying notes to consolidated financial statements.

F-5

SAFLINK CORPORATIO N

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Saflink Corporation offers biometric security, smart card and cryptographic technologies that help protect intellectual property and control access to secure facilities. Saflink security technologies are key components in identity assurance management solutions that allow administrators and security personnel to positively confirm a person’s identity before access is granted. Saflink cryptographic technologies help to ensure that sensitive information is accessed only by the intended recipient(s).

Saflink Corporation was incorporated in the State of Delaware on October 23, 1991, and maintains its headquarters in Kirkland, Washington.

2. Liquidity

These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As further discussed in this note to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Since inception, the Company has been unable to generate net income from operations. The Company has accumulated net losses of approximately $281.9 million from its inception through December 31, 2006, and has continued to accumulate net losses since December 31, 2006. The Company has historically been financed through issuances of common and preferred stock and convertible debt. The Company financed operations during fiscal 2006 primarily from existing working capital at December 31, 2005, and the issuance of convertible debentures and warrants in June 2006, which raised approximately $7.4 million in net cash proceeds. As of December 31, 2006, the Company’s principal source of liquidity consisted of $1.4 million of cash and cash equivalents and working capital (deficit) was negative $6.3 million.

On June 12, 2006, the Company raised $7.4 million in net proceeds through a private placement of 8% convertible debentures. The principal amount of the debentures is payable at the rate of 1/12 of the original principal amount per month plus accrued but unpaid interest on the debentures commencing December 1, 2006. The Company may, in its discretion, elect to pay the interest due on the debentures and the monthly redemption amount in cash or in shares of its common stock. The Company has paid all the redemption amounts and interest due in shares of its common stock through the March 2007 redemption payment date and has elected to pay the April 2007 redemption payment date in shares of its common stock as well. If the Company continues to elect to pay these obligations in shares of its common stock after April 2007, the Company may have to register additional shares of its common stock with the SEC and possibly propose a shareholder vote to amend its certificate of incorporation to increase the number of authorized shares of common stock to have enough registered shares to make the required payments. See Note 13—Stockholders’ Equity.

On January 24, 2007, the Company borrowed $400,000 from Richard P. Kiphart, a member of the Company’s board of directors and current stockholder, and issued an unsecured promissory note to Mr. Kiphart bearing interest at the rate of 10% per annum. The note is due and payable in four equal quarterly installments beginning January 1, 2008, with accrued interest payable with each installment of principal. The note is subordinated to the Company’s 8% convertible debentures due December 12, 2007, and contains customary default provisions.

On February 27, 2007, the Company entered into a Software Rights Agreement with IdentiPHI, LLC, whereby the Company sold its rights in its SAFsolution and SAFmodule software programs for an initial payment of $778,000 plus deferred payments due quarterly over a period of three years. See Note 19—Subsequent Events.

F-6

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of the capital raised during 2006, the promissory note issued in January 2007, the proceeds from the sale of Safsolution and Safmodule and the Company’s efforts to reduce its cash expenditures as discussed in Note 5—Restructuring, the Company believes it has sufficient funds to continue operations at current levels through June 2007. The Company currently does not have a credit line or other borrowing facility to fund its operations. To continue its current level of operations beyond June 30, 2007, it is expected that the Company will need to seek additional funds through the issuance of additional equity or debt securities or other sources of financing.

Additional financing sources may not be available when and if needed by the Company and will depend on many factors including, but not limited to:

• the ability to extend terms received from vendors;

• the market acceptance of products and services;

• the levels of promotion and advertising that will be required to launch new products and services and attain a competitive position in the marketplace;

• research and development plans;

• levels of inventory and accounts receivable;

• technological advances;

• competitors’ responses to the Company’s products and services;

• relationships with partners, suppliers and customers;

• projected capital expenditures; and

• the state of the economy

If the Company were unable to obtain the necessary additional financing, it would be required to reduce the scope of its operations, primarily through the reduction of discretionary expenses, which include personnel, benefits, marketing and other costs, or discontinue operations.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial statements of Saflink Corporation and its wholly-owned subsidiaries, Saflink International, Inc., a Delaware corporation organized on June 25, 1998, and Litronic, Inc. (Litronic), a Delaware corporation, acquired on August 6, 2004. All significant intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

The Company derives revenue from license fees for software products, selling hardware manufactured by the Company, reselling third party hardware and software applications, and fees for services related to these software and hardware products including maintenance services, installation and integration consulting services.

The Company recognizes revenue in accordance with the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” and related interpretations, including Technical

F-7

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Practice Aids, which provides specific guidance and stipulates that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post-contract customer support, installation, integration and/or training. Under this guidance, the determination of fair value is based on objective evidence that is specific to the vendor. In multiple element arrangements in which fair value exists for undelivered elements, the fair value of the undelivered elements is deferred and the residual arrangement fee is assigned to the delivered elements. If evidence of fair value for any of the undelivered elements does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist, or until all elements of the arrangement are delivered.

Revenue from biometric software and data security license fees is recognized upon delivery, net of an allowance for estimated returns, provided persuasive evidence of an arrangement exists, collection is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. If customers receive pilot or test versions of products, revenue from these arrangements is recognized upon customer acceptance of permanent license rights. If the Company’s software is sold through a reseller, revenue is recognized when the reseller delivers its product to the end-user. Certain software delivered under a license requires a separate annual maintenance contract that governs the conditions of post-contract customer support. Post-contract customer support services can be purchased under a separate contract on the same terms and at the same pricing, whether purchased at the time of sale or at a later date. Revenue from these separate maintenance support contracts is recognized ratably over the maintenance period. If software maintenance is included under the terms of the software license agreement, then the value of such maintenance is deferred and recognized ratably over the initial license period. The value of such deferred maintenance revenue is established by the price at which the customer may purchase a renewal maintenance contract.

Revenue from hardware manufactured by the Company is generally recognized upon shipment, unless contract terms call for a later date, net of an allowance for estimated returns, provided persuasive evidence of an arrangement exists, collection is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. Revenue from some data security hardware products contains embedded software. However, the embedded software is considered incidental to the hardware product sale. The Company also acts as a reseller of third party hardware and software applications. Such revenue is also generally recognized upon shipment of the hardware, unless contract terms call for a later date, provided that all other conditions above have been met.

Service revenue includes payments under support and upgrade contracts and consulting fees. Support and upgrade revenue is recognized ratably over the term of the contract, which typically is twelve months. Consulting revenue primarily relates to installation, integration and training services performed on a time-and-materials or fixed-fee basis under separate service arrangements. Fees from consulting are recognized as services are performed. If a transaction includes both license and service elements, license fees are recognized separately upon delivery of the licensed software, provided services do not include significant customization or modification of the software product, the licenses are not subject to acceptance criteria, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. If the services do include significant customization or modification of the software product, the revenue is recognized in accordance with the relevant guidance from the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).

The Company recognizes revenue for these types of arrangements as services are rendered using the percentage-of-completion method with progress-to-complete usually measured using labor hour or labor cost inputs. The Company believes that these input measures more accurately reflects its progress on projects

F-8

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

accounted for under SOP 81-1, as opposed to output measures, which are generally difficult to establish for the projects in which the Company is engaged. The Company periodically reviews cost estimates on percentage-of-completion contracts and records adjustments in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in the Company’s consolidated financial statements. A number of internal and external factors can affect the Company’s estimates, including labor rates, availability of qualified personnel and project requirement and/or scope changes. Billings on uncompleted contracts may be less than or greater than the revenues recognized and are recorded as either unbilled receivable (an asset) or deferred revenue (a liability) in the consolidated financial statements.

Major Customers

Two customers accounted for 13% and 11% of the Company’s 2006 revenue, while two customers accounted for 16% and 10% of the Company’s 2005 revenue and one customer accounted for 15% of the Company’s 2004 revenue.

Four customers accounted for 27%, 22%, 21% and 12% of the outstanding trade accounts receivable balance at December 31, 2006, while one customer accounted for 32% of the outstanding balance at December 31, 2005.

Use of Estimates

The preparation of consolidated 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 amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents of $1.4 million and $15.2 million at December 31, 2006 and 2005, respectively, consisted of bank account balances and money market funds. Cash equivalents were $896,000 and $14.5 million at December 31, 2006 and 2005, respectively. The Company considers all highly liquid debt instruments with original maturities of three months or less at the date of purchase to be cash equivalents. Interest income recognized for the years ended December 31, 2006, 2005 and 2004, was $275,000, $465,000 and $203,000, respectively.

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and customer specific information. The Company reviews its allowance for doubtful accounts quarterly. Past due balances in excess of 90 days are reviewed individually for collectibility. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of December 31, 2006 and 2005, the Company

F-9

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

had $3,000 and $60,000, respectively, of unbilled revenue classified as trade accounts receivable. These amounts will be invoiced in accordance with billing schedules established in the contracts with the customers.

The following table summarized the Company’s allowance for doubtful accounts balance for the years ended December 31, 2006, 2005 and 2004:

	2006			2005			2004
	(In thousands)
Allowance for doubtful accounts January 1,	$	55		$	27		$	6
Bad debt expense		17			34			22
Receivables written off		(61	)		(6	)		(1	)
Allowance for doubtful accounts December 31,	$	11		$	55		$	27

Inventory

Inventory is comprised of raw materials, work-in-process and finished goods related to the Company’s smart card readers, biometric physical access readers and hardware appliances for its network authentication products. These products are either manufactured by the Company or manufactured by third parties. The Company also inventories third party biometric and non-biometric hardware devices to be purchased by customers in connection with the installation of the Company’s security products. Inventories are stated at the lower of cost, on a first-in, first-out basis, or market. If the cost of the inventory exceeds their market value, provisions are made for the difference between the cost and the market value.

Furniture and Equipment

Depreciation on furniture and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of computer equipment and software are 2 to 3 years, while office furniture and other equipment are 3 to 10 years. Furniture and equipment held under leasehold improvements are amortized straight-line over the shorter of the lease term or estimated useful life of the asset.

Software Development Costs

The Company expenses costs associated with the development of software as incurred until technological feasibility is established. The Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility; accordingly, software costs incurred after establishment of technological feasibility have not been material and, therefore, have been expensed.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expenses were approximately $271,000, $526,000, and $687,000 in 2006, 2005 and 2004, respectively.

Guarantees

In the ordinary course of business, the Company is not subject to potential obligations under guarantees that fall within the scope of the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No. 45), except for standard indemnification and warranty provisions that are contained within many of its customer license and service agreements, and give rise only to the disclosure

F-10

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

requirements prescribed by FIN No. 45. Indemnification and warranty provisions contained within the Company’s customer license and service agreements are generally consistent with those prevalent in its industry. The duration of the Company’s product warranties generally does not exceed one year following delivery of its products. The Company has not incurred significant obligations under customer indemnification or warranty provisions historically and does not expect to incur significant obligations in the near future. Accordingly, the Company’s accruals for potential customer indemnification or warranty-related obligations are insignificant.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, and applied the provision of Staff Accounting Bulletin No. 107, “Share-Based Payment,” using the modified-prospective transition method. Under this transition method, stock-based compensation expense is recognized in the consolidated financial statements for grants of stock options. Compensation expense recognized includes the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Further, as required under SFAS 123R, forfeitures are estimated for share-based awards that are not expected to vest. Results for prior periods have not been restated, as provided for under the modified-prospective transition method.

Prior to January 1, 2006, the Company had elected to apply the disclosure-only provisions of SFAS No. 123. Accordingly, the Company accounted for stock-based compensation transactions with employees using the intrinsic value method prescribed in APB No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. Under this method, compensation expense is recognized only if the current market price of the underlying stock exceeded the exercise price on the date of the grant.

The following table illustrates the effect on net loss if the fair-value-based method had been applied to all outstanding and unvested awards in each period (in thousands except per share data):

	2005			2004
Net loss attributable to common stockholders	$	(47,096	)	$	(18,104	)
Add: Stock-based employee compensation expense included in reported net loss		1,346			795
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all rewards and modifications		(9,623	)		(6,091	)
Pro forma net loss attributable to common stockholders		(55,373	)		(23,400	)
Basic and diluted net loss attributable to common stockholders per common share, as reported		(0.56	)		(0.36	)
Basic and diluted net loss attributable to common stockholders per common share, pro forma	$	(0.66	)	$	(0.47	)

F-11

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company accounts for non-employee stock-based compensation in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

Net Loss per Common Share

In accordance with SFAS No. 128, “Earnings Per Share,” the Company has reported both basic and diluted net loss per common share for each period presented. Basic net loss per common share is computed on the basis of the weighted average number of common shares outstanding for the year. Diluted net loss per common share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding. Dilutive potential common shares are calculated under the treasury stock method.

The following table sets forth the computation of basic and diluted loss per common share:

	2006			2005			2004
	(In thousands, except per share data)
Numerator:
Net loss	$	(120,114	)	$	(47,037	)	$	(15,937	)
Modification of warrants		611			59			2,167
Net loss attributable to common stockholders	$	(120,725	)	$	(47,096	)	$	(18,104	)
Denominator:
Weighted average number of common shares outstanding during the period		89,640			84,927			50,479
Less: Weighted average number of restricted common shares outstanding during the period		(605	)		(802	)		(354	)
		89,035			84,125			50,125
Net loss attributable to common stockholders per common share	$	(1.36	)	$	(0.56	)	$	(0.36	)
Basic and diluted loss per common share:
Net loss	$	(1.35	)	$	(0.56	)	$	(0.32	)
Modification of warrants		(0.01	)		(0.00	)		(0.04	)
Net loss attributable to common stockholders	$	(1.36	)	$	(0.56	)	$	(0.36	)

Net loss attributable to common stockholders included net loss and modification of warrants. As the Company had a net loss attributable to common shareholders in each of the periods presented, basic and diluted net loss per common share were the same. Dilutive potential securities outstanding at year-end were not included in the computation of diluted net loss per common share, because to do so would have been anti-dilutive. Potentially dilutive securities for the years ended December 31, 2006, 2005, and 2004, which included stock options, warrants, debentures and a convertible promissory note, together were convertible into 43.0 million, 17.5 million and 13.7 million shares of common stock, respectively.

Segment Reporting

Operating segments are defined as revenue-producing components of an enterprise for which discrete financial information is available and whose operating results are regularly reviewed by the Company’s chief operating decision maker. Saflink management and chief operating decision maker review financial information on a consolidated basis and, therefore, the Company operated as single segment for all periods presented.

F-12

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Comprehensive Loss

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and presentation of comprehensive income and loss and its components in a full set of financial statements. SFAS No. 130 requires only additional disclosures in the financial statements; it does not affect the Company’s financial position or operations. The Company has not had any items in comprehensive loss, except for net loss.

Reclassifications

Certain reclassifications, including stock-based compensation were made to the 2005 and 2004 consolidated financial statements to conform to the 2006 presentation.

Foreign Currency

The Company had operations in Canada through November 2006 and accordingly had expenses denominated in foreign currencies. Realized and unrealized gains and losses resulting from foreign currency transactions are included in other income (expense). There were no significant foreign currency gains or losses realized or unrealized in 2006, 2005 or 2004.

Goodwill and Other Intangible Assets with Indefinite Useful Lives

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized.

The Company assesses the impairment of goodwill, in accordance with guidance provided by SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), on an annual basis or whenever events or changes in circumstances indicate that the fair value of the reporting unit to which goodwill relates is less than the carrying value. Factors the Company considers important that could trigger an impairment review include the following:

• poor economic performance relative to historical or projected future operating results;

• significant negative industry, economic or company specific trends;

• changes in the manner of its use of the assets or the plans for its business; and

• loss of key personnel.

If the Company were to determine that the fair value of a reporting unit was less than its carrying value, including goodwill, based upon the annual test or the existence of one or more of the above indicators of impairment, the Company would measure impairment based on a comparison of the implied fair value of reporting unit goodwill with the carrying amount of goodwill. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of reporting unit goodwill. To the extent the carrying amount of reporting unit goodwill is greater than the implied fair value of reporting unit goodwill, the Company would record an impairment charge for the difference.

The Company also assesses the impairment of intangible assets with indefinite useful lives on at least an annual basis, or more frequently if any of the above factors exist that might cause impairment to the carrying value. The Company compares the fair value of the intangible asset, which is determined based on a discounted

F-13

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

cash flow valuation method, with the carrying value of the intangible asset. If the Company were to determine that the fair value of an intangible asset was less than its carrying value, based upon the discounted cash flow valuation, the Company would recognize impairment loss in the amount of the difference between fair value and the carrying value of the asset.

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

The Company had significant purchased intangible assets subject to amortization on its balance sheet as of December 31, 2005 and 2004, related to developed technology. These intangible asset values were estimated using a discounted cash flow approach that used estimated future revenues, costs and discount rates. The useful lives of these assets were estimated using the Company’s own historical experience, as well as analyzing other companies in the same or related industries. Factors the Company used to determine appropriate estimates of useful lives include, but are not limited to, the expected use of the assets, any legal regulatory, or contractual provisions that may affect the useful lives, the effects of competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the assets. These estimates have a significant effect on the Company’s financial statements.

Fair Value of Financial Instruments

At December 31, 2006 and 2005, the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, an other current obligation, convertible debentures and a convertible note payable to a related party. The fair value of these instruments approximates their carrying value based on their short-term nature.

Recently Issued Accounting Pronouncements

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN No. 48 will have a material impact on its consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement approach and a balance sheet approach in assessing materiality

F-14

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Adoption of SAB No. 108 did not have a material effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial statements.

4. Business Combination

Litronic Acquisition

On August 6, 2004, the Company acquired all of the outstanding shares of SSP-Litronic (Litronic) common stock in a stock-for-stock transaction where each outstanding share of Litronic common stock was converted into the right to receive 0.6 shares of Saflink common stock. Saflink issued 40,137,148 shares of its common stock in exchange for the outstanding shares of Litronic common stock. Pursuant to the merger agreement, Saflink assumed each option, warrant and promissory note exercisable for or convertible into shares of Litronic common stock, and those securities are now exercisable for or convertible into shares of Saflink common stock, with appropriate adjustments to reflect the merger. At the time of the merger, the approximate number of shares exercisable for or convertible into shares of Saflink common stock assumed in connection with the merger included 2,360,552 million shares issuable upon exercise of options, 889,335 shares issuable upon exercise of warrants, and 816,000 shares issuable upon conversion of convertible promissory notes.

Litronic designed and developed innovative data and communication security solutions for both corporate and government institutions. Litronic also provided network security, desktop protection, and high assurance messaging systems for many organizations of the U.S. Government. The Company believed that the Litronic acquisition would help broaden its customer base and enable it to offer an integrated smart card plus biometric solution to the government and commercial sectors. As a result of the asset sale to RDSK in December 2006, as described in Note 5—Restructuring, the majority of Litronic’s assets were sold.

A summary of the components of the final purchase price for the acquisition is as follows (in thousands):

Fair value of common stock issued	$	116,398
Fair value of SSP-Litronic stock options assumed		5,835
Fair value of SSP-Litronic warrants assumed		2,210
Merger related costs		1,840
Total purchase price	$	126,283

The total purchase consideration has been allocated to the assets and liabilities acquired, including identifiable intangible assets, based on their respective estimated fair values summarized below. The respective estimated fair values were determined by an independent third-party appraisal at the acquisition date and resulted in excess purchase consideration over the net tangible and identifiable intangible assets acquired of $93.1 million. The $93.1 million in goodwill was not deductible for tax purposes.

F-15

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the allocation of the purchase price at the time of acquisition was as follows (in thousands):

Tangible assets, primarily cash and cash equivalents, accounts receivable and inventory	$	17,000
Current liabilities		(4,697	)
Deferred tax liability		(576	)
Long-term debt		(1,360	)
Identifiable intangible assets:
Patents (7 year life)		400
Tradenames (indefinite life)		1,600
Developed technology (7 to 10 year lives)		16,900
Customer relationships (8 year life)		4,700
Non-competition agreements (3 year life)		300
Goodwill		93,065
Fair value of conversion feature of convertible debt assumed		(1,233	)
Deferred stock compensation		184
Total	$	126,283

The identifiable intangible assets are amortized, on a straight-line basis, over their expected useful lives. As of December 31, 2006, all amortizable intangible assets related to this acquisition had been either sold or considered to be impaired and the Company recorded impairment charges in its statement of operations during 2005 and 2006.

5. Restructuring

During 2006, the Company implemented several restructuring initiatives, which are discussed below.

Management Changes

On September 28, 2006, the Company’s board of directors approved the terms of an executive consulting agreement with Capital Placement Holdings, Inc. under which Steven Oyer, the president and principal of Capital Placement Holdings and a member of the board of directors of Saflink, agreed to serve as Saflink’s interim chief executive officer, replacing Glenn Argenbright. Mr. Argenbright continues to serve as a member of the Company’s board of directors and was named chairman of the board of directors and president and general manager of the Company’s registered traveler solutions group. The reassignment of Mr. Argenbright triggered certain severance provisions contained in Mr. Argenbright’s employment agreement and, as a result, the Company determined that it had an obligation of $240,000, or twelve months’ base salary, to Mr. Argenbright, which the Company recorded in the third quarter of 2006 and is reflected in its accrued liability balance as of December 31, 2006. In addition, on September 25, 2006, Jon Engman submitted his resignation as Saflink’s chief financial officer, effective November 24, 2006, for personal reasons and to pursue other interests. Per the terms of Mr. Engman’s retention agreement, the Company paid $242,000 during 2006. Both these severance amounts were recorded as general and administrative expense in the Company’s statement of operations.

October 2006 Restructuring Activities

As part of the restructuring activities in October 2006, the Company reduced its workforce by 47 employees, or approximately 62%, reassessed its facility requirements, and took action to significantly reduce the Company’s use of cash. The majority of the Company’s remaining workforce was dedicated to the Registered

F-16

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Traveler program and the Company focused on leveraging its technologies and intellectual property through licensees or partners. The Company recorded and paid restructuring costs of $775,000 related to severance payment to the effected employees in its statement of operations during 2006.

Asset Sale and Termination of Facility Lease

When the Company failed to pay its October lease payment for its Irvine, California facility and was notified of its breach of the contract by its landlord, KRDS, Inc., the Company accrued a $2.4 million restructuring liability and corresponding restructuring expense in October 2006, which reflected the amount required to terminate the lease with the landlord per the terms of the lease. The $2.4 million reflected the net present value of all future rent payments under the lease at a specified discount rate per the terms of the lease and was recorded as a restructuring charge in the Company’s statement of operations.

On December 15, 2006, the Company entered into an asset purchase agreement to sell certain assets related to its wholly-owned subsidiary, Litronic, to RDSK, Inc. In exchange for the assets, RDSK agreed to assume certain liabilities related to the assets and KRDS, Inc., the landlord of the Company’s Irvine, California facility, agreed to terminate and cancel the lease agreement for the Company’s Irvine facility. RDSK and KRDS are entities that are majority-owned by three former employees of Litronic, one of whom being Kris Shah, a former member of the Company’s board of directors and the former president of Litronic.

The assets the Company sold to RDSK included the furniture, equipment and inventory located at the Irvine facility, as well as the material contracts and intellectual property used in the Litronic business, including the Argus reader product line and the Fortezza support contract. RDSK also assumed certain liabilities related to the Litronic business, including liabilities under the assumed contracts and warranty obligations. In addition, KRDS agreed to terminate the lease for the Irvine facility, and to release the Company from any liabilities or obligations under the lease, which included $2.9 million in rent payments from October 2006 through February 2012, the expiration date of the lease.

Upon completion of the asset purchase agreement with RDSK and KRDS, which resulted in the exchange of certain assets and liabilities in settlement of the lease termination payable, the Company reduced the lease termination payable by the recorded value of the net assets relinquished, resulting in an approximate $200,000 reduction in the restructuring charge.

6. Goodwill

The Company tests goodwill as of November 30^th annually. However, the Company concluded that certain factors, such as the lack of significant revenue, restructuring initiatives that included headcount reductions and facility consolidation, and the continued decline of the price of its common stock as reported on the Nasdaq Capital Market constituted triggering events under SFAS 142 at various times during 2006. Given the volatility in the Company’s historical revenue trends, the significant decline in the Company’s market capitalization, and other indicators of fair value, the Company determined that the best estimate of fair value as of March 31, 2006 as well as June 30, 2006 for the goodwill impairment test was the Company’s market capitalization. During the first quarter of 2006, the Company recorded a $29.7 million impairment charge on goodwill. During the process of finalizing its goodwill valuation as of March 31, 2006, the Company reduced this $29.7 million goodwill impairment loss by $2.3 million during the second quarter of 2006. The nature of this adjustment was related to the finalization of the estimated in-process research and development amount as of March 31, 2006. In addition, as a result of the Company’s testing of goodwill as of June 30, 2006, the Company recorded another goodwill impairment charge of $33.0 million in the second quarter of 2006. Lastly, as a result of its annual goodwill testing as of November 30, 2006, the Company recorded a $15.5 million goodwill impairment loss during the fourth quarter of 2006. The impairment valuations were based on various valuation methods, including the

F-17

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

discounted cash flow approach that used estimated future revenues and costs as well as appropriate discount rates. The estimates to determine the fair value of the Company’s identifiable assets that were used were consistent with the plans and estimates the Company uses to manage the business. After allocating the fair value (market capitalization) of Saflink to the calculated fair value of its identifiable intangible assets and the fair value of the Company’s other assets and liabilities, the total goodwill impairment loss for the year ended December 31, 2006, was $75.9 million, which reduced the goodwill balance to zero as of December 31, 2006.

In 2005, the Company concluded that the price of the its common stock, as reported on the Nasdaq Capital Market, was depressed long enough to constitute a triggering event under SFAS No. 142 and accordingly, the Company performed an interim impairment test of goodwill and other intangible assets as of September 30, 2005. Based on the results of the impairment test, the Company recorded a goodwill impairment charge of $19.3 million at September 30, 2005, since the carrying amount of Saflink was greater than its fair value and the carrying value of the Company’s goodwill exceeded the implied fair value of that goodwill. The impairment valuation was based on a discounted cash flow approach that used estimated future revenues and costs as well as appropriate discount rates. The estimates that were used were consistent with the plans and estimates the Company used to manage the business at that time. The Company also performed its annual goodwill impairment test as of November 30, 2005, and concluded that there was no further impairment to goodwill as of that date.

The changes in the carrying value of goodwill for 2006 and 2005 are as follows:

	2006			2005
	(In thousands)
Beginning balance, January 1,	$	75,923		$	95,223
Impairment losses		(75,923	)		(19,300	)
Ending Balance, December 31,	$	—		$	75,923

7. Intangible Assets

The Company periodically reviews the carrying values of its long-lived assets to determine whether such assets have been impaired. An impairment loss must be recorded pursuant to SFAS No. 144 when the undiscounted net cash flows expected to be realized from the use of such assets are less than their carrying value. The Company believed that its decision in the third quarter of 2006 to restructure and refocus its resources toward specific product offerings and revenue opportunities constituted a triggering event under SFAS 144. In reviewing the Company’s long-lived assets for impairment during the third quarter of 2006, the Company compared the carrying value of its primary long-lived assets – amortizable intangible assets and furniture and equipment (asset group) to undiscounted cash flows expected from the use of the asset group. As a result of continuing operating losses and lower sales and growth rates in the first nine months of 2006 compared to forecasts, the carrying value of the asset group exceeded undiscounted cash flows expected from the use of this asset group. Consequently, the Company measured the fair value of its long-lived assets as of September 30, 2006, based on a discounted cash flow model and the orderly liquidation method, and concluded that an impairment charge of $14.6 million should be allocated to the asset group on a pro rata basis, which was recognized during the third quarter of 2006. The pro rata allocation resulted in a $13.9 million impairment charge of intangible assets and a $716,000 impairment charge related to furniture and equipment, which were recorded in the Company’s statement of operations.

The Company believed that its restructuring efforts during the fourth quarter of 2006, which included facility consolidations, the reduction of headcount by 47 employees, or 62% of the workforce, and the sales of certain assets and product lines constituted a triggering event under SFAS 144. In reviewing the Company’s

F-18

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

long-lived assets for impairment during the fourth quarter of 2006, the Company compared the carrying value of its primary long-lived assets—amortizable intangible assets and furniture and equipment (asset group) to undiscounted cash flows expected from the use of the asset group. As a result of continuing operating losses and changes in business strategy, the carrying value of the asset group exceeded undiscounted cash flows expected from the use of this asset group. Consequently, the Company concluded that an impairment charge of $1.6 million should be allocated to its intangible assets and was recorded in the Company’s statement of operations.

As a result of the RDSK transaction in December 2006, the Company sold approximately $2.0 million of intangible assets. See Note 5—Restructuring.

In February 2005, the Company assessed the marketing strategy for its product offerings and decided to discontinue use of two tradenames that were acquired in connection with the Litronic acquisition. Management estimated the fair value of these two tradenames to be zero because no future use was anticipated and the Company did not believe that a market existed for these tradenames. As a result, the Company recorded a $900,000 impairment loss on intangible assets during the first quarter of 2005. In October 2005, in connection with the preliminary impairment results under SFAS No. 142 as described in Note 6—Goodwill, the Company estimated the fair value of the indefinite-lived intangible asset tradenames to be $100,000 at September 30, 2005, and accordingly, recorded a $600,000 impairment loss on intangible assets during the third quarter of 2005. The impairment valuation was based on a discounted cash flow approach that used estimated future revenues and costs as well as appropriate discount rates. The estimates that were used were consistent with the plans and estimates the Company uses to manage the business. Upon finalization of the impairment test as of September 30, 2005, the Company determined that no further adjustment to the impairment charge related to tradenames was necessary.

During the years ended December 31, 2006, 2005 and 2004, the Company recorded impairment losses on intangible assets of $15.5 million, $1.5 million and $0, respectively. The changes in the carrying value of intangible assets for 2006 and 2005 are as follows:

	2006			2005
	(In thousands)
Beginning balance, net of accumulated amortization, January 1,	$	19,848		$	24,186
Amortization		(2,271	)		(2,838	)
Impairment losses		(15,535	)		(1,500	)
Sale of intangible assets		(2,042	)		—
Ending Balance, net of accumulated amortization, December 31,	$	—		$	19,848

The following are the components of intangible assets as of December 31, 2005:

	December 31, 2005
	(In thousands)
Non-competition agreements	$	410
Developed technology		18,400
Patents		400
Tradenames		100
Customer relationships		4,700
Perpetual license		100
		24,110
Less: Accumulated amortization		(4,262	)
	$	19,848

F-19

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization expense related to non-competition agreements was recorded as an operating expense in the statement of operations, while amortization expense related to all other intangible assets was recorded as a cost of revenue in the statement of operations. During the years ended December 31, 2006, 2005 and 2004, total amortization of intangible assets was $2.3 million, $2.8 million and $1.3 million, respectively.

8. Stock-based Compensation

Stock Options

On September 6, 2000, the Company’s Board of Directors adopted, and on June 29, 2001 amended, the Saflink Corporation 2000 Stock Incentive Plan (the “2000 Plan”). The Company’s shareholders approved the 2000 Plan on September 24, 2001. The Company maintains the plan for officers, directors, employees and consultants. In general, option grants vest monthly over a 36 month term and expire ten years from the date of grant. As of December 31, 2006, there were 1.1 million options available for grant under the 2000 plan.

Determining Fair Value Under SFAS 123R

Valuation and Amortization Method. The Company estimates the fair value of stock-based awards granted using the Black-Scholes-Merton (BSM) option valuation model. Generally, these awards have an exercise price that is equal to the fair value of the Company’s common stock at the date of grant with monthly vesting over a 36 month term, no post-vesting restrictions and expire ten years from the date of grant. The Company amortizes the fair value of all stock option awards using the single option valuation approach over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules, exercise behavior and post-vesting cancellations.

Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock. The volatility factor the Company uses in the BSM option valuation model is based on the Company’s historical stock prices over the most recent period commensurate with the estimated expected life of the award. Certain historical periods that have characteristics that the Company does not expect in the future have been given less weight when calculating expected volatility.

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the BSM option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the BSM option valuation model.

Expected Forfeitures. Due to the monthly vesting schedules associated with the Company’s stock option grants, the Company is using actual forfeitures in determining stock-based compensation expense. The Company asserts that the difference between using actual forfeitures versus using an estimated forfeiture rate that is trued up at every vesting date would be insignificant.

F-20

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The fair value for each option grant was estimated at the date of the grant using a BSM option pricing model based on the following weighted average assumptions:

	Year ended December 31,
	2006			2005
Expected dividend yield		0	%		0	%
Risk-free interest rate		4.70	%		4.20	%
Volatility		105	%		125	%
Expected life (years)		6.9			6.1
Fair value of options granted	$	0.41		$	0.26

Stock-based compensation expense recognized in the Company’s consolidated statement of operations is as follows (in thousands):

	Year ended December 31,
	2006		2005		2004
Stock-based compensation:
Product development	$	100	$	39	$	53
Sales and marketing		79		100		38
General and administrative		949		1,261		768
Total stock-based compensation	$	1,128	$	1,400	$	859

Non-employee Awards

On September 29, 2006, in connection with the Company’s agreement with Capital Placement Holdings, Inc. for Steven Oyer to provide services as the Company’s interim chief executive officer, the Company granted Mr. Oyer a fully-vested and exercisable non-statutory option to purchase 350,000 shares of its common stock. The fair value of this grant was determined by using a BSM option valuation model with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 4.64%, expected volatility of 139%, and an estimated life of 10 years, the contractual term of the option. The fair value of this grant was estimated to be $127,000 and was expensed in the statement of operations during the third quarter of 2006. In addition, the Company granted Mr. Oyer a non-statutory option to purchase 700,000 shares of its common stock that becomes exercisable upon the achievement of specified performance objectives. The Company has not recognized any compensation expense related to this grant as of December 31, 2006, as none of the performance objectives had been met. The Company will not measure or recognize compensation expense related to this grant until completion of the specified performance objectives has been determined to be probable. As of December 31, 2006, the Company had determined that none of such objectives were considered probable. Both option grants have an exercise price of $0.37 per share, which is equal to the last sale price per share of the Company’s common stock as reported on the Nasdaq Capital Market on the last trading day prior to the date of grant.

F-21

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the impact of the Company’s adoption of SFAS 123R on selected line items from its consolidated financial statements (in thousands, except per share amounts):

	Year ended December 31, 2006
	As Reported Following SFAS 123R			If Reported Following APB 25
Consolidated statement of operations:
Operating loss	$	(117,788	)	$	(117,252	)
Loss before income taxes		(120,254	)		(119,718	)
Net loss attributable to common stockholders		(120,725	)		(120,189	)
Basic and diluted net loss per share attributable to common stockholders	$	(1.36	)	$	(1.35	)

Stock Option Activity

The following table summarizes employee stock option activity:

	Options Outstanding (in thousands)		Weighted Average Exercise Price		Weighted Average Fair Value of Grants
Outstanding at December 31, 2003	5,447		$	2.64
Granted at common stock price	1,525			2.63	$	2.31
Granted below common stock price	777			2.58	$	2.66
Assumed in Litronic acquisition	2,361			2.21
Exercised	(745	)		1.24
Expired or Canceled	(503	)		4.88
Outstanding at December 31, 2004	8,862		$	2.51
Granted at common stock price	1,724			1.36	$	1.34
Granted below common stock price	43			1.07	$	1.95
Exercised	(558	)		1.33
Expired or Canceled	(1,564	)		3.12
Outstanding at December 31, 2005	8,507		$	1.12
Granted at common stock price	33			0.39	$	0.31
Granted below common stock price	1,267			0.33	$	0.30
Granted above common stock price	2,083			0.62	$	0.47
Exercised	(21	)		0.79
Expired or Canceled	(2,337	)		1.17
Outstanding at December 31, 2006	9,532		$	0.89

F-22

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes information about employee stock options outstanding at December 31, 2006:

	Options outstanding				Options exercisable
Range of exercise prices	Number of shares (in thousands)	Weighted average remaining contractual life (in years)	Weighted average exercise price per share		Number of shares (in thousands)	Weighted average exercise price per share
$0.01 – $1.50	8,721	4.4	$	0.70	7,251	$	0.75
1.51 –   3.00	522	5.6		2.42	522		2.42
3.01 –   4.50	197	1.7		3.51	197		3.51
4.51 –   6.00	92	6.5		5.28	92		5.28
Total	9,532	4.4	$	0.89	8,062	$	0.98

At December 31, 2005, and 2004, exercisable options of 8,284,000 and 5,542,000, respectively, were outstanding and at weighted average exercise prices of $1.12 and $2.42 per share, respectively.

At December 31, 2006, the Company had 1,470,234 non-vested stock options outstanding that had a weighted average grant date fair value of $0.35, which excludes Mr. Oyer’s performance option grant to purchase 700,000 shares of the Company’s common stock described above. As of December 31, 2006, the Company had $615,000 of total unrecognized compensation cost related to non-vested stock-based awards granted under the 2000 Plan and expects to recognize this cost over a weighted average period of 1.2 years. This unrecognized compensation cost does not include any compensation cost related to the vesting of Mr. Oyer’s option grant when or if certain specified performance objectives are met.

Acceleration of Vesting of Outstanding Stock Options

On December 31, 2005, the board of directors of Saflink Corporation approved the acceleration of vesting of all unvested options to purchase shares of the Company’s common stock that were held by employees as of December 31, 2005. Options to purchase 2,034,393 shares of the Company’s common stock were subject to this vesting acceleration. The accelerated options had a weighted average exercise price of $1.97 per share and all but 125,000 options had exercise prices greater than $0.79 per share, which is equal to the last sale price per share of the Company’s common stock as reported on the Nasdaq Capital Market on December 30, 2005. The accelerated options include options held by the Company’s executive officers to purchase 918,637 shares of the Company’s common stock. Options granted to the Company’s non-employee directors as compensation for their service as members of the board of directors were excluded from the acceleration.

The primary purpose of the acceleration of vesting of these options was to eliminate the future compensation expense that the Company would have otherwise recognized in its consolidated statement of operations with respect to these options once SFAS 123R became effective for reporting periods beginning in January 2006. As a result of the acceleration, the Company estimates that it avoided recognition of approximately $2.8 million of compensation expense over the course of the original vesting schedules of these options, of which approximately $2.3 million of such compensation expense would have been recognized in 2006.

Stock-based compensation expense, as reported under the disclosure requirements of SFAS No. 123 in Note 3, increased by $2.9 million for the year ended December 31, 2005 as a result of the vesting acceleration of these stock options.

On September 25, 2006, Jon Engman, the Company’s chief financial officer, resigned from the Company, and per the terms of his retention agreement dated April 27, 2006, gave 60 days notice of his departure from the

F-23

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company. On November 24, 2006, Mr. Engman’s last day of employment with the Company and per the terms of his employment agreement, any unvested options to purchase shares of the Company’s common stock that Mr. Engman held were to become fully-vested. Options to purchase 101,564 shares of common stock at an exercise price of $0.79 per common share were immediately vested, resulting in $65,000 in stock-based compensation that was reflected in the Company’s statement of operations for the year ended December 31, 2006.

Repricing of Outstanding Stock Options

On December 31, 2005, the board of directors of Saflink Corporation approved the amendment of all outstanding options to purchase shares of the Company’s common stock held by employees as of December 31, 2005, with an exercise price greater than $0.79 per share, which is equal to the last sale price per share of the Company’s common stock as reported on the Nasdaq Capital Market on December 30, 2005. The amendment provides that, effective as of December 31, 2005, the exercise price of each such option shall be reduced to $0.79 per share. Options to purchase 6,614,860 shares of the Company’s common stock were subject to this amendment with a weighted average exercise price prior to the repricing of $2.22 per share. The repriced options included options held by the Company’s executive officers to purchase 2,691,127 shares of the Company’s common stock with a weighted average exercise price of $2.30 per share. Options granted to the Company’s non-employee directors as compensation for their service as members of the board of directors were excluded from the repricing.

The primary purpose of the stock option repricing was to restore the incentive afforded by options to purchase shares of the Company’s common stock to retain and motivate the Company’s employees whose contributions are important to its future success. The Company’s board of directors believed that options with exercise prices significantly above the market value of the Company’s common stock are less likely to serve their intended purposes.

Stock-based compensation expense, as reported under the disclosure requirements of SFAS No. 123 in Note 3, increased by $401,000 for the year ended December 31, 2005 as a result of the repricing of these stock options. The fair value of these modifications was determined by using a Black-Scholes model immediately before and after the modifications on December 31, 2005, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 4%, volatility between 70% and 120%, and estimated lives between 0.9 and 5.6 years. The fair value of the common stock used in the calculation was $0.79, the last sale price of the Company’s common stock as reported on the Nasdaq Capital Market on December 30, 2005.

Modification of Stock Options

On August 5, 2005, the Company extended the termination date related to options to purchase 75,000 shares of the Company’s common stock which were granted on June 23, 2004, to a then-current member of the board of directors at an exercise price of $2.55 per share. The extension was granted in connection with a consulting agreement for sales and marketing activities between the Company and the now former board member where the termination date was modified to be eighteen months following the date he ceases to provide consulting services to the Company or ten years from the original date of grant, whichever comes first.

The Company accounted for the extension of the termination date as a new grant as of August 5, 2005, and the fair value of the options to purchase 75,000 shares of the Company’s common stock was determined by using a Black-Scholes model with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 4%, volatility of 73%, and an estimated life of 2 years, which is comprised of the six month duration of

F-24

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the consulting agreement plus eighteen months of post-service exercise period. The fair value of the modification was estimated to be $27,000 and was recorded as stock-based compensation in the statement of operations for the year ended December 31, 2005.

Issuance of Stock Options for Services

On June 10, 2005, the Company entered into a consulting agreement with Campbell, Cilluffo & Furlow, LLC (now known as The Pennant Group). Frank J. Cilluffo, a former member of the Company’s board of directors, is a principal of Campbell, Cilluffo & Furlow. The agreement provided that Campbell, Cilluffo & Furlow would provide consulting services to the Company to assist in the development of long-term and short-term marketing and business strategies. The Company granted non-statutory options to purchase 10,000 shares of its common stock under its 2000 stock incentive plan to each of the three principals of the firm, including to Mr. Cilluffo. The options have an exercise price of $1.79 per share, have a three-year term and vested in six equal monthly installments following the date of grant and became fully-vested on December 10, 2005.

The fair value of these grants of stock options was determined by using a Black-Scholes model as of June 10, 2005, with the following assumptions: the estimated fair value of the common stock of $1.79, the closing price of the Company’s common stock on the day before the grant, an expected dividend yield of 0.0%, a risk-free interest rate of 3.75%, volatility of 74%, and an estimated life of 3 years, the contractual life of these options. The fair value as of June 10, 2005, was estimated to be $27,000. During the twelve months ended December 31, 2005, the Company recorded $12,000 in stock-based compensation in the statement of operations related to these stock option issuances. Adjustments totaling $15,000 to decrease the deferred compensation to its current fair market value at interim period ends and as of December 10, 2005, were recorded, with the offset to additional paid-in capital.

Options Assumed in the Litronic Acquisition

The unexercised options issued under SSP-Litronic option plans (SSP Options) were assumed as part of the acquisition. Effective with the closing of the Litronic acquisition, no additional options can be granted under those plans. The terms and conditions related to the SSP Options remain unchanged, with the exception of the adjustment required to reflect the affect of the Litronic acquisition conversion ratio on the number of shares exercisable and the exercise price. The Company assumed SSP Options to purchase approximately 2.3 million shares of the Company’s common stock on the closing date of the Litronic acquisition. Generally, SSP Options vested and became exercisable 25% upon the first anniversary of the grant issuance, and thereafter vested as to 1/48 of the total number of shares underlying the option each month until vested and exercisable in full.

Non-vested Restricted Stock Awards

The Company has one outstanding non-vested, restricted common stock grant as of December 31, 2006, held by Glenn Argenbright, president of the Company’s registered traveler solutions group and chairman of the Company’s board of directors. Mr. Argenbright holds 301,928 non-vested, restricted shares of the Company’s common stock, which are scheduled to vest in total on June 23, 2007. The remaining compensation expense of $121,000 at December 31, 2006, is being recorded equally over the remaining vesting period. Compensation expense related to this grant during the years ended December 31, 2006, 2005 and 2004, was $253,000, $253,000, and $126,000, respectively.

Kris Shah, a former member of the Company’s board of directors and former president of Litronic Inc., a wholly-owned subsidiary of the Company, held 500,000 restricted shares of the Company’s common stock, which vested in total on August 9, 2006, prior to his departure from the Company in October 2006. The

F-25

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

compensation cost related to these awards was calculated based on the market price of the Company’s common stock on the grant date of the restricted stock. Compensation expense related to this grant during the years ended December 31, 2006, 2005 and 2004, was $166,000, $773,000 and $430,000, respectively.

9. Inventory

The following is a summary of inventory:

	December 31,
	2006		2005
	(In thousands)
Raw materials	$	47	$	83
Work-in-process		1		49
Finished goods		38		431
	$	86	$	563

10. Furniture and Equipment

Furniture and equipment at cost consists of the following:

	December 31,
	2006			2005
	(In thousands)
Computer equipment and software	$	1,339		$	2,787
Leasehold improvements		207			238
Office furniture, equipment and other		514			699
		2,060			3,724
Less: Accumulated depreciation		(1,640	)		(2,706	)
	$	420		$	1,018

Depreciation expense amounted to $557,000 in 2006, $536,000 in 2005, and $322,000 in 2004.

11. Accrued Expenses

Accrued expenses consist of the following:

	December 31,
	2006		2005
	(In thousands)
Compensation and related benefits	$	618	$	1,589
Professional services		88		113
Deferred rent		438		137
Other		164		311
	$	1,308	$	2,150

F-26

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Income Taxes

Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before income taxes as a result of the following:

	Year Ended December 31,
	2006			2005			2004
	(In thousands)
Income tax benefit at U.S. statutory rate of 34%	$	(40,886	)	$	(16,159	)	$	(5,401	)
State tax, net of federal benefit		(2,405	)		(951	)		(318	)
Impairment of goodwill and intangibles		26,555			6,948			—
Other, net		175			(2,300	)		673
Change in valuation allowance		16,421			11,974			5,098
Income tax expense	$	(140	)	$	(488	)	$	52

The Company recorded a net income tax benefit of $140,000 and $488,000 for the years ended December 31, 2006 and 2005, respectively, related to the income tax effect of goodwill and intangible asset amortization and impairment.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
	2006			2005
	(In thousands)
Deferred tax assets:
Net operating loss carryforwards	$	70,250		$	62,095
Capital loss carryforward		1,744			1,744
Research and development credits		172			172
Intangible assets		2,251
Other		2,021			1,313
Total deferred tax assets		76,438			65,324
Deferred tax liabilities:
Intangible assets		—			(5,447	)
Total deferred tax liabilities		—			(5,447	)
Net deferred tax assets		76,438			59,877
Valuation allowance		(76,438	)		(60,017	)
Deferred tax liability, net	$	—		$	(140	)

F-27

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Due to the Company’s history of net operating losses, the Company has established a valuation allowance that is at least equal to its net deferred tax assets. The valuation allowance increased approximately $16.4 million, $12.0 million, and $16.8 million during 2006, 2005, and 2004, respectively.

At December 31, 2006, the Company had net operating loss carryforwards of approximately $195.1 million, which begin to expire in 2008. In connection with the Litronic acquisition, the Company acquired $49.5 million in net operating losses, $4.8 million in capital losses which began to expire in 2006, and $172,000 in federal research and development credits which begin to expire in 2019, all of which will be subject to limitation under Section 382 of the Internal Revenue Code. The Tax Reform Act of 1986 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. The Company believes that such a change has occurred, and that the utilization of the carryforwards could be limited such that a portion of the net operating loss carryforwards may never be utilized.

13. Stockholders’ Equity

June 2006 Convertible Debenture and Warrant Issuance

On June 12, 2006, the Company raised $8.0 million in gross proceeds through a private placement of 8% convertible debentures and warrants to purchase up to 8,889,002 shares of the Company’s common stock. The warrants have an exercise price of $0.48 per share and are exercisable for a period of five years beginning December 10, 2006. The Company also issued a warrant to purchase 1,066,680 shares of its common stock, exercisable at $0.48 per share, to the placement agent for services rendered in connection with this financing.

The debentures bear interest at 8% per annum and are due December 12, 2007. The debentures are convertible into shares of the Company’s common stock at any time at a conversion rate of $0.45 per share; however, the conversion price is subject to adjustment in the event the Company issues common stock or common stock equivalents at a price per share of common stock below the conversion price of the debentures. The principal amount of the debentures is redeemable at the rate of 1/12 of the original principal amount per month plus accrued but unpaid interest on the debentures commencing December 1, 2006. The Company may, in its discretion, elect to pay the interest due on the debentures and the monthly redemption amount in cash or in shares of its common stock, subject to certain conditions related to the market for shares of the Company’s common stock and the registration of the shares issuable upon conversion of the debentures under the Securities Act of 1933. Per the terms of the debentures, the redemption calculation if elected to be paid in shares of the Company’s common stock is calculated as 85% of the average of the ten lowest daily volume weighted average prices of a share of the Company’s common stock during the 20 trading days prior to the payment date (the “Redemption Conversion Price”). If the Company elects to pay the interest on the debentures in shares of its common stock, the amount is calculated as 85% of the last ten daily volume weighted average prices of a share of the Company’s common stock prior to the payment date (the “Interest Conversion Price”).

The Company concluded that the convertible debentures included a beneficial conversion feature, which was valued at $1,655,000. This amount was determined by first allocating the cash proceeds received in the financing transaction to the convertible debentures and warrants on a relative fair value basis. Second, an effective conversion price on the convertible debentures was calculated based on this allocation and used to measure the intrinsic value of the embedded conversion option. The warrants were valued at $2,812,000, using the BSM option valuation model with the following assumptions: an expected dividend yield of 0%, risk-free interest rate of approximately 5%, expected volatility of 95% and contractual life of five and half years. The beneficial conversion feature and warrants were recorded as a debt discount which is being amortized to interest expense over the term of the convertible debentures using the effective interest method.

F-28

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The debt issuance costs associated with this financing are recorded as a long-term asset and are being amortized over the term of the debentures to interest expense using the effective interest method. The components of the debt issuance costs include cash costs of $614,000 for legal, banking and other fees and a warrant issued to the placement agent to purchase 1,066,680 shares of the Company’s common stock valued at $337,000, using the BSM option valuation model with the same assumptions used to value the investor warrants.

On November 2, 2006, the Company provided notice to the holders of the debentures of its election to pay interest on the debentures in shares of common stock beginning with the payment due in December 2006, and for future interest payment dates until revised by subsequent notice. The Company also provided notice to the holders of the debentures of its election to pay the monthly redemption payment due in December 2006 in shares of common stock. The Company is required to give the selling stockholders 20 trading days advance notice of its election to pay the monthly redemption amount in shares of common stock. At the time the Company provided notice of its election to pay the monthly redemption amount in shares of its common stock, the Company is obligated to issue a number of shares of its common stock to the debenture holders to be applied against the monthly redemption amount (the “Pre-redemption”). The number of shares the Company is obligated to issue for the Pre-redemption is equal to the quotient of the monthly redemption amount divided by the current conversion price of the debentures. Accordingly, on November 2, 2006, the Company issued a total of 1,481,510 shares of its common stock to the debenture holders that were applied against the total monthly redemption amount due in December 2006. On December 1, 2006, the Company calculated the Redemption Conversion Price per the terms of the debentures and issued 4,553,149 shares of its common stock to the debenture holders, which when added to the 1,481,510 shares of the Company’s common stock that was issued on November 2, 2006, represented an aggregate of 6,034,659 shares of the Company’s common stock issued in payment of the $667,675 December 2006 monthly redemption amount. In addition, on December 1, 2006, the Company calculated the Interest Conversion Price and issued 2,695,238 shares of its common stock to the debenture holders in payment of the $298,670 interest amount due on the debentures. The Company recorded the differences between the fair market value of the common stock issued in payment of the principal and interest using the price per common share on the date the shares were issued, as reported on the Nasdaq Capital Market, and the calculated Redemption Conversion Price and Interest Conversion Price to interest expense in the Company’s statement of operations. As of December 31, 2006, there were 1,625,810 shares of the Company’s common stock that had not been received by certain debenture holders, and was classified as common stock subscribed in the Company’s balance sheet.

On December 1, 2006, the Company provided notice to the holders of the debentures of its election to pay the monthly redemption payment due in January 2007 in shares of common stock. Accordingly, on December 1, 2006, the Company issued a total of 1,481,510 shares of its common stock to the debenture holders as a pre-redemption payment that was applied against the total monthly redemption amount due in January 2007. The Company calculated the fair market value of the Pre-redemption issuance using the price per common share as reported on the Nasdaq Capital Market as of December 1, 2006, and recorded the value as a reduction of the principal of the outstanding convertible debt.

The following table summarizes the balances related to the Company’s convertible debentures issued in June 2006 as of December 31, 2006 (in thousands):

Original face value of convertible debentures	$	8,000
December 1, 2006 Redemption payment (paid in shares of common stock)		(668	)
January 1, 2007 Pre-redemption share issuance of common stock		(132	)
Less: unamortized debt discounts		(2,581	)
Total carrying value, net of debt discount December 31, 2006	$	4,619
Current portion of debt, net of debt discount	$	4,619
Long term portion of debt, net of debt discount	$	—

F-29

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes interest expense for the year ended December 31, 2006, related to the Company’s convertible debentures issued in June 2006 (in thousands):

Nominal interest expense (8% stated rate)	$	348
Amortization of debt discount		1,886
Amortization of capitalized financing costs		402
Difference between fair market value of common shares issued for redemption and interest and the calculated Redemption Conversion Price and Interest Conversion Price		(45	)
Total interest expense related to convertible debentures	$	2,591

Convertible Note Payable to Related Party

As part of the Litronic acquisition, the Company assumed three convertible promissory notes with a combined face value of $1,360,000. During November 2004, two of the outstanding convertible promissory notes in the amount of $50,000 and $60,000 were converted into 66,264 shares of the Company’s common stock. The remaining outstanding convertible promissory note with a face value of $1,250,000 is held by Richard P. Kiphart, the Co-Chairman and Lead Independent Director of the Company’s board of directors.

On December 31, 2005, the Company amended the convertible note, dated November 19, 2003, held by Richard P. Kiphart. Under the terms of the original note, the unpaid principal and any unpaid and accrued interest were due and payable by the Company on December 31, 2005. The amendment revised the maturity date of the note such that the unpaid principal and any unpaid and accrued interest are due and payable by the Company on the earlier of (i) December 31, 2006, and (ii) upon demand on or after the date of the closing of any strategic or financing transaction that generates at least $20,000,000 of additional working capital. Although the debt was due and payable on December 31, 2006, the Company did not pay the balance due but intends to pay the outstanding balance to Mr. Kiphart upon his request. Until that time, the Company will continue to accrue and pay interest at 10% on the outstanding balance. In addition, the amendment revised the conversion rate at which, under certain circumstances, the unpaid principal and any unpaid and accrued interest under the promissory note convert into shares of the Company’s common stock from $1.67 to $0.71. The Company applied the guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” and EITF 05-7, “Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues” and determined that the change in fair value of the conversion rate resulted in a substantial change in the terms of the convertible note and therefore determined that a debt extinguishment had occurred. The fair value of this modification was determined by using a Black-Scholes model immediately before and after the modification, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 4.4%, volatility of 69%, and an estimated life of one year after the modification, the remaining contractual life of the convertible note and no estimated life prior to the modification. The fair value of the common stock used in the calculation was $0.79, the last sale price of the Company’s common stock as reported on the Nasdaq Capital Market on December 30, 2005. The Company estimated the fair value of the modification to be $455,000 and recorded it as a debt extinguishment loss in the consolidated statement of operations.

During 2004, the conversion feature embedded in the convertible promissory notes was valued at $1.2 million on the date of the Litronic acquisition, and was classified into equity in the purchase price allocation. See Note 4—Business Combinations.

F-30

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Authorized Common Shares Adjustments

The Company amended its certificate of incorporation to decrease the number of common shares authorized for issuance from 500,000,000 to 200,000,000, which was approved by the Company’s stockholders on August 25, 2005.

Employee Stock Purchase Plan

On August 25, 2005, the Company’s stockholders approved the Saflink Employee Stock Purchase Plan (the “Plan”). The Plan authorizes the issuance of up to 300,000 shares of the Company’s common stock, subject to appropriate adjustment in the event of any stock dividend, stock split, reverse stock split, recapitalization or similar change in the capital structure of the Company, or in the event of any merger, sale of assets or other reorganization. Generally, each purchase period under the Plan will be for a period of six months, with the purchase date being the last day of the purchase period and the purchase price will be no less than 95% of the fair value of the Company’s common stock on the purchase date. The Company has not yet commenced the initial purchase period under the Plan.

Reclassification of Warrants to Liability

The Company’s Series A warrants and the related placement agent warrants that were issued on June 5, 2001, contained a cash redemption provision that was triggered if the Company issued, in a business combination, capital stock that represented more than 40% of its outstanding common stock immediately prior to such issuance. The Litronic acquisition qualified as a triggering event because the Company issued more than 40% of its common stock in that transaction. The cash redemption value was measured as of August 2, 2004, the date the warrant holders were officially notified of the Litronic acquisition by the Company, and, in accordance with the warrant provisions, was determined using a Black-Scholes model with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 2.5%, a volatility of 105%, and a remaining contractual life of 1.8 years, as the warrants expire on June 5, 2006. As of August 2, 2004, there were Series A warrants and placement agent warrants outstanding to purchase 244,224 and 192,124 shares of the Company’s common stock, respectively. Exercise prices of the warrants ranged from $1.30 to $3.06. The total cash redemption value was estimated to be $765,000 as of August 2, 2004, and was fixed as long as the warrants were outstanding. On August 6, 2004, the closing date of the acquisition, these warrants were reclassified from equity to an other current obligation in accordance with SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” because the warrants now contain characteristics of a debt instrument. The outstanding warrants were valued as of December 31, 2004, using a Black-Scholes model with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of 2.0%, a volatility of 78%, and a remaining contractual life of 1.4 years. The value of the warrants includes the value of the cash redemption provision, which was determined using a Black-Scholes model with similar assumptions. The value of the warrants was estimated to be $937,000, as of December 31, 2004, and was classified as an other current obligation. At each interim period and year-end until their expiration date of June 5, 2006, the remaining outstanding warrants were revalued and any difference from the previous valuation date was recognized as a change in fair value of outstanding warrants, and charged or credited to the consolidated statement of operations. At December 31, 2005, the estimated fair value of these warrants was below the cash redemption value of $765,000, and the Company consequently valued the warrants at the $765,000 cash redemption value. The change in fair value of outstanding warrants related to the Company’s Series A warrants and the related placement agent warrants for the years ended December 31, 2005 and 2004, resulted in a gain of $172,000 and a loss of $29,000, respectively.

Prior to the expiration of these warrants on June 5, 2006, the Company received notices from certain warrant holders exercising the redemption provision. Based on the redemption notices received and the cash redemption

F-31

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

calculation contained in the warrant, the Company reduced the current obligation from $765,000 to $569,000 during the three months ended June 30, 2006, reclassifying $196,000 into stockholders’ equity. Subsequently, the Company made payments to warrant holders of $356,000 during 2006 and as of December 31, 2006, had a current obligation balance of $213,000.

Preferred Stock

On June 5, 2001, the Company issued 40,000 shares of Series E convertible preferred stock and common stock purchase warrants for an aggregate price of $8 million, including the conversion of approximately $2.2 million in bridge notes and accrued interest, in a private placement to 66 accredited investors. On June 5, 2004, due to provisions in the Company’s Series E preferred stock, all outstanding shares of Series E preferred stock automatically converted into shares of the Company’s common stock. As of June 4, 2004, there were 15,166 shares of Series E preferred stock outstanding, which converted into 2,166,576 shares of the Company’s common stock on June 5, 2004.

As of December 31, 2006 and 2005, there was no preferred stock outstanding.

Common Stock

The right to vote on all matters to be voted upon by the stockholders of the Company is vested exclusively in the holders of the outstanding shares of common stock, with each outstanding share of common stock having one vote per share, voting together as a class.

June 2005 Financing

On June 8, 2005, the Company raised $15.0 million in gross proceeds through a private placement of common stock and warrants. A total of 8,823,530 shares of the Company’s common stock were sold at a price of $1.70 per share to accredited institutional investors. The Company issued to these investors warrants to purchase up to 2,647,059 additional shares of the Company’s common stock. The warrants have an exercise price of $2.50 per share and expire on June 8, 2010. The Company also issued warrants to purchase an aggregate of 529,412 shares of its common stock, exercisable at $2.50 per share and expiring on June 8, 2010, to the placement agent for services rendered in connection with this financing. Issuance costs associated with this financing were approximately $1.8 million, which includes the $786,000 non-cash estimate of fair value for the placement agent warrants and $1.0 million in other fees. Of the net proceeds of $13.9 million, $10.3 million and $3.6 million were allocated to the common stock and investor warrants issued, respectively.

Litronic Acquisition

In conjunction with the Litronic acquisition, as described in Note 4—Business Combinations, that closed August 6, 2004, the Company issued 40,137,148 common shares.

February 2004 Financing

On February 26, 2004, the Company issued and sold an aggregate of 3,080,000 shares of the Company’s common stock and warrants to purchase up to 1,232,000 shares of the Company’s common stock in a private placement, for an aggregate purchase price of approximately $9.2 million. The warrants have a 5-year term, an original exercise price of $3.97 per share, and a call feature which the Company is entitled to exercise after three years and ten trading days from the date of issuance, provided that the per share market value of the common stock has been equal to or greater than 200% of the warrant price for a period of ten consecutive trading days

F-32

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

immediately prior to the date of delivery of the call notice. Due to anti-dilution provisions contained in these warrants, the exercise price was reduced to $2.50 per share related to the warrant amendments that occurred in July 2004. Per the original registration rights agreement, if the registration statement ceased to be effective prior to its expiration date of February 26, 2007, or if the Company’s common stock was suspended or delisted from both the Nasdaq Capital Market and the OTC Bulletin Board for any reason for more than five business days, the Company may have been required to pay an amount as liquidated damages to each stockholder equal to 2% for the first thirty day period and 1% per thirty day period thereafter or portion thereof of the stockholder’s initial investment in the shares from the event date until the applicable event is cured. The warrant value as of February 26, 2004, was $4,070,000 based on the estimated value of the warrants using the Black-Scholes model, with an expected dividend yield of 0.0%, a risk-free interest rate of 3.0%, volatility of 140% and an expected life of two to five years. On September 28, 2004, the registration rights agreement was amended so that the Company could remedy any of these situations with shares of the Company’s common stock rather than cash. Due to the amendment of the Company’s potential obligation to settle the warrants in common stock rather than cash if the terms of the registration rights agreement are not met, the fair value of the warrants on the modification date, estimated at $2.3 million, has been reclassified from a liability to additional paid-in capital in stockholders’ equity and was estimated using the Black-Scholes model, with an expected dividend yield of 0.0%, a risk-free interest rate of 3.0%, a volatility of 78%-132% and an expected life of one to four years. The change in fair value of the warrants between February 26, 2004, and September 28, 2004, was $1.8 million and was credited to change in fair value of outstanding warrants in the statement of operations.

Warrants

The following table summarizes warrant activity by warrant type, in terms of shares of the Company’s common stock issuable upon the exercise of the warrants (in thousands):

	Series A		Series C		June 2002		November 2002		February 2004	Other		SSP-Litronic Warrants		June 2005		June 2006	Total
Outstanding at December 31, 2003	1,778		875		2,045		1,050		—	409		—		—		—	6,157
Issued	—		—		—		—		1,417	—		—		—		—	1,417
Exercised	(1,349	)	(665	)	(1,667	)	(795	)	—	(1	)	—		—		—	(4,477	)
Surrendered through net exercises	—		—		—		(6	)	—	—		—		—		—	(6	)
Assumed in Litronic acquisition	—		—		—		—		—	—		889		—		—	889
Anti-dilution adjustment	8		25		—		—		—	2		—		—		—	35
Expired or cancelled	—		—		—		—		—	—		—		—		—	—
Outstanding at December 31, 2004	437		235		378		249		1,417	410		889		—		—	4,015
Issued	—		—		—		—		—	—		—		3,176		—	3,176
Exercised	—		—		—		—		—	—		(1	)	—		—	(1	)
Anti-dilution adjustment	11		12		—		—		—	6		19		—		—	48
Expired or cancelled	—		(9	)	—		—		—	(16	)	—		—		—	(25	)
Outstanding at December 31, 2005	448		238		378		249		1,417	400		907		3,176		—	7,213
Issued	—		—		—		—		—	—		—		—		9,956	9,956
Exercised or redeemed	(341	)	—		—		—		—	—		—		(2,250	)	—	(2,591	)
Anti-dilution adjustment	—		65		—		—		—	45		242		—		—	352
Expired or cancelled	(107	)	—		—		—		—	(83	)	—		—		—	(190	)
Outstanding at December 31, 2006	—		303		378		249		1,417	362		1,149		926		9,956	14,740

Modification of Warrants

As a result of the June 2005 financing, anti-dilution provisions contained in certain warrants that the Company had outstanding as of June 8, 2005, were triggered and adjustments to the exercise prices and, in certain cases, to the number of common shares issuable upon exercise of these warrants were made during the

F-33

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

second quarter of 2005. The increase in the total number of the Company’s shares of common stock issuable upon exercise of these warrants was approximately 48,000 shares.

The fair value of this modification of these warrants was determined by using a Black-Scholes model immediately before and after the modification date of June 8, 2005, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate between 3% and 4%, volatility between 68% and 93%, and estimated lives between 1 and 4 years, the remaining contractual lives of these warrants. The fair value of the modification was estimated to be $59,000 and was recorded as a modification of outstanding warrants. This charge increased net loss attributable to common stockholders.

Warrants Assumed in Litronic Acquisition

The unexercised warrants issued by SSP-Litronic were assumed effective with the closing of the acquisition and the number of shares issuable upon exercise and the exercise price has been adjusted to reflect the Litronic acquisition. Warrants assumed consisted of A-1 Warrants, A-2 Warrants, Placement Agent Warrants and a BIZ Roth Warrant to purchase a total of 889,335 shares of Saflink common stock. The A-1 and A-2 Warrants are subject to customary anti-dilution provisions and weighted average anti-dilution provisions if the Company issues shares of common stock or securities convertible into or exercisable for common stock, other than excluded securities, at per share prices less than the then effective exercise price. These anti-dilution provisions were triggered during the Company’s private placement financing in June 2005 and as a result the total number of shares issuable upon exercise of the A-1 and A-2 Warrants increased by 18,794 shares.

As of December 31, 2006, the A-1 Warrants had an exercise price of $1.61 per share, and the A-2 Warrants had an exercise price of $1.88 per share. At December 31, 2006, a total of 545,421 A-1 Warrants and 552,615 A-2 Warrants were outstanding. In addition, there were Placement Agent Warrants to purchase 37,082 shares of the Company’ common stock at an exercise price of $1.16 per share and a BIZ Roth warrant to purchase 14,253 shares of the Company’s common stock at an exercise price of $3.51 per share outstanding as of December 31, 2006.

Beginning January 23, 2007, and subject to a minimum average dollar trading volume, the Company may redeem the A-1 and A-2 Warrants for $.17 per Warrant if the Company’s stock closes above $5.00 relative to the A-1 Warrants and $5.83 relative to the A-2 Warrants for ten consecutive trading days.

July 2004 Warrant Amendments and Exercises

On July 20, 2004, certain holders of outstanding warrants to purchase shares of the Company’s common stock exercised warrants to purchase an aggregate of 4,473,806 shares of common stock for cash, resulting in net proceeds of approximately $10.8 million. In order to encourage early exercise of the warrants by the warrant holders, the Company agreed to reduce the exercise price with respect to the warrants from a weighted average exercise price of $3.36 per share to $2.50 per share. All other material terms of the warrants, including the number of shares issuable upon exercise of the warrants and their expiration date, remained unchanged. The proceeds from the warrant exercises were held in a third party escrow account and, upon closing of the Litronic acquisition on August 6, 2004, the funds were released to the Company and the Company issued the shares of common stock to the warrant holders.

The fair value of this modification of warrants was determined by using a Black-Scholes model immediately before and after the modification date of July 20, 2004, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate 0.8%, volatility of 42.5%, and an expected term of 5 days, the period of

F-34

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

time the warrant holders had to accept the reduced exercise price. The value was estimated to be approximately $2.2 million and was recorded as a modification of outstanding equity instruments. This charge increased net loss attributable to common stockholders.

February 2004 Financing Warrants

In connection with the February 2004 financing, in which investors received warrants to purchase 1,232,000 shares of the Company’s common stock, the Company also issued placement agent warrants to purchase up to 184,800 shares of the Company’s common stock at an original exercise price of $3.97 per share. The warrants have a 5-year term but are not subject to the registration rights agreement. The value of these placement agent warrants was included in financing costs and was estimated at $663,000, based on the estimated value of the warrants using the Black-Scholes model with an expected dividend yield of 0.0%, a risk-free interest rate of 4.0%, volatility of 140% and an expected life of five years. Other costs associated with this financing include $691,000 in direct fees paid to various third parties. Due to anti-dilution provisions contained in these warrants, the exercise price was reduced to $2.50 per share related to the warrant amendments that occurred in July 2004.

Anti-dilution Adjustments

On January 1, 2006, anti-dilution provisions were triggered in certain outstanding warrants issued by the Company as a result of the modification to the Company’s convertible note payable to a related party on December 31, 2005. Accordingly, the Company recorded adjustments to the exercise price and, in certain cases, to the number of common shares issuable upon exercise of these warrants. The total number of shares of the Company’s common stock issuable upon exercise of these warrants increased by approximately 5,000 shares and the exercise price of the warrants issued in connection with the Company’s June 2005 financing was reduced from $2.50 to $0.71 per common share as of that date. The exercise price of these warrants was subsequently reduced to $0.45 per common share as a result of the June 2006 convertible debenture financing.

The fair value of the modification of these warrants was determined by using a BSM option valuation model immediately before and after the effective date of January 1, 2006, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate between 4% and 5%, expected volatility between 71% and 98%, and estimated lives between 2 and 5 years, the remaining contractual lives of these warrants. The fair value of the modification was estimated to be $509,000 and was recorded as a modification of outstanding warrants. This charge increased net loss attributable to common stockholders.

As a result of the Company’s convertible debenture issuance on June 12, 2006, anti-dilution provisions contained in certain outstanding warrants issued by the Company were triggered. Accordingly, the Company recorded adjustments to the exercise price and, in certain cases, to the number of common shares issuable upon exercise of these warrants. The total number of shares of the Company’s common stock issuable upon exercise of these warrants increased by approximately 253,000 shares and the exercise price reductions varied depending upon the type of warrant.

The fair value of the modification of these warrants was determined by using a BSM option valuation model immediately before and after the effective date of June 12, 2006, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of approximately 5%, expected volatility between 71% and 75%, and estimated lives between 6 months and 4 years, the remaining contractual lives of these warrants. The fair value of the modification was estimated to be $76,000 and was recorded as a modification of outstanding warrants. This charge increased net loss attributable to common stockholders.

F-35

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of the Company’s decision to pay the monthly redemption and accrued interest for convertible debentures due on December 1, 2006, certain anti-dilution provisions were triggered. Accordingly, the Company recorded adjustments to exercise price and, in certain cases, the number of common shares issuable upon exercise of these warrants. The total number of shares of the Company’s common stock issuable upon exercise of these warrants increased by approximately 94,000 shares and the exercise price reductions varied depending on the type of warrant.

The fair value of the modification of these warrants was determined by using a BSM option valuation model immediately before and after the effective date of December 1, 2006, with the following assumptions: an expected dividend yield of 0.0%, a risk-free interest rate of approximately 5%, expected volatility between 80% and 120%, and estimated lives between 1 month and 4 years, the remaining contractual lives of these warrants. The fair value of the modification was estimated to be $26,000 and was recorded as a modification of outstanding warrants. This charge increased net loss attributable to common stockholders.

14. Commitments and Contingencies

On February 6, 2004, Litronic received notice from the Environmental Protection Agency (EPA) regarding the Omega Chemical Superfund Site (Omega Site). The notice states that Litronic is a potentially responsible party (PRP) that contributed to the waste at the Omega Site. The notice also states that the amount of waste contributed to the Omega Site was a comparatively small quantity, or a de minimis quantity. As such, the notice is intended to offer Litronic the opportunity to resolve its liability for waste disposed at the Omega Site. The notice also states that if Litronic accepts the settlement offer, it can be released from further liability from the United States regarding the Omega Site as well as gaining contribution protection against lawsuits by other PRP’s, who potentially have claims against Litronic. The settlement offer amount is $108,000 and Litronic accepted the EPA offer on September 24, 2004. Litronic was advised by its legal counsel that there will be no further liability regarding this claim from the EPA or other PRP’s. As such, Litronic accepted the settlement offer of $108,000, which was reflected in the allocation of the purchase price to the acquired liabilities of Litronic. This amount was paid in full during January 2006.

The Company leases office space and equipment under various non-cancelable operating leases. Future minimum payments under these lease commitments are as follows (in thousands):

Year ending December 31,	Lease Commitments
2007	$	520
2008		539
2009		357
2010		287
2011		198
Thereafter		—
	$	1,901

Rent expense was $1.2 million, $1.3 million and $802,000 for the years 2006, 2005, and 2004, respectively.

The Company has a $1.25 million current obligation for a related party convertible note to Richard P. Kiphart, a member of the Company’s board of directors that was due December 31, 2006, but was not paid at that time and is due and payable upon request by Mr. Kiphart. The Company also has a $7.2 million obligation as of December 31, 2006, for its convertible debentures issued in June 2006. The principal amount of the debentures is redeemable at the rate of 1/12 of the original $8.0 million principal amount per month plus accrued but unpaid interest on the

F-36

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

debentures, which commenced on December 1, 2006. The Company may, in its discretion, elect to pay the interest due on the debentures and the monthly redemption amount in cash or in shares of its common stock. If the Company continues to elect to pay these obligations in shares of its common stock after April 2007, the Company may have to register additional shares of its common stock with the SEC and possibly propose a shareholder vote to amend its certificate of incorporation to increase the number of authorized shares of common stock to have enough registered shares to make the required payments.

15. Defined Contribution Retirement Plan

The Company offers an employee benefit plan pursuant to Section 401(k) of the Internal Revenue Code covering substantially all employees. Matching employer contributions are set at the discretion of the Board of Directors. There were no employer contributions made for 2006, 2005 or 2004.

16. Legal Proceedings

G2 Resources, Inc. and Classical Financial Services, LLC filed complaints in January 1998 against Pulsar Data Systems, Inc., a wholly-owned subsidiary of Litronic, Inc., which is in turn the Company’s wholly-owned subsidiary. The complaints alleged that Pulsar breached a contract by failing to make payments to G2 in connection with services allegedly provided by G2. In April 2001, the court dismissed the complaint for lack of prosecution activity for more than twelve months. G2 re-filed the action in May 2001. In 2002, the court moved the case into the same division handling other matters related to G2 and Classical, and stayed any further action in this case pending the resolution of matters between G2 and Classical. In 2005, G2 amended its complaint to add Litronic, Inc. as a defendant.

The Company is also involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

17. Related Party Transactions

Asset Sale and Termination of Lease

On December 15, 2006, the Company entered into an asset purchase agreement to sell certain assets related to its wholly-owned subsidiary, Litronic to RDSK. In exchange for the assets, RDSK agreed to assume certain liabilities related to the assets and KRDS, the landlord of the Company’s Irvine, California facility, agreed to terminate and cancel the lease agreement for the Irvine facility. RDSK and KRDS are entities that are majority-owned by three former employees of Litronic, one of whom is Kris Shah, a former member of the Company’s board of directors and the former president of Litronic. See Note 5—Restructuring.

Interim Chief Executive Officer

On September 28, 2006, the Company’s board of directors approved the terms of an executive consulting agreement with Capital Placement Holdings, Inc. under which Steven Oyer, the president and principal of Capital Placement Holdings, Inc. and a member of the Company’s board of directors, agreed to serve as the Company’s interim chief executive officer until such time as the Company can find a qualified successor to Glenn L. Argenbright, the Company’s former president and chief executive officer. The agreement provides that Mr. Oyer will provide services as the Company’s interim chief executive officer, and as such, the Company has agreed to pay Capital Placement Holdings a fee of $25,000 per month for the length of the agreement. In connection with the agreement, the Company granted Mr. Oyer a fully-vested and exercisable non-statutory option to purchase

F-37

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

350,000 shares of its common stock under the Company’s 2000 stock incentive plan. The grant date fair value of this grant was estimated to be $127,000 and was recorded in the statement of operations during 2006. In addition, the Company granted Mr. Oyer a non-statutory option to purchase 700,000 shares of its common stock that become exercisable upon the achievement of specified performance objectives. The Company has not recognized any compensation expense related to this grant as of December 31, 2006, as none of the performance objectives had been determined to be probable. The grants have an exercise price of $0.37 per share, which is equal to the last sale price per share of the Company’s common stock as reported on the Nasdaq Capital Market on the last trading day prior to the date of grant. No compensation expense was recognized for the performance grant as none of the performance objectives had been met as of December 31, 2006. The agreement commenced as of September 29, 2006 and continues until either party terminates the agreement upon 30 days advance written notice.

Amendment to Convertible Note

On December 31, 2005, the Company amended the convertible note, dated November 19, 2003, held by Richard P. Kiphart, a member of the Company’s board of directors. The terms of the convertible note were modified, as described in Note 13—Stockholders’ Equity, which resulted in a $455,000 charge that was recorded as a debt extinguishment loss in 2005.

Revenue Recognized

For the year ended December 31, 2004, the Company recognized $231,000 in revenue through related party sales to Information Systems Support, Inc., a Maryland corporation (ISS). The Company purchased certain assets from ISS in 2003. After March 31, 2004, ISS was no longer considered a related party.

KRDS Real Property Lease

As a result of the Litronic acquisition in August 2004, the Company assumed the building lease for Litronic’s corporate offices in Irvine, California. The lessor was KRDS, Inc., which is majority-owned by three employees of Saflink’s subsidiary, Litronic. Saflink recognized rent expense of $487,000, $523,000 and $216,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The lease was cancelled during the fourth quarter of 2006. See Note 5—Restructuring Charges.

Equity Transactions

The Company had two related party transactions during the year ended December 31, 2006, that are described in the Stock Options section of Note 13—Stockholders’ Equity, under the headings “Modification of Stock Options” and “Issuance of Stock Options for Services.”

F-38

SAFLINK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. Quarterly Information (Unaudited)

The following table summarizes the unaudited statements of operations for each quarter of 2006 and 2005:

	Mar. 31			June 30			Sept. 30			Dec. 31			Total
	(in thousands except per share data)
2006
Revenue	$	857		$	944		$	1,658		$	702		$	4,161
Gross profit		(267	)		(223	)		(13,611	)		(1,570	)		(15,671	)
Operating loss		(36,321	)		(37,355	)		(20,570	)		(23,542	)		(117,788	)
Net loss attributable to common stockholders		(36,770	)		(37,708	)		(21,487	)		(24,760	)		(120,725	)
Basic and diluted net loss attributable to common stockholders per share		(0.42	)		(0.43	)		(0.24	)		(0.27	)		(1.36	)
2005
Revenue	$	2,184		$	1,806		$	2,358		$	768		$	7,116
Gross profit		489			262			501			(419	)		833
Operating loss		(7,336	)		(6,586	)		(26,388	)		(7,244	)		(47,554	)
Net loss attributable to common stockholders		(6,831	)		(6,585	)		(26,087	)		(7,593	)		(47,096	)
Basic and diluted net loss attributable to common stockholders per share		(0.09	)		(0.08	)		(0.30	)		(0.09	)		(0.56	)

Due to the use of the rounding convention for quarterly reporting, the sum of quarters may not equal annual totals.

The Company’s results during all quarters of 2006 and the third quarter of 2005 included significant impairment losses on goodwill and/or intangible assets. (See Note 6—Goodwill and Note 7—Intangible Assets)

19. Subsequent Events

Note Payable to Related Party

On January 24, 2007, the Company borrowed $400,000 from Richard P. Kiphart, a member of the Company’s board of directors and current stockholder, and issued an unsecured promissory note to Mr. Kiphart bearing interest at the rate of 10% per annum. The note is due and payable in four equal quarterly installments beginning January 1, 2008, with accrued interest payable with each installment of principal. The note is subordinated to the Company’s 8% convertible debentures due December 12, 2007, and contains customary default provisions.

Asset Sale

On February 27, 2007, the Company entered into a Software Rights Agreement with IdentiPHI, LLC, whereby the Company sold its rights in its SAFsolution and SAFmodule software programs for an initial payment of $778,000 plus deferred payments due quarterly over a period of three years. The amount of the deferred payments will be equal to a percentage of the provider’s gross margin on sales that include the software programs’ source code, including (i) 20% of gross margin on OEM sales that include SAFsolution, (ii) 15% of gross margin on non-OEM sales that include SAFsolution, and (iii) 30% of gross margin on sales that include SAFmodule.

F-39

EX-4.13

Exhibit 4.13

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.

PROMISSORY NOTE

$400,000.00	January 24, 2007
	Kirkland, Washington

For value received, Saflink Corporation, a Delaware corporation (the “Company”), promises to pay to Richard P. Kiphart (the “Holder”), the principal sum of Four Hundred Thousand Dollars ($400,000.00). Interest shall accrue from the date of this Note on the unpaid principal amount at a rate equal to ten percent (10%) per annum, compounded annually. This Note is subject to the following terms and conditions.

1. Maturity. This Note will automatically mature and be due and payable in four (4) equal quarterly installments, with the first such installment due January 1, 2008. Interest shall accrue on this Note and accrued interest shall be due and payable with each installment of principal. Notwithstanding the foregoing, the entire unpaid principal sum of this Note, together with accrued and unpaid interest thereon, shall become immediately due and payable upon the insolvency of the Company, the commission of any act of bankruptcy by the Company, the execution by the Company of a general assignment for the benefit of creditors, the filing by or against the Company of a petition in bankruptcy or any petition for relief under the federal bankruptcy act or the continuation of such petition without dismissal for a period of ninety (90) days or more, or the appointment of a receiver or trustee to take possession of the property or assets of the Company.

2. Payment. All payments shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the Company. Payment shall be credited first to the accrued interest then due and payable and the remainder applied to principal. Prepayment of this Note may be made at any time without penalty.

3. Subordination. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all the Company’s Senior Indebtedness, as hereinafter defined. As used in this Note, the term “Senior Indebtedness” shall mean the principal of and unpaid accrued interest on all indebtedness of the Company evidenced by the Company’s 8% convertible debentures due December 12, 2007.

a. Default on Senior Indebtedness. If there should occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization or arrangement with creditors (whether or not pursuant to bankruptcy or other insolvency laws); or sale of all or substantially all of the assets, dissolution, liquidation or any other marshalling of the assets and liabilities of the Company, then (i) no amount shall be paid by the Company in respect of the principal of or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder of this Note that shall assert any right to receive any payments in respect of the principal of and interest on this Note, except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding.

b. Effect of Subordination. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 3 to receive cash or other properties otherwise payable or deliverable to the Holder of this Note, nothing contained in this Section 3 shall impair, as between the Company and the Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to the Holder the principal hereof and interest hereon as and when the same became due and payable, or shall prevent the Holder of this Note, upon default hereunder, from exercising all right, powers and remedies otherwise provided herein or by applicable law.

c. Undertaking. By its acceptance of this Note, the Holder agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Section 3.

4. Transfer; Successors and Assigns. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Notwithstanding the foregoing, the Holder may not assign, pledge, or otherwise transfer this Note without the prior written consent of the Company, except for transfers to affiliates. Subject to the preceding sentence, this Note may be transferred only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company. Thereupon, a new note for the same principal amount and interest will be issued to, and registered in the name of, the transferee. Interest and principal are payable only to the registered holder of this Note.

5. Governing Law. This Note and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

6. Notices. Any notice required or permitted by this Note shall be in writing and shall be deemed sufficient upon delivery, when delivered personally or by a nationally-recognized delivery service (such as Federal Express or UPS), or forty-eight

-2-

(48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, addressed to the party to be notified at such party’s address as set forth below or as subsequently modified by written notice.

7. Amendments and Waivers. Any term of this Note may be amended only with the written consent of the Company and the Holder. Any amendment or waiver effected in accordance with this Section 6 shall be binding upon the Company, the Holder and each transferee of the Note.

8. Officers and Directors Not Liable. In no event shall any officer or director of the Company be liable for any amounts due or payable pursuant to this Note.

COMPANY:
SAFLINK CORPORATION
By:
Name:
	(print)
Title:
Address:	12413 Willows Road NE
	Suite 300
	Kirkland, WA 98034

AGREED TO AND ACCEPTED:
RICHARD P. KIPHART
By:
Name:
	(print)
Title:
Address:	c/o William Blair & Co.
	222 W Adams St
	Chicago, IL 60606

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EX-10.1

Exhibit 10.1

SAFLINK CORPORATION

AMENDED AND RESTATED 2000 STOCK INCENTIVE PLAN

1. Purposes of the Plan. The purposes of this SAFLINK Corporation Amended and Restated 2000 Stock Incentive Plan are:

• to attract and retain the best available personnel for positions of substantial responsibility;

• to provide additional incentive to Employees, Directors and Consultants; and

• to promote the success of the Company’s business.

Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan.

2. Definitions. As used herein, the following definitions shall apply:

(a) “Administrator” means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan.

(b) “Applicable Laws” means the requirements relating to the administration of stock plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted, and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan.

(c) “Board” means the Board of Directors of the Company.

(d) “Cause” means (i) an act of personal dishonesty committed by the Optionee in connection with his or her responsibilities as a Service Provider, which is intended to result in substantial personal enrichment of the Optionee; (ii) a felony conviction of the Optionee; (iii) a willful act by the Optionee which constitutes gross misconduct and which is injurious to the Company; or (iv) following delivery to the Optionee of a written demand for performance from the Company which describes the basis for the Company’s reasonable belief that the Optionee has not substantially performed his duties, a continued violation by the Optionee of the Optionee’s obligations to the Company which are demonstrably willful and deliberate on the Optionee’s part. Notwithstanding the foregoing, however, Cause shall be determined with respect to any foreign Service Provider in accordance with Applicable Laws in the appropriate foreign country or jurisdiction.

(e) “Change of Control” means the occurrence of any of the following events:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the total voting power represented by the Company’s then outstanding voting securities who is not already such as of the Effective Date; or

(ii) Consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; or

(iii) Consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least 35% of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation; or

(iv) A change in the composition of the Board, occurring within a two-year period, as a result of which fewer than a majority of the Directors are Incumbent Directors. “Incumbent Directors” shall mean Directors who either (A) are Directors of the Company as of the Effective Date, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those Directors whose election or nomination was not in connection with any transaction described in subsections (i), (ii), or (iii) above, or in connection with an actual or threatened proxy contest relating to the election of Directors.

(f) “Code” means the Internal Revenue Code of 1986, as amended.

(g) “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.

(h) “Common Stock” means the common stock of the Company.

(i) “Company” means SAFLINK Corporation, a Delaware corporation.

(j) “Consultant” means any person, including an advisor, engaged by the Company or by a Parent or Subsidiary to render services to such entity.

(k) “Director” means a member of the Board.

(l) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.

(m) “Effective Date” means the effective date of this Plan as determined in accordance with Section 7.

(n) “Employee” means any person, including an Officer, who is employed by the Company or by any Parent or Subsidiary. A Service Provider shall not cease to be an Employee in the event of (i) any leave of absence approved by the Company or (ii) any transfer between locations of the Company or between the Company, its Parent, any Subsidiary, or any

successor. For purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three months following the 91st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to classify an individual as an Employee.

(o) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(p) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the mean between the high bid and low asked prices for such stock on the last market trading day prior to the date of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(iii) In the absence of an established market for the Common Stock, the value as determined in good faith by the Administrator.

(q) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(r) “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

(s) “Notice of Grant” means a written or electronic notice evidencing certain terms and conditions of a grant of an individual Option or Stock Purchase Right. The Notice of Grant is part of the Option Agreement.

(t) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(u) “Option” means an Incentive Stock Option or a Nonstatutory Stock Option that is granted pursuant to the Plan.

(v) “Option Agreement” means an agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.

(w) “Option Exchange Program” means a program whereby outstanding Options are surrendered in exchange for Options with a lower exercise price.

(x) “Optioned Stock” means the Common Stock that is subject to an Option or Stock Purchase Right.

(y) “Optionee” means the holder of an outstanding Option or Stock Purchase Right that is granted under the Plan.

(z) “Parent” means a “parent corporation” with respect to the Company, whether now or hereafter existing, as defined in Section 424(e) of the Code.

(aa) “Plan” means this SAFLINK Corporation Amended and Restated 2000 Stock Incentive Plan.

(bb) “Restricted Stock” means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.

(cc) “Restricted Stock Purchase Agreement” means a written agreement between the Company and an Optionee evidencing the terms and restrictions that apply to Common Stock purchased under a Stock Purchase Right. A Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice of Grant.

(dd) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

(ee) “Section 16(b) “ means Section 16(b) of the Exchange Act.

(ff) “Service Provider” means an Employee, Director or Consultant.

(gg) “Share” means a share of Common Stock, as adjusted in accordance with Section 13 of the Plan.

(hh) “Stock Purchase Right” means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.

(ii) “Subsidiary” means a “subsidiary corporation” with respect to the Company, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 1,000,000 Shares. However, on each January 1 during the term of this Plan, the number of Shares that may

be optioned and sold under the Plan shall be increased such that the maximum number of Shares available to be optioned and sold under the Plan shall be equal to the lesser of (i) 15,000,000 Shares or (ii) 20% of the number of Shares of Common Stock (on an as converted basis) outstanding on the immediately preceding December 31. For purposes of the limitations that are contained in the preceding sentence on the maximum aggregate number of Shares that may be optioned and sold under this Plan, Shares that may be optioned and sold under the 1992 Stock Incentive Plan of the Company or under any other plan or non-plan arrangement under which Shares of Common Stock may be optioned and sold as incentive compensation to any Service Provider shall be considered to be available for option and sale under this Plan. The Shares may be authorized, but unissued, or reacquired Common Stock.

If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been issued under the Plan, whether upon exercise of an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan.

4. Administration of the Plan.

(a) Procedure.

(i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.

(ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder.

(iii) Rule 16b-3. To the extent that the Administrator determines it to be desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3.

(iv) Other Administration. Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be organized to satisfy Applicable Laws.

(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion:

(i) to determine the Fair Market Value;

(ii) to select the Employees, Directors and Consultants to whom Options and Stock Purchase Rights may be granted hereunder;

(iii) to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right granted hereunder;

(iv) to approve forms of agreement for use under the Plan;

(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;

(vi) to reduce the exercise price of any Option or Stock Purchase Right to the then current Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right if such Fair Market Value shall have declined since the date the Option or Stock Purchase Right was granted;

(vii) to institute an Option Exchange Program;

(viii) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan;

(ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred treatment under Applicable Laws of foreign jurisdictions;

(x) to modify or amend any Option or Stock Purchase Right (subject to Section 15(c) of the Plan), including the discretionary authority to accelerate the vesting of any Option or Stock Purchase Right or to extend the post-termination exercisability period of Options longer than is otherwise provided for in the Plan;

(xi) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to (or less than) the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable;

(xii) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; and

(xiii) to make all other determinations deemed necessary or advisable for administering the Plan.

(c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights.

5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Employees, Directors or Consultants. Incentive Stock Options may be granted only to Employees.

6. Limitations.

(a) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.

(b) Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee’s relationship as a Service Provider, nor shall they interfere in any way with the Optionee’s right or the Company’s right, as applicable, to terminate such relationship at any time, with or without Cause.

(c) The following limitations shall apply to grants of Options:

(i) No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 1,000,000 Shares.

(ii) In connection with his or her commencement of service, a Service Provider may be granted Options to purchase up to an additional 1,000,000 Shares, which shall not count against the limit set forth in subsection (i) above.

(iii) The foregoing limitations shall be subject to the limit on the maximum aggregate number of Shares with respect to which Options may be granted hereunder pursuant to Section 3, and shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 13.

(iv) If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option.

7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of 10 years unless terminated earlier under Section 15 of the Plan.

8. Term of Option. The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the term shall be 10 years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five years from the date of grant or such shorter term as may be provided in the Option Agreement.

9. Option Exercise Price and Consideration.

(a) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following:

(i) In the case of an Incentive Stock Option

(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.

(B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator, but in no event shall be less than 85% of the Fair Market Value per Share on the date of grant. In the case of a Nonstatutory Stock Option intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.

(b) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and shall determine any conditions that must be satisfied before the Option may be exercised.

(c) Form of Consideration. The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:

(i) cash;

(ii) check;

(iii) promissory note;

(iv) other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised;

(v) consideration received by the Company under a cashless exercise program;

(vi) a reduction in the amount of any Company liability to the Optionee, including any liability attributable to the Optionee’s participation in any Company-sponsored deferred compensation program or arrangement;

(vii) any combination of the foregoing methods of payment; or

(viii) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

10. Exercise of Option.

(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement; provided, however, that, with the exception of an Option granted to an Officer, Director or Consultant, no Option shall become exercisable at a rate less than twenty percent (20%) per year over a period of five (5) years from the effective date of grant of such Option. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be suspended during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by

the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan.

Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

(b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee’s death or Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. In no event may an Optionee exercise an Option following such Optionee’s termination as a Service Provider for Cause.

(c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for 12 months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(d) Death of Optionee. If an Optionee dies while a Service Provider, or during the period specified pursuant to paragraph (b) or (c) above during which the Optionee may exercise the Option following the Optionee’s termination as a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant) but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for 12 months following the Optionee’s death. The Option may be exercised within the applicable time period by the personal

representative of the Optionee’s estate or by the person or persons to whom the Option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.

(e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares an Option previously granted based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

11. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan; provided, however that in no event may Stock Purchase Rights be issued in any fiscal year of the Company for more than 10% of the total Shares available for issuance hereunder, in the aggregate, on the first day of such fiscal year. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.

(b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant to the Company a repurchase option exercisable upon the voluntary or involuntary termination of the Optionee’s service with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the Optionee and may be paid by cancellation of any indebtedness of the Optionee to the Company. The repurchase option shall lapse at a rate determined by the Administrator.

(c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion.

(d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the Optionee shall have the rights equivalent to those of a stockholder, and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan.

12. Transferability of Options and Stock Purchase Rights. An Option or Stock Purchase Right may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee.

13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale.

(a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of Shares of Common Stock which have been authorized for issuance under the Plan, including Shares as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, the number of Shares that may be added to the Shares reserved under the Plan (pursuant to Section 3(i)), and the number of Shares that are covered by each outstanding Option and Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares that are subject to an Option or Stock Purchase Right.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until 10 days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to any or all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action.

(c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested

and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully vested and exercisable for a period of 15 days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

Notwithstanding the foregoing, if an Optionee’s status as a Service Provider is terminated for reasons other than Cause within 12 months following a Change of Control, then the vesting and exercisability of each of the Optionee’s outstanding Options and Stock Purchase Rights shall accelerate upon such termination with respect to 100% of the then unvested Shares subject to or acquired under each such Option or Stock Purchase Right.

14. Date of Grant. The date of grant of an Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination to grant such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.

15. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

(b) Stockholder Approval. The Company shall obtain stockholder approval of any Plan amendment to the extent necessary or desirable to comply with Applicable Laws.

(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Options and Stock Purchase Rights granted under the Plan prior to the date of such termination.

16. Conditions Upon Issuance of Shares.

(a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws, and such issuance and delivery shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required or desirable.

17. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability with respect to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

18. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

19. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within 12 months after the date the Plan is adopted by the Board. Such stockholder approval shall be obtained in the manner and to the degree required under Applicable Laws.

20. Provision of Information. Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s stockholders.

EX-10.15

Exhibit 10.15

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (the “Agreement”), dated as of December 15, 2006 (the “Closing Date”), is made by and among SAFLINK Corporation, a Delaware corporation (“SFLK”), and Litronic, Inc., a Delaware corporation (“Litronic,” and together with SFLK, “Seller”), RDSK, Inc., a California corporation (the “Buyer”), and, for purposes of Sections 6 and 7 only, KRDS, Inc., a California corporation “KRDS”), and, for purposes of Sections 4 and 7 only, Kris Shah (“Kris”), Ramesh Shah (“Ramesh”), and Dilip Shah (“Dilip”).

RECITALS

A. On August 6, 2004, SFLK acquired Litronic, which designs and develops data and communication security solutions for both corporate and government institutions (the “Litronic Business”).

B. The parties hereto desire that Seller sell to Buyer, and that Buyer purchase from Seller, certain assets and liabilities of the Litronic Business on the terms and conditions set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Purchase of Assets.

1.1 Assets to be Sold. On the Closing Date, subject to the terms and conditions of this Agreement, Seller shall sell, transfer, convey, assign and deliver (with physical delivery to be in accordance with Exhibit A) (collectively, “Transfer”), or cause to be Transferred, to Buyer, free and clear of all liens, security interests, pledges, mortgages and encumbrances incurred on or after August 6, 2004 (collectively, “Encumbrances”), except as described on Exhibit A, and Buyer shall purchase and acquire, all of Seller’s right, title and interest in and to all of the following assets and rights (collectively, the “Purchased Assets”):

(a) Tangible Assets. All furniture, furnishings, fixtures, machinery, equipment and other goods and tangible assets physically located at 17861 Cartwright Road, Irvine, California (the “Litronic Facility”), plus those tangible assets and items of equipment not located at the Litronic Facility and specifically set forth in Part 1.1(a) of Exhibit A hereto.

(b) Assumed Contracts. The contracts and agreements, purchase orders, sales orders, sale and distribution agreements and other instruments and agreements set forth in Part 1.1(b) of Exhibit A hereto (collectively, the “Assumed Contracts”).

(c) Intellectual Property. The trade names, trademarks, service marks, domain names, patents and patent applications described in Part 1.1(c) of Exhibit A hereto, and the

telephone and telefax numbers used at the Litronic Facility as listed on Part 1.1(c) of Exhibit A hereto (collectively, the “Intellectual Property”).

(d) Inventory. All inventory located at the Litronic Facility, including but not limited to, supplies, materials, work in process, finished goods, forms and supplies, including those items specified on Part 1.1(d) of Exhibit A hereto (subject to the provisions of Section 5.7, collectively, the “Inventory”).

(e) Customer Information. The mailing lists, customer lists, supplier lists, vendor data, billing data, marketing information and procedures, sales and customer files, standard forms of documents, manuals of operations or business procedures and other similar procedures, and other information of Seller that relate to the Purchased Assets, as listed on Part 1.1(e) of Exhibit A hereto.

1.2 Excluded Assets. Seller and Buyer expressly understand and agree that Seller is not Transferring to Buyer, and Buyer is not purchasing from Seller, pursuant to this Agreement any of the assets or rights of Seller other than the Purchased Assets specifically set forth in Section 1.1 (collectively, the “Excluded Assets”). For purposes of this Agreement, “Excluded Assets” shall specifically include (but shall not be limited to) the items set forth on Exhibit B hereto.

1.3 Assumption of Liabilities. Subject to and upon the terms and conditions of this Agreement, effective as of the Closing Date, Buyer agrees to assume from Seller and to pay, perform and discharge according to their terms the following Liabilities (as defined below) of Seller (the “Assumed Liabilities”):

(a) Liabilities under the Purchased Assets, including the Assumed Contracts, arising from and after the Closing Date, other than (A) Liabilities performed or paid, or required under any Purchased Asset or Assumed Contract to have been performed or paid, prior to the Closing Date, and (B) Liabilities arising from any breach or default of any Assumed Contract to the extent occurring (or arising from facts and/or activities occurring) prior to the Closing Date; and

(b) Those other Liabilities identified on Exhibit C hereto.

For purposes of this Agreement, “Liabilities” shall mean any direct or indirect liability, indebtedness, obligation or guarantee, whether known or unknown, whether accrued or unaccrued, whether absolute or contingent, whether due or to become due, or whether liquidated or unliquidated.

1.4 Consideration. Subject to the terms and conditions of this Agreement, in consideration of, and in payment in full for, the Transfer of the Purchased Assets, Buyer shall (a) on the Closing Date, cause the real property lease between KRDS and Litronic for the Litronic Facility (the “Lease”), to be cancelled in its entirety, as set forth in Section 6, (b) cause KRDS to agree to the waiver and release of Seller set forth in Section 7, and (c) pay Seller the book value, as set forth on attached Exhibit A hereto, for all Inventory sold by Buyer, provided, that Buyer shall deliver payment to Seller

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for such Inventory sold within ten days of the receipt of proceeds from any such sale of Inventory (collectively, the “Purchase Price”).

2. The Closing.

2.1 Deliveries by Seller. On the Closing Date, subject to the terms and conditions of this Agreement, Seller shall deliver to Buyer the following:

(a) An executed copy of this Agreement;

(b) A bill of sale made by Seller in favor of Buyer, substantially in the form attached hereto as Exhibit D, to be effective as of the Closing Date (the “Bill of Sale”);

(c) An assignment and assumption agreement between Buyer and Seller, substantially in the form attached hereto as Exhibit E, to be effective as of the Closing Date (the “Assignment and Assumption Agreement”);

(d) A trademark assignment substantially in the form attached hereto as Exhibit F;

(e) A patent assignment substantially in the form attached hereto as Exhibit G;

(f) Such third party consents necessary to Transfer the Assumed Contracts to Buyer, except as set forth on Exhibit A hereto; and

(g) Such other instruments of sale and assignment as shall, in the reasonable judgment of Buyer and Seller, be effective to vest in Buyer on the Closing Date all of Seller’s right, title and interest in and to the Purchased Assets and to assign and Transfer to Buyer all of the Assumed Liabilities (the “Other Instruments” and, collectively with the Bill of Sale, the Assignment and Assumption Agreement and this Agreement, the “Transaction Documents”).

2.2 Deliveries By Buyer. On the Closing Date, subject to the terms and conditions of this Agreement, Buyer shall deliver to the Seller the following:

(a) A copy of this Agreement executed by Buyer, Kris, Ramesh and Dilip;

(b) A copy of the Bill of Sale executed by Buyer;

(c) A copy of the Assignment and Assumption Agreement executed by Buyer; and

(d) Such Other Instruments as reasonably requested by Seller.

2.3 Further Assurances. Seller and Buyer hereby agree that each of them will execute and deliver any and all documents and instruments in addition to those provided for herein that may be reasonably necessary or appropriate to effectuate the provisions of this Agreement, whether before, at or after the Closing Date, including, but not limited to, such confirmatory conveyances and assignments

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of the Purchased Assets as Buyer may reasonably request or regarding the Assumed Liabilities as Seller may reasonably request.

3. Representations and Warranties by Seller; As-Is, Where-Is Basis. Seller hereby represents and warrants the following to be true and correct in all respects as of the Closing Date:

3.1 Power and Authority. Seller has full corporate power and authority to enter into and perform this Agreement and all of the transactions contemplated by this Agreement. This Agreement is, and each other Transaction Document to be executed by Seller, when executed and delivered by Seller, will be, a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors’ rights generally.

3.2 No Conflict. The execution and the delivery by Seller of this Agreement and the other Transaction Documents to which Seller is or will be a party, do not, and the consummation of the transactions contemplated herein and therein and compliance with the provisions hereof and thereof will not, conflict with, result in a breach of, or constitute a default (with or without notice or lapse of time, or both) under or violation of, any provision of the Certificate of Incorporation or Bylaws of Seller. Except for such consents, authorizations, filings, and approvals required by applicable laws or regulations, no consent of any third party is required to be obtained on the part of Seller to permit the consummation of the transactions contemplated in this Agreement or the other Transaction Documents to which Seller is or will be a party.

3.3 Title to Assets. Seller has good, indefeasible and marketable title to all of the Purchased Assets, free and clear of all Encumbrances, and title to the Purchased Assets shall be transferred by Seller to Buyer free and clear of all Encumbrances, except in each case with respect to imperfections or irregularities of title or Encumbrances of which Kris, Ramesh or Dilip have knowledge assuming due inquiry or as would not have a material adverse effect on the Litronic Business.

3.4 No Warranties. Except as expressly set forth in this Section 3, Seller makes no representation or warranty, express or implied, at law or inequity, in respect of any of the Purchased Assets, liabilities or operations, including, without limitation, with respect to merchantability or fitness for any particular purpose, and any such other representations or warrants are hereby expressly disclaimed. Buyer hereby acknowledges and agrees that, except to the extent specifically set forth in this Section 3, Buyer is purchasing the Purchased Assets on an “as-is, where-is” basis. Without limiting the generality of the foregoing, Seller makes no representation or warranty regarding any assets other than the Purchased Assets or any liabilities other than the Assumed Liabilities, and none shall be implied at law or in equity.

4. Representations and Warranties of Buyer. Buyer, KRDS, Kris, Ramesh and Dilip hereby represent and warrant, as applicable, the following to be true and correct in all respects as of the Closing Date:

4.1 Power and Authority. Buyer and KRDS each represents, as to itself, that it has full corporate power and authority to enter into and perform this Agreement, and all of the

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transactions contemplated by this Agreement. Each of Buyer, KRDS, Kris, Ramesh and Dilip represents, as to itself or himself, that this Agreement, and each other Transaction Document to be executed by it or him, when executed and delivered by it or him, will be, a legal, valid and binding obligation of it or him, as the case may be, enforceable against it or him in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditors’ rights generally.

4.2 No Conflict. Each of Buyer and KRDS represents, as to itself, that the execution and the delivery by it of this Agreement and the other Transaction Documents to which it is or will be a party, do not, and the consummation of the transactions contemplated herein and therein and compliance with the provisions hereof and thereof will not, conflict with, result in a breach of, or constitute a default (with or without notice or lapse of time, or both) under or violation of, any provision of the Articles of Incorporation or Bylaws of Buyer or KRDS, as applicable. Except for such consents, authorizations, filings, and approvals required by applicable laws or regulations, no consent of any third party is required to be obtained on the part of Buyer or KRDS, as applicable, to permit the consummation of the transactions contemplated in this Agreement or the other Transaction Documents to which Buyer or KRDS, as applicable, is or will be a party.

5. Post-Closing Covenants.

5.1 Transfer of Intellectual Property and Domain Names. Seller agrees to cooperate with Buyer to effectuate the Transfer of all of the Intellectual Property. Buyer shall be responsible for all fees and charges necessary for the Transfer of the Intellectual Property.

5.2 Use of Name. Promptly after the Closing Date, Seller agrees to remove the name “Litronic” from all corporate names and to cease using the name “Litronic” to conduct business.

5.3 Monthly Sales Reports. In furtherance of Section 1.4(c) and until all such Inventory is sold, Buyer agrees to provide SFLK with a monthly detailed report of sales of Inventory by finished good part number.

5.4 Indemnification.

(a) Indemnification by Seller. Seller shall indemnify and hold Buyer harmless in respect of any and all claims, losses, damages, liabilities and expenses (including, without limitation, settlement costs and any legal, accounting and other expenses for investigating or defending any actions or threatened actions) reasonably incurred by Buyer, in connection with each and all of the following:

(i) Any breach of any representation or warranty made by Seller in this Agreement;

(ii) The breach of any covenant, agreement or obligation of Seller contained in this Agreement or any other instrument contemplated by this Agreement;

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(iii) Any misrepresentation contained in any statement, instrument or certificate furnished by Seller pursuant to this Agreement or in connection with the transactions contemplated by this Agreement; and

(iv) Any claims against, or liabilities or obligations of, Seller other than the Assumed Liabilities.

(b) Indemnification by Buyer. Buyer shall indemnify and hold Seller harmless in respect of any and all claims, losses, damages, liabilities and expenses (including, without limitation, settlement costs and any legal, accounting or other expenses for investigating or defending any actions or threatened actions) reasonably incurred by Seller, in connection with each and all of the following:

(i) Any breach of any representation or warranty made by Buyer in this Agreement;

(ii) The breach of any covenant, agreement or obligation of Buyer contained in this Agreement or any other instrument contemplated by this Agreement;

(iii) The Assumed Liabilities; and

(iv) Any misrepresentation contained in any statement, instrument or certificate furnished by Buyer pursuant to this Agreement.

(c) Manner of Indemnification. All indemnification by Buyer shall be effected by payment of cash or delivery of a bank cashier’s check in the amount of the indemnification liability. All indemnification by Seller may be effected, at the election of Buyer, by the payment of cash or delivery of a bank cashier’s check or out of a holdback and/or set-off against monies otherwise payable to Seller pursuant to clause (c) of Section 1.4.

5.5 Utilities. Seller agrees to reimburse KRDS for all utility bills related to the Lease for amounts accrued prior to the Closing Date, with such reimbursement to occur within 10 days following the Closing Date.

5.6 Access to Employees and Contractors. During the period from the Closing Date through March 31, 2007: (i) Seller shall not, directly or indirectly, take any action to prohibit or discourage any of Seller’s employees, contractors or consultants from providing services to Buyer; and (ii) Buyer shall not, directly or indirectly, and shall not permit Kris, Ramesh or Dilip to take any action to prohibit or discourage any of Buyer’s employees, contractors or consultants from providing services to Seller; provided that in each case such employees, contractors or consultants may be prohibited from disclosing confidential information to Buyer or Seller, respectively.

5.7 Inventory Adjustment. Promptly after the Closing Date, Seller agrees to cooperate with Buyer to perform a count or confirmation of all inventory located at the Litronic Facility that will constitute a part of the Purchased Assets as of the Closing Date and, if mutually agreed, Seller and Buyer shall revise Part 1.1(d) of Exhibit A accordingly.

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6. Termination of Lease. Effective as of the Closing Date, and pursuant to Section 35 of the Lease, KRDS hereby terminates and cancels the Lease in its entirety. KRDS hereby further acknowledges and agrees that, except as otherwise provided in this Agreement, any and all obligations and Liabilities of SFLK and Litronic, including their respective affiliates, officers, directors, employees, agents, successors and assigns, related to, or arising from, the Lease or occupancy of the premises related thereto are hereby extinguished. Notwithstanding the foregoing, if a court of competent jurisdiction declares the Transfer of Purchased Assets from Seller to Buyer invalid, the termination contained in this Section 6 shall be null and void and the parties shall be restored to their positions as if this Agreement had not been entered into.

7. Waiver and Release. KRDS hereby releases Seller, including its respective affiliates, officers, directors, employees, agents, successors and assigns, of and from any and all claims, demands, damages, Liabilities, accounts, costs, expenses, liens, actions and causes of action of every kind and nature whatsoever, at law and in equity, whether now known or unknown, which either party may now have, or may hereafter have, arising out of any matter, cause, act or omission whatsoever occurring or existing at any time prior to and including the date of this Agreement, including, without limitation, any claim or Liability related to the Lease, the termination thereof or occupancy of the premises related thereto, except as expressly provided in this Agreement. KRDS each hereby further acknowledges and agrees that the consideration set forth in this Agreement is in full and complete satisfaction of all obligations and responsibilities of Seller related to, or arising from, the Lease. Notwithstanding the foregoing, if a court of competent jurisdiction declares the Transfer of Purchased Assets from Seller to Buyer invalid, the waiver and release contained in this Section 7 shall be null and void and the parties shall be restored to their positions as if this Agreement had not been entered into. Kris, Ramesh and Dilip each hereby acknowledges and affirms the releases given by them in their Separation Agreements with Seller.

8. Miscellaneous.

8.1 Waiver; Amendments. The failure of any party to insist, in any one or more instances, upon performance of any of the terms, covenants or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right or claim granted or arising hereunder or of the future performance of any such term, covenant, or condition, and such failure shall in no way affect the validity of this Agreement or the rights and obligations of the parties hereto. This Agreement may not be modified, amended or supplemented except by an agreement in writing signed by all of the parties hereto.

8.2 Assignability and Binding Effect; Third Parties. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. This Agreement and the rights and obligations hereunder may not be assigned by Seller. Nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or entity other than the parties hereto and their successors or permitted assigns, any rights or remedies under or by reason of this Agreement.

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8.3 Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the conflict of laws rules or choice of laws rules thereof.

8.4 Notices. All notices and other communications hereunder will be in writing and will be deemed given (a) upon receipt if delivered personally (or if mailed by registered or certified mail), (b) the day after dispatch if sent by overnight courier, (c) upon dispatch if transmitted by telecopier or other means of facsimile transmission (and confirmed by a copy delivered in accordance with clause (a) or (b)), properly addressed to the parties at the following addresses:

Seller:	SAFLINK Corporation Attn: President 12413 Willows Road NE, Suite 300 Kirkland, WA 98034 Facsimile: (425) 278-1300
With a copy to:	DLA Piper US LLP Attn: Michael Hutchings 701 Fifth Avenue, Suite 7000 Seattle, WA 98104 Facsimile: (206) 839-4801
Buyer, KRDS, Kris, Ramesh or Dilip:	RDSK, Inc.
	Attn: Kris Shah 17861 Cartwright Road Irvine, CA 92620 Facsimile: (949) 851-8679
With a copy to:	Rutan & Tucker LLP Attn: Gregg Amber 611 Anton Boulevard Suite 1400 Costa Mesa, CA 92626 Facsimile: (714) 546-9035

Any party may change its address for such communications by giving notice thereof to the other parties in conformity with this Section.

8.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument notwithstanding that all parties are not signatories to each counterpart.

8.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the transactions contemplated hereby and shall supersede all prior negotiations, understandings and agreements.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

SELLER:
SAFLINK CORPORATION	LITRONIC, INC.
By:	By:
Name:	Name:
Title:	Title:
BUYER:
RDSK, INC.
By:
Name:
Title:
For Purposes of Sections 6 and 7 only:
KRDS, INC.
By:
Name:
Title:
For Purposes of Sections 4 and 7 only:
Kris Shah
Ramesh Shah
Dilip Shah

[Signature page to Asset Purchase Agreement.]

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EX-10.16

Exhibit 10.16

SAFLINK Corporation

SEVERANCE PLAN

AND

SUMMARY PLAN DESCRIPTION

January 9, 2007

TABLE OF CONTENTS

		Page
I.	INTRODUCTION	1
II.	ELIGIBILITY	1
III.	SEVERANCE BENEFITS	3
IV.	CLAIMS PROCEDURE	4
V.	STATEMENT OF RIGHTS UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (“ERISA”)	5
VI.	AMENDMENT AND TERMINATION	6
VII.	EMPLOYMENT RIGHTS	6
VIII.	NONALIENATION OF BENEFITS	6
IX.	GOVERNING LAW	6
X.	GENERAL INFORMATION	6

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SAFLINK CORPORATION

SEVERANCE PLAN AND SUMMARY PLAN DESCRIPTION

I. INTRODUCTION

The Board of Directors of SAFLINK Corporation (“SAFLINK”) hereby adopts the SAFLINK Severance Plan and Summary Plan Description (the “Plan”) effective as of January 9, 2007, to provide severance benefits to eligible employees of SAFLINK whose employment is terminated involuntarily under certain circumstances. All benefit determinations under the Plan and interpretation of Plan provisions will be made by SAFLINK (or its designee) in its sole discretion as Plan Administrator. The Plan is described in further detail below.

II. ELIGIBILITY

Any employee currently working on a regular, full-time basis for SAFLINK whose employment with SAFLINK is involuntarily terminated as a result of a permanent reduction in force on or after the effective date of this Plan is eligible for severance benefits described in Section III of this Plan, PROVIDED each of the following requirements is met:

1. The termination of employment is involuntary. The termination is involuntary if initiated by SAFLINK.

2. The termination is not due to retirement, death or disability of the employee.

3. The termination of employment is not for “cause” (as described below). Employment is terminated for cause if the termination is due to misconduct or unsatisfactory performance including, but not limited to, the following:

a. Conviction of a crime against SAFLINK, its affiliates, customers or employees, whether prosecuted or not.

b. Conviction of any other crime or violation of law, statute or regulation that creates an inability to perform job duties.

c. Failure or inability to perform job duties due to intoxication by drugs or alcohol during working hours.

d. A direct conflict of interest, not specifically waived in advance by SAFLINK.

e. Unauthorized use or disclosure of confidential information that belongs to SAFLINK, its affiliates, customers or employees.

f. Habitual neglect of duties.

g. Unsatisfactory performance of job duties or failure or refusal to comply with established policies or procedures or follow instructions of a supervisor.

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h. Other misconduct including, but not limited to: falsification of company records, including timekeeping records and the employee’s application for employment; illegal discrimination or harassment of another employee, customer or supplier; theft; unauthorized use or possession of property belonging to SAFLINK, a co-worker or customer; destruction of company or another employee’s property; possession of firearms, controlled substances or illegal drugs on company premises or while performing company business; gambling on company premises; concealing serious offenses by another employee; and any other conduct interfering with work performance or constituting an unsafe, unethical or unlawful practice.

The Plan Administrator, will, in its sole discretion, determine if a termination of employment is for “cause.”

4. The employee is not a part-time or temporary employee or a new hire who has not yet started to work on a regular, full-time basis.

5. The employee is not covered under any other severance-type plan, policy, arrangement or agreement that would obligate SAFLINK to make a severance payment.

6. The employee has not agreed in writing to waive severance benefits under this Plan or otherwise payable from SAFLINK.

7. The employee is not offered or does not accept alternative employment with a successor of SAFLINK as a result of a merger or acquisition.

8. The employee has signed a Confidential Separation Agreement and General Release of All Claims in a form acceptable to SAFLINK (“Separation Agreement”). The Separation Agreement provides for a full, general release of all claims, known and unknown, suspected and unsuspected, by the eligible employee, as well as agreements pertaining to nondisparagement, confidentiality, return of company property and nonsolicitation of employees. In the event of breach, the Separation Agreement provides for all legal and equitable remedies as well as recovery of attorneys’ fees and costs.

9. The employee has returned all SAFLINK property and equipment to SAFLINK on or before the Separation Date.

A terminated employee must satisfy all of the requirements set forth above in order to receive severance benefits under the Plan. Eligibility for severance benefits under the Plan will be determined by the Plan Administrator upon an eligible employee’s termination of employment. The Plan Administrator has full discretionary power and authority to interpret the provisions of the Plan and render decisions on eligibility for benefits. If the Plan Administrator determines that an eligible employee satisfies all of the eligibility conditions described above, the employee will receive a severance benefit calculated in accordance with Section III below. The severance benefits will be paid in accordance with the terms set forth in the Confidential Separation Agreement and General Release of all Claims.

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III. SEVERANCE BENEFITS

The following severance benefits are payable under this Plan:

A. Severance Pay. The amount of the severance pay payable to an eligible involuntarily terminated employee shall equal the employee’s weekly base salary according to the following formula:

Months of Service	Severance Payment
0 – 23 months	2 times weekly base salary
24 – 47 months	3 times weekly base salary
48 – 71 months	4 times weekly base salary
72 or more months	5 times weekly base salary

The amount of severance payable to an eligible employee shall be based upon the employee’s regular weekly base salary in effect immediately before his/her termination of employment. The weekly base salary shall be determined without regard to any overtime, bonuses, fringe benefits, reimbursements or other irregular payments. Months of Service means, determined as of the date immediately preceding the date of the involuntary termination of employment of the eligible employee, the number of whole and consecutive months (without regard to any fractional or partial months) during which the eligible employee was a regular, full-time employee of SAFLINK.

Severance payments will be made to an eligible employee in a single lump sum payment, less applicable tax withholdings and other lawful deductions, as soon as administratively practicable following his/her involuntary termination of employment, subject to the other terms and conditions set forth in this Plan.

B. No Separate Fund. All severance benefits payable under the Plan are payable from SAFLINK’s general assets. There is no separate trust or fund established for the payment of severance benefits under the Plan. All amounts shall be less applicable federal and state withholding taxes, including any other authorized deductions.

C. Additional Benefits. SAFLINK reserves the right to pay benefits in addition to those required by the Plan based on special circumstances. Each exception will be considered unique and not precedent-setting. Payment of additional amounts will be subject to such terms and conditions as SAFLINK may determine. All such determinations shall be made by SAFLINK in its sole and absolute discretion.

D. Section 409A Compliance. SAFLINK intends for the Plan to be exempt from the requirements of Section 409A of the Code and all applicable guidance promulgated thereunder (“Section 409A”) by operation of the short-term deferral exemption, and the Plan shall be construed and interpreted accordingly. If by virtue of subsequent regulatory developments the Plan fails to be exempt from the requirements of Section 409A, then SAFLINK shall timely amend or clarify the Plan so that the Plan is exempt from the requirements of Section 409A or satisfies the requirements of Section 409A.

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E. Tax Consequences. By providing a copy of this Plan and Summary Plan Description to the employee, SAFLINK has informed the employee that the federal, state, local, and/or foreign tax consequences (including without limitation those tax consequences implicated by Section 409A) of the Plan are complex and subject to change. As a condition to eligibility for benefits under this Plan, the employee acknowledges and agrees that the employee should consult with his/her own personal tax, legal, or financial advisor in connection with the Plan and its tax consequences. SAFLINK has no obligation and no responsibility to provide the employee with any tax or other legal advice in connection with the Plan and its tax consequences. Employee agrees that he/she shall bear sole and exclusive responsibility for any and all adverse federal, state, local and/or foreign tax consequences (including without limitation those tax consequences implicated by Section 409A) of this Plan.

IV. CLAIMS PROCEDURE

Severance benefits under this Plan will automatically be paid to employees who qualify for such benefits.

An employee who believes that he or she is entitled to severance benefits under this Plan that has not been provided should file a claim with the Plan Administrator. The claim must be in writing.

If the claim is denied, written notice (the “Notice”) of the denial will be provided within 60 days of initial receipt of the claim. Such notice will include (i) an explanation of the factors (including specific plan provisions) on which the denial is based; (ii) what, if any, additional information is needed to support the claim and an explanation of why such material is necessary; and (iii) an explanation of the claim review procedure, including applicable time limits and a statement of the claimant’s right to bring a civil action under ERISA following an adverse benefit determination upon review. Further review of the claim may be obtained by filing a written request for review within 60 days of the mailing of the Notice. If the employee does not respond to the Notice within 60 days of mailing, there shall be no further right of review.

In the event that the Notice is insufficient to satisfy the claimant, the claimant or his/her duly authorized representative, shall submit to the Plan Administrator, within 60 days of the mailing of the Notice, a written notification of appeal of the claim denial. The notification of appeal of the claim denial shall permit the claimant or his/her duly authorized representative to utilize the following formal claim review procedures:

(a) to review pertinent documents (the claimant will be provided, upon request and free of charge, copies of all information relevant to the claim); and

(b) to submit issues and comments in writing to which the plan shall respond (material shall be considered without regard to whether it was submitted or considered in the initial benefit claim).

The Plan Administrator shall furnish a written decision on formal review not later than 60 days after receipt of the notification of appeal, unless special circumstances require an extension of the time for processing the appeal. If special circumstances requiring an extension are present, the claimant will be notified of the extension within the first 60-day period. The notice will indicate the reason for the extension and the date by which a final decision is

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expected. In no event, however, shall the Plan Administrator communicate the decision on the claim later than 120 days after a request for a formal review. The decision on formal review shall be in writing and shall include specific reasons for the decision and shall be written in a manner calculated to be understood by the claimant and contain specific reference to the pertinent plan provisions on which the decision is based. The decision shall also include a statement explaining that the claimant may request free of charge copies of all documents relevant to the claim and a statement explaining the claimant’s right to bring an action under ERISA.

V. STATEMENT OF RIGHTS UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 (“ERISA”)

As a participant in the Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA provides that all participants in the Plan shall be entitled to:

1. Receive information about your Plan and severance benefits.

2. Examine, without charge, at SAFLINK offices all documents governing the Plan and a copy of the latest annual report (Form 5500 series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.

3. Obtain copies of documents governing the operation of the Plan and the latest annual report (Form 5500 series) and updated Summary Plan Description upon written request to SAFLINK. SAFLINK will make a reasonable charge for the copies.

In addition to creating rights for participants in the Plan, ERISA imposes obligations upon the persons who are responsible for the operation of the Plan. The persons who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including SAFLINK, the Plan Administrator, or any other person, may fire you or discriminate against you in any way to prevent you from obtaining a benefit from the Plan or exercising your rights under ERISA.

If your claim for a benefit is denied or ignored in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have the Plan review and reconsider your claim. You have the right to obtain copies of all documents relating to the decision without charge and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Plan documents or the latest annual report from the Plan and do not receive them within 30 days, you may file suit in Federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a Federal or a state court after you have exhausted the Plan’s benefit claims procedure (described above). The court will decide who should pay court costs and legal fees. If you are discriminated against for asserting your rights, you may seek

5

assistance from the Department of Labor or you may file suit in a Federal court. The court will decide who should pay court costs and fees. If you are successful in your lawsuit, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.

If you have any questions about your Plan, you should contact your Plan Administrator. If you have questions about this statement, or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact the nearest Area Office of the Employee Benefits Security Administration, Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

VI. AMENDMENT AND TERMINATION

SAFLINK, by action of its Board of Directors or by action of any committee appointed by the Board to administer the Plan, reserves the right to terminate or amend the Plan at any time and in any manner in its sole discretion. No employee shall have any vested interest in severance benefits payable under this Plan prior to satisfying all of the terms and conditions for payment of benefits under this Plan.

VII. EMPLOYMENT RIGHTS

Nothing in this Plan shall have any effect on SAFLINK’s right to terminate an employee, with or without cause, at anytime (subject to the terms of any written employment contract between the employee and SAFLINK). The payment of severance benefits under this Plan does not extend an employee’s term of employment.

VIII. NONALIENATION OF BENEFITS

No benefit under the Plan may be assigned, transferred, pledged as security for indebtedness or otherwise encumbered by any eligible employee or subject to any legal process for the payment of any claim against an eligible employee.

IX. GOVERNING LAW

This Plan shall be governed by and construed in accordance with the laws of the State of Washington to the extent such laws are not preempted by ERISA.

X. GENERAL INFORMATION

Employer and Plan Administrator Name: Jeffrey Dick CFO SAFLINK Corporation 12413 Willows Road N.E., Suite 300 Kirkland, WA 98034 (425) 278-1100

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Employer Identification Number:	95-4346070
Plan Number:	521
Type of Plan:	The Plan is an unfunded welfare benefit plan providing severance benefits. There is no trust and there are no trustees.
Agent For Service of Process:	National Registered Agents, Inc. 1780 Barnes Blvd. SW Tumwater, WA 98512-0410 Service of process may also be made upon the Plan Administrator at the address noted above.
Plan Year:	Calendar

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EX-10.17

Exhibit 10.17

AGREEMENT OF SUBLEASE

Agreement of Sublease (“Sublease”) dated this 5th day of February, 2007, between SAFLINK CORPORATION, a Delaware corporation, with a notice address of 108th Avenue NE, Bellevue, Washington 98004 (“Sublandlord”) and ABRAXAS CORPORATION, a Virginia corporation, with a notice address of 6845 Elm Street, Suite 310, McLean, Virginia 22101 (Attn: Michael S. Friedman) (“Subtenant”).

RECITALS

A. Sublandlord has leased approximately 6,083 rentable square feet (the “Demised Premises”) on the third (3rd) floor of a commercial office building commonly known as Campus South (“Building”) with a street address of 1875 Campus Commons Drive, Reston, Virginia, pursuant to a lease dated November 10, 2003, between Sublandlord, as tenant, and VA Branches, LLC, as landlord (“Landlord”), a copy of which lease (the “Master Lease”) has been reviewed by Subtenant and is annexed hereto as Exhibit “A”.

B. Subtenant desires to sublease from Sublandlord the Demised Premises and Sublandlord desires to sublease the Demised Premises to Subtenant on the terms hereinafter set forth.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, it is hereby mutually covenanted and agreed as follows:

1. Demised Premises and Term:

(a) Sublandlord hereby subleases the Demised Premises to Subtenant and Subtenant hereby subleases the Demised Premises from Sublandlord upon and subject to the terms, covenants, rentals and conditions herein set forth, for a Term (the “Term”) commencing on the later of (a) February 1, 2007 or (b) the date written consent is obtained from the Landlord to this Sublease (the “Commencement Date”) and expiring on April 30, 2009 (the “Expiration Date”) provided, however, that if the Master Lease shall be terminated for any reason prior to the Expiration Date, then this Sublease shall expire on the termination date of the Master Lease. If the Sublandlord is unable to deliver possession of the Demised Premises to Subtenant on the Commencement Date, for any reason, Sublandlord shall not be subject to any liability for failure to tender possession of the Demised Premises on said date. In such event, the rent covenanted to be paid herein shall not commence and the Commencement Date shall not occur until possession of the Demised Premises is tendered to Subtenant. No such failure to give possession on the Commencement Date shall in any other respect affect the validity of this Sublease or the obligations of Subtenant hereunder, nor shall the same be construed to extend the Term, which shall in all events expire on the Expiration Date as set forth herein. Sublandlord shall remain in a portion of the Demised Premises consisting of two (2) cubicles and the lab area until March 31, 2007, such portion as identified on Exhibit “B” attached hereto.

(b) The period commencing with the Commencement Date (on the first day of the next calendar month in the event Commencement Date does not occur on the first day of a month) and ending on the last day of the twelfth calendar month thereafter shall constitute the first “lease year” as such term is used herein. Each successive full twelve (12) month period during the Term shall constitute a “lease year” and any portion of the Term remaining after the last twelve (12) month period during said Term shall constitute the last “lease year” for the purpose of this Sublease.

(c) Subtenant shall have the right to use the furniture, fixtures and equipment, including, without limitation, the phone system, existing in the Demised Premises as of the Commencement Date (collectively, the “FF&E”), identified on Exhibit “C” attached hereto. Sublandlord shall use reasonable efforts to facilitate the transfer of the account pertaining to the existing voice and data connectivity to Subtenant’s name.

2. Delivery of Demised Premises:

(a) Delivery and Acceptance. Sublandlord shall deliver, and Subtenant shall accept, the FF&E and the Demised Premises in their “as is” condition with Subtenant accepting all defects, if any, and it is understood and agreed that Sublandlord has made no representations or warranties of any kind, express or implied, with respect to the FF&E or the Demised Premises (without limitation Sublandlord makes no warranty as to habitability, fitness or suitability for Subtenant’s intended use). In this regard, Subtenant acknowledges having been given the opportunity to inspect the FF&E and the Demised Premises and, if desired, to have qualified experts inspect the FF&E and the Demised Premises prior to the Sublease.

(b) Permits. Subtenant shall be responsible for obtaining the occupancy permit for the Demised Premises, and any other permits or licenses necessary for its lawful occupancy of the Demised Premises. This requirement shall not relieve Subtenant of its liability for Base Annual Rent and Additional Rent from the Commencement Date in the event all said permits have not been acquired prior thereto.

3. Rent: Commencing on the Commencement Date, Subtenant covenants and agrees to pay to Sublandlord, at Sublandlord’s address (set forth hereinabove) or at such other address as Sublandlord may designate by written notice to Subtenant, as rent for the Demised Premises.

(a) Base Annual Rent: A Base Annual Rent of One Hundred Forty Five Thousand Nine Hundred Ninety Two and 00/100 Dollars ($145,992.00), payable in equal monthly installments of Twelve Thousand One Hundred Sixty Six and 00/100 Dollars ($12,166.00). Subtenant shall pay the first installment of Base Annual Rent upon execution of this Sublease. Subtenant shall pay the remaining monthly installments of Base Annual Rent in advance without prior demand, and without deduction, abatement or set-off of any kind, upon the first day of each and every calendar month throughout the Term.

On the first day of the second lease year, and on the first day of each lease year thereafter during the Term, the Base Annual Rent (then in effect) shall be increased by five percent (5%), as follows. Accordingly, the Base Annual Rent for the second lease year shall be in an amount equal One Hundred Fifty Three Thousand Two Hundred Ninety One and 60/100 Dollars ($153,291.60), payable in equal monthly installments of Twelve Thousand Seven Hundred Seventy Four and 30/100 Dollars ($12,774.20) and the Base Annual Rent for the third year shall be in an amount equal to One Hundred Sixty Thousand Nine Hundred Fifty Six and 18/100 Dollars ($160,956.18), payable in eleven equal monthly installments of Thirteen Thousand Four Hundred Thirteen and 01/100 Dollars (13,413.01) and one monthly installment of Thirteen Thousand Four Hundred Thirteen and 07/100 Dollars ($13,413.07).

(b) Additional Rent: In addition to Base Annual Rent, Subtenant covenants and agrees to pay to Sublandlord, as additional rent (“Additional Rent”), upon demand therefor by Sublandlord, the following:

(i) The actual cost to Sublandlord of heating and air conditioning supplied to the Demised Premises after Standard Building Operating Hours at Subtenant’s request, pursuant to Section 10(b) of the Master Lease, which amounts shall be payable by Subtenant to Sublandlord within ten (10) days after delivery to Subtenant of a bill therefor; and

(ii) Any other costs, charges, reimbursements, legal fees, or payments (other than Base Annual Rent) required to be paid by Subtenant to Sublandlord under the terms of this Sublease.

For default in payment of Additional Rent, Sublandlord shall have the same remedies as for a default in payment of Base Annual Rent.

(c) Late Charge. Any amount due to Sublandlord that is not paid within three business (3) days of the date when due shall be subject to a late charge calculated in accordance with Section 4(f) of the Master Lease.

4. Use: Subtenant shall use and occupy the Demised Premises for general office use and light assembly of software packages, and for no other purpose unless consented to in writing by Sublandlord and Landlord.

5. Security Deposit: Subtenant has deposited with Sublandlord, simultaneously with the execution of this Sublease, the sum of twenty four thousand three hundred thirty two dollars ($24,332.00) as a deposit (the “Security Deposit”) to secure the prompt performance of Subtenant’s obligations hereunder. The Security Deposit may be commingled with Sublandlord’s general funds, if permitted by law and Sublandlord’s receipt and retention of the Security Deposit shall not create any trust or fiduciary relationship between Sublandlord and Subtenant. Sublandlord shall have the right, but shall not be obligated, to apply all or any portion of the Security Deposit to cure any default, in which event Subtenant shall be obligated to deposit with Sublandlord the amount necessary to restore the Security Deposit to its original amount within five (5) days after written notice from Sublandlord. To the extent not forfeited or otherwise used as provided herein, and provided the Demised Premises are vacated in good condition, reasonable wear and tear excepted, as described in Section 15 below, the Security Deposit shall be returned, without interest, to Subtenant within thirty-five (35) business days after the termination of this Sublease. If the Subtenant fails to take possession of the Demised Premises as required by this Sublease, the Security Deposit shall not be deemed liquidated damages and Sublandlord’s use of the Security Deposit shall not preclude Sublandlord from recovering from Subtenant all additional damages incurred by Sublandlord.

6. Incorporation of Master Lease:

(a) Except as herein otherwise expressly provided, all of the terms of the Master Lease are hereby incorporated into and made a part of this Sublease as if stated at length herein, and Subtenant accepts this Sublease subject to, and hereby, during the Term of this Sublease, covenants and assumes all of the terms, covenants, conditions and agreements contained in the Master Lease to be performed by Sublandlord thereunder and agrees that all obligations of Sublandlord as “Tenant” under the Master Lease shall be done or performed by Subtenant with respect to the Demised Premises on and after the Commencement Date. The parties hereto agree that subject to the provisions of this Sublease, wherever the words “Demised Premises” or words of similar import appear in the Master Lease, the same shall be deemed to mean the Demised Premises and wherever the words “Landlord” and “Tenant” appear in the Master Lease, the words shall be deemed to refer to Sublandlord and Subtenant respectively, so that, subject to the provisions of this Sublease, Sublandlord shall have the rights and powers of the Landlord under the Master Lease, and Subtenant shall have and does hereby agree to be bound by and accepts all the rights, powers, duties and obligations of the Tenant under the Master Lease; provided, however, that notwithstanding the foregoing, Sublandlord shall have no obligation to perform any of the obligations of Landlord under the Master Lease, including, but not limited to, the furnishing of any of the work, services, repairs or maintenance undertaken to be made by Landlord under the Master Lease, or any other term, covenant or condition required to be performed by Landlord under the Master Lease and Subtenant agrees to look solely to Landlord for the performance of such obligations.

(b) Subtenant shall not, under any circumstances, seek or require Sublandlord to perform any of the obligations of Landlord under the Master Lease, nor shall Subtenant make any claim upon Sublandlord for any damages which may arise by reason of Landlord’s default under the Master Lease unless such default is caused by Sublandlord. Any condition resulting from a default by Landlord under the Master Lease shall not constitute as between Sublandlord and Subtenant an eviction, actual or constructive, of Subtenant and no such default shall excuse Subtenant from the performance or observance of any of its obligations to be performed or observed under this Sublease, or entitle Subtenant to receive any reduction in or abatement of the Rent provide for in this Sublease, except to the extent Sublandlord receives an abatement in its rent under the Master Lease. Sublandlord covenants and agrees with Subtenant that Sublandlord will pay when due all rent and other sums payable by Sublandlord pursuant to the Master Lease, provided that Subtenant pays when due all Rent and other sums payable hereunder. Subtenant covenants and agrees that it shall do nothing which shall have the effect of creating a breach of any of the terms, covenants and conditions of the Master Lease. To the extent applicable to the Demised Premises, Subtenant shall have the benefit of each and every covenant and agreement made by Landlord to Sublandlord under the Master Lease. In the event that Landlord shall fail or refuse to comply with any of the respective provisions of the Master Lease, Sublandlord shall have no liability on account of any such failure or refusal, provided that the Subtenant shall have the non-exclusive right to exercise in the name of the

Sublandlord all the rights to enforce compliance on the part of Landlord as are available to the Sublandlord with respect to the Demised Premises; provided, however, that Sublandlord hereby reserves the non-exclusive right to enforce the rights of tenant under the Master Lease. Sublandlord hereby agrees to cooperate with and execute, all at Subtenant’s expense, all instruments and supply information reasonably required by Subtenant in order to enforce such compliance. Subtenant hereby agrees to indemnify and hold Sublandlord harmless of and from any and all damages, liabilities, obligations, costs, claims, losses, demands, and expenses, including reasonable attorneys’ fees, which may be incurred by Sublandlord in or as a result of such cooperation and execution. In amplification and not in limitation of the foregoing and without any allowance to Sublease or other reduction or adjustment of the rent, Sublandlord shall not be responsible for furnishing electrical, elevator, heating, air conditioning, cleaning, window washing or other services, nor for any maintenance or repairs in or to the Demised Premises or the Building of which it is a part or to any of the facilities or equipment therein. In the event of a default by Sublandlord, Landlord shall have the right to demand that Subtenant pay directly to Landlord all amounts owed under the Sublease and shall have all the rights and remedies set forth in the Master Lease against the Subtenant for a default under the Sublease.

(c) Notwithstanding the foregoing incorporation of the Master Lease, the following provisions thereof are hereby excluded from this Sublease: 1(a)7, 1(a)8, 1(a)9, 1(a)10, 1(a)12, 1(a)13, 1(a)14, 1(a)16, 1(a)17, 4(b), 4(c)(ii), Exhibit C and the following sections of the Addendum: 2, 4, 5 and 6.

7. Transmittal of Notices and Demands: Sublandlord shall promptly transmit to Landlord any notice or demand received from Subtenant and shall promptly transmit to Subtenant any notice or demand received from Landlord. Subtenant shall promptly transmit to Sublandlord any notice or demand received from Landlord or any other party relating to the Demised Premises (other than in the ordinary course of Subtenant’s business).

8. Landlord’s Consent to Certain Acts: Subtenant agrees that in any case where the provisions of the Master Lease or this Sublease require that consent or approval of Landlord or Sublandlord prior to the taking of any action, it shall be a condition precedent to the taking of such an action that the prior written consent or approval of both Landlord and Sublandlord shall have been obtained if Landlord’s consent must be obtained under the Master Lease in such cases. Subtenant agrees that Sublandlord shall not have any duty or responsibility with respect to obtaining the consent or approval of Landlord when the same is required under the terms of the Master Lease, other than the transmission by Sublandlord to Landlord of Subtenant’s request for such consent or approval.

9. Sublandlord’s Right to Cure Subtenant’s Default: Subtenant shall not do or suffer or permit anything to be done which would cause the Master Lease to be terminated or forfeited by virtue of any rights of termination or for forfeiture reserved or vested in Landlord or by law or in equity. If Subtenant shall default in the performance of any of its obligations under this Sublease or under the Master Lease, Sublandlord, without being under any obligation to do so and without thereby waiving such default, may remedy such default for the account and at the expense of Subtenant. If Sublandlord makes any expenditures or incurs any obligation for the payment of money in connection therewith, such sums paid or obligations incurred shall be deemed to be Additional Rent hereunder and shall be paid to Sublandlord by Subtenant on demand.

10. Brokerage Fees: The parties hereto represent and warrant to each other that they have not dealt with any broker other than Scheer Partners (“Broker”). Sublandlord shall pay Broker a brokerage commission pursuant to a separate agreement between Sublandlord and Broker in connection with this Sublease. Each party agrees to indemnify and defend the other, and hold it harmless, from and against any and all claims, damages, losses, expenses and liabilities (including reasonable attorneys’ fees) incurred by the other party as a result of any breach by such party or any of its representations, warranties or covenants in this section. The parties do not intend to confer any right, remedy or benefit upon the Broker by this sectopm or any other provision of this Sublease, and the Broker shall not be a third party beneficiary of this Sublease or otherwise be entitled to enforce any right, obligation or remedy under this Sublease.

11. Assignment of Sublease: Subtenant shall not assign, mortgage or encumber this sublease, nor sublet, nor suffer or permit the Demised Premises or any part thereof to be used by

others except with the prior written consent of Sublandlord and Landlord and as provided in and pursuant to the terms of Section 9 of the Master Lease. In no event shall any assignment or subletting relieve Subtenant of its liability and responsibility to Sublandlord under this sublease or to Landlord under the Master Lease in the absence of any express written agreement with Sublandlord or Landlord, as the case may be, to that effect. Subtenant may assign this lease to any subsidiary or affiliated company without further approval provided that such assignment includes a provision whereby the Subtenant guarantees the obligations of such assignee with respect to this Sublease.

12. Eminent Domain, Loss by Casualty: In the event of any taking by eminent domain or damage by fire or other casualty to the Demised Premises thereby rendering the Demised Premises wholly or in part untenantable, Subtenant shall acquiesce in and be bound by any action taken by or agreement entered into between Landlord and Sublandlord with respect thereto.

13. Notice and Demands: All notices or demands under this Sublease shall be in writing and shall be sent by a nationally recognized overnight courier service (e.g. Federal Express), registered or certified mail, return receipt requested, or hand delivered, to Sublandlord at its address set forth above, and to Subtenant at its address set forth above, or such other address as either of the parties may designate by written notice. All notices hereunder shall be effective on the date of personal delivery, on the next business day after delivery by overnight courier service, or three (3) days after mailing, as the case may be.

14. Alterations to Demised Premises: Subtenant covenants at all times during the term of this Sublease not to make any alterations or additions to the Demised Premises of any nature whatsoever without the prior written consent of Sublandlord and Landlord, which may be granted or withheld in their sole discretion. In the event Subtenant obtains Sublandlord’s and Landlord’s consent and all necessary governmental approvals and permits, Subtenant shall have the right to make such alterations at Subtenant’s sole expense and in accordance with the terms of Section 12 of the Master Lease. All alterations and additions made by Subtenant to the Demised Premises shall remain upon the Demised Premises and be surrendered with the Demised Premises at the expiration of the Term without disturbance, molestation or injury, unless otherwise specified by Sublandlord or Landlord. Should Sublandlord or Landlord elect that any alterations or additions made by Subtenant upon the Demised Premises be removed upon the expiration of the Term, Subtenant agrees that Sublandlord or Landlord shall have the right to cause same to be removed at Subtenant’s sole cost and expense. Subtenant agrees to reimburse Sublandlord or Landlord for the cost of such removal and repairing any damage resulting therefrom.

15. Surrender of Demised Premises: Upon the expiration or other termination of this Sublease, Subtenant covenants to quit and surrender to Sublandlord or Landlord, as the case may be, the Demised Premises, broom clean, in good order and condition, ordinary wear and tear excepted, and at Subtenant’s expense to remove all property of Subtenant and shall fully vacate the Demised Premises on the Expiration Date or sooner termination of this Sublease. Any property not so removed by Subtenant shall be deemed to have been abandoned by Subtenant and may be retained or disposed of at Subtenant’s expense by Sublandlord or Landlord, as either may desire.

16. Hours of Operation: The normal building operating hours shall be 8:00 a.m. to 6:00 p.m. Monday through Friday, and 9:00 a.m. to 1:00 p.m. Saturday, exclusive of all legal holidays recognized by the federal government. After-hours heating and air-conditioning shall be available to Subtenant pursuant to Section 10(b) of the Master Lease.

17. Access: Subtenant shall have access to the Building and the Demised Premises twenty-four (24) hours per day, seven (7) days per week in accordance with Section 17 of the Master Lease.

18. Maintenance and Repair: Subtenant shall, at all times during the Term and at its sole cost and expense, keep and maintain the Demised Premises in good order, condition and repair pursuant to the terms and conditions of Section 11 of the Master Lease. If Subtenant shall fail to perform the required maintenance or fail to make repairs required of it pursuant to this Section 18 within a reasonable period of time following written notice from Sublandlord to do so, then Sublandlord may, at its election and without waiving any other remedy it may otherwise have under this Sublease or at law, perform such maintenance or make such repairs and charge to Subtenant, as Additional Rent, the costs so incurred by Sublandlord for same.

19. Parking: Subtenant shall be entitled to the number of parking spaces as set forth in Section 1 of the Addendum to the Master Lease.

20. Signage: Subtenant shall have the right to install signage, at Sublandlord’s cost, on the Building Directory subject to Landlord’s consent in accordance with Section 13 of the Master Lease and the Addendum to the Master Lease. Notwithstanding the foregoing, Subtenant shall be responsible for all costs associated with any future changes to Subtenant’s name on the Building directory. Subject to Landlord’s consent, Subtenant shall be permitted to display Subtenant’s name on a suite entrance sign, at Sublandlord’s expense, on the corridor wall adjacent to the Demised Premises, as directed and approved by Landlord in Building standard color, size and style of lettering.

21. Indemnification and Warranty: Subtenant shall indemnify, defend and hold Sublandlord, its agents, directors, officers and employees harmless from and against any and all losses, claims, judgments, demands, costs, expenses (including, without limitation, attorneys’ fees), damages or liabilities incurred by Sublandlord arising out of, from or in connection with (i) the use or occupancy of the Premises, or (ii) any breach or default by Subtenant under this Sublease. Sublandlord shall indemnify, defend and hold Subtenant, its agents, directors and employees harmless from and against any and all losses, claims, judgments, demands, costs, expenses (including, without limitation, attorneys’ fees), damages or liabilities incurred by Subtenant arising out of, from or in connection with any breach or default by Sublandlord under this Sublease or any breach or default by Sublandlord under the Master Lease, except to the extent due to any breach of this Sublease by Subtenant.

22. Insurance: Subtenant agrees to carry the insurance coverage described in Section 19(b), 19(c), 19(d) and 19(e) of the Master Lease during the Term. Subtenant shall name Sublandlord and Landlord as additional insureds under the required insurance policies. Prior to its occupancy of the Demised Premises, Subtenant shall deliver certificates of insurance, with wet signature, or endorsement evidencing the above to Sublandlord and Landlord.

23. Default by Subtenant: In the event Subtenant shall be in default of any covenant of, or shall fail to honor any obligation under, this Sublease, Sublandlord, upon giving any required notice and subject to the right, if any, of Subtenant to cure any such default within any applicable cure period, shall have available to it against Subtenant all of the remedies available to Landlord under the Master Lease in the event of a similar default on the part of Sublandlord thereunder or at law.

24. Continuing Obligation of Sublandlord: Sublandlord expressly acknowledges and confirms that this Sublease of the Master Lease and Landlord’s consent thereto, in no way releases it, or in any way mitigates or modifies its obligations under the Master Lease to provide for the timely and proper performance of all terms and conditions of the Master Lease undertaken by the Tenant of the Leased Premises. Sublandlord shall remain fully liable under all terms, covenants, and conditions of the Master Lease to the end of the term of the Master Lease.

25. Attorneys’ Fees: If either party commences an action or proceeding against the other party arising out of or in connection with this Sublease including, but not limited to, the enforcement of any provision of this Sublease or to protect or establish any right or remedy of either Sublandlord or Subtenant hereunder, the prevailing party in such an action or proceeding shall be entitled to recover from the losing party reasonable attorneys’ fees and costs.

26. Termination of Master Lease: In the event the Master Lease is terminated for any reason, then, on the date of such termination, this Sublease shall automatically terminate and be of no further force or effect. If the termination of the Master Lease (and resulting termination of this Sublease) occurs through no fault of Sublandlord, Sublandlord shall have no liability to Subtenant for the resultant termination of this Sublease.

27. Time of the Essence: Time is strictly of the essence with respect to each and every term, condition, obligation and provision of this Sublease.

28. Interpretation of Sublease: Section headings in this Sublease are included solely for ease of reference and shall not affect the construction of this Sublease. This Sublease shall be construed as if it had been prepared jointly by Sublandlord and Subtenant. Each exhibit referred to in this Sublease is an exhibit attached to this Sublease and is incorporated herein by reference. As used in this Sublease, the term “business day” means any day that is not a Saturday, Sunday or day on which banking institutions in the State of Virginia are authorized or obligated by law or executive order to be closed, and the term “day” means a calendar day, whether or not a business day. If any portion of this Sublease shall be declared to be invalid, illegal or unenforceable by any court of competent jurisdiction, such portion shall be deemed severed from this Sublease and the remaining portions shall continue in full force and effect.

29. Entire Agreement; Amendments in Writing: There are no oral agreements between the parties hereto affecting this Sublease and this Sublease supersedes and cancels any and all previous negotiations, arrangements, agreements and understandings, if any, between the parties hereto with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Sublease. This Sublease, and the exhibits and schedules attached hereto, contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises and shall be considered to be the only agreements between the parties hereto and their representatives and agents. None of the terms, covenants, conditions or provisions of this Sublease can be modified, deleted or added to except in writing signed by the parties hereto. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein. There are no other representations or warranties between the parties except as set forth in this Sublease.

30. Conditions Precedent to Effectiveness: This Sublease shall not be effective unless and until the date on which this Sublease is executed by Subtenant and Sublandlord and consented to in writing by the Landlord. In the event Landlord does not execute or deliver a consent to this Sublease within 3 weeks, then either party may terminate this Sublease by delivery of written notice to the other party. Upon any such termination, Sublandlord shall promptly refund to Subtenant, without interest, the Security Deposit and any other sums theretofore paid by Subtenant to Sublandlord (but Sublandlord shall not be obligated to reimburse the out-of-pocket costs incurred by Subtenant in connection with entering into this Sublease), whereupon neither party shall have any further rights against or obligations to the other party.

31. Counterparts: This Sublease may be executed in counterparts each of which shall be deemed an original, but all of which together shall constitute one and the same document.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have duly executed this instrument the day and year first above written.

ATTEST/WITNESS:	SUBLANDLORD:
	SAFLINK CORPORATION,
	a Delaware corporation
	By:		(SEAL)
	Title:
	Date:
ATTEST/WITNESS:	SUBTENANT:
	ABRAXAS CORPORATION,
	a Virginia corporation
	By:		(SEAL)
	Title:
	Date:
ATTEST/WITNESS:	CONSENTED TO AND APPROVED BY:
	LANDLORD:
	a limited partnership
	By:	Guardian Realty Management, Inc.
	as Agent for the Landlord
	By:		(SEAL)
		Anthony G. LaBarbera, President
	Date:

EX-10.18

Exhibit 10.18

SOFTWARE RIGHTS

AGREEMENT

This SOFTWARE RIGHTS AGREEMENT (this “Agreement”) is entered into as of February 27, 2007 (the “Effective Date”), by and between Saflink Corporation, a Delaware corporation (“Saflink”), with its principal place of business at 12413 Willows Road NE, Suite 300, Kirkland, WA 98034-8766, and IdentiPHI, LLC, a Delaware limited liability company with its principal place of business at 13809 Research Blvd, Suite 275, Austin, TX 78750 (“IdentiPHI”).

The parties hereby agree as follows:

1. Definitions.

“Affiliates” means, with respect to any entity, any other entity directly or indirectly controlling or controlled by, or under common control with, such entity. For the purposes of this definition, an entity shall control another entity if the first entity: (i) owns, beneficially or of record, more than fifty percent (50%) of the voting securities of the other entity; or (ii) has the ability to elect a majority of the directors of the other entity.

“Ancillary Items” shall mean those items related to the Works and being sold hereunder as listed in Exhibit A to this Agreement.

“Excluded Works” means (a) those software programs developed by Saflink as of the Effective Date that do not contain any part of the Works, and (b) MiValet, except as to that portion thereof also contained in the Works as of the Effective Date, with the understanding that IdentiPHI shall non-exclusively license same back to Saflink as set forth hereinafter.

“Intellectual Property Rights” shall mean patent, copyright, trademark, trade name, service mark, service name, trade secret, or other proprietary right arising or enforceable under any law, rule regulation of the United States or any other state, country or jurisdiction.

“Rights in the Works” means all Intellectual Property Rights incorporated in or utilized by the Works, excluding the Saflink Patents.

“Saflink Patents” means the patents and pending patent applications owned by Saflink as of the Effective Date, and any subsequent continuing applications thereof including divisions, extensions, reissues and reexamined patents based on the foregoing, whether domestic of foreign.

“The ‘806 Patents” means United States Patent No. 6,618,806 of the Saflink Patents, and any continuing applications thereof including divisions, extensions, reissues and reexamined patents based on such patent, and any corresponding foreign patents and patent applications.

“Works” means those software programs described on Exhibit A to this Agreement.

2. Rights Conveyed.

(a) Assignment of Works. Saflink hereby irrevocably assigns, conveys and transfers to IdentiPHI, all right, title and interest in and to the Works, including all Rights in the Works, the foregoing exclusive of the Excluded Works. This includes the right for IdentiPHI to develop derivative works of the Works with no reservation for, or grant back, to Saflink as regards such derivative works. The foregoing

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notwithstanding, IdentiPHI grants back to Saflink a fully paid up, perpetual, irrevocable, worldwide nonexclusive license in and to that portion of MiValet also contained in the Works as of the Effective Date, including the right for Saflink to develop derivative works thereof with no reservation for, or grant back, to IdentiPHI as regards such derivative works. No right or license is being granted to IdentiPHI by Saflink in the Excluded Works.

(b) Saflink hereby irrevocably assigns, conveys and transfers to IdentiPHI, all right, title and interest in and to the SAFsolution and SAFmodule marks and any registration(s) thereof owned by Saflink as of the Effective Date. Nothing herein shall be deemed to convey any right or interest in any other mark of Saflink, nor create in IdentiPHI any right to challenge any rights or use by Saflink or its successor(s) with respect to any mark containing the term “SAF” or confusingly similar variants thereof.

(c) Saflink hereby grants to IdentiPHI a perpetual, fully paid-up, royalty-free, non-exclusive worldwide license under the Saflink Patents with respect to use by or through IdentiPHI of the Works with respect to their functionality substantially in the form as of the Effective Date. Subject to section 10 of this Agreement, Saflink hereby further grants to IdentiPHI a perpetual, fully-paid up, royalty-free, non-exclusive worldwide license under the ‘806 Patents to produce, distribute, sell, license, modify, improve, and use the Works, both in their current form and as IdentiPHI may modify, improve or make derivative works of same. No right or license is being granted to IdentiPHI under the Saflink Patents except as expressly set forth in this part (c) of this Section 2. Subject to part (a) of this Section 2 related to MiValet, Saflink retains no right to produce, use, license, or sell the Works, except that Saflink may retain an archival copy thereof.

(d) No rights in any Intellectual Property Rights of Saflink are being conveyed to IdentiPHI except and only as expressly recited in other parts of this Section 2.

(e) In consideration of the conveyances under this Section 2, IdentiPHI shall pay to Saflink the payments and deferred purchase payments set forth in Sections 4 and 5 hereof.

(f) Saflink and IdentiPHI agree to execute whatever additional instruments either party may reasonably request to effectuate or evidence the conveyances intended under this Section 2 and Section 3 of this Agreement. The parties agree to perform all acts deemed necessary to permit and assist IdentiPHI, at IdentiPHI’s expense, in perfecting and enforcing its rights in the Works. IdentiPHI acknowledges and agrees that the Works are subject to the Assumed Licenses.

3. Assignment and Assumption of License Agreements.

Saflink hereby sells, conveys, transfers and assigns to IdentiPHI all of Saflink’s rights and obligations under each End User License Agreement with respect to the Works in force as of the Effective Date (the “Assumed Licenses”). IdentiPHI hereby accepts the foregoing assignment, and hereby assumes and agrees to perform the obligations of Saflink to be performed under, and shall hold Saflink harmless against, the Assumed Licenses. Saflink shall be entitled to retain, and shall not be obligated to compensate IdentiPHI in any way, for license and/or maintenance fees collected under the Assumed Licenses through the Effective Date; thereafter, all future license and/or maintenance fees under the Assumed Licenses will accrue to the benefit of IdentiPHI. Saflink will promptly remit to IdentiPHI any license and/or maintenance fees paid to Saflink in respect of the Assumed Licenses after the Effective Date.

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4. Payments.

In addition to deferred purchase payments as set out in Section 5 hereof, upon execution of this Agreement, IdentiPHI shall pay to Saflink the sum of Seven Hundred Seventy Eight Thousand Dollars ($778,000), which shall, upon execution of this Agreement, be delivered by wire transfer to a bank account designated by Saflink failing which this Agreement shall terminate and all rights and conveyances shall immediately revert to Saflink.

5. Deferred Purchase Payments.

(a) For products other than SAFmodule, in addition to the payments as set out in Section 4 hereof, for a period of three (3) years from the Effective Date, IdentiPHI agrees to pay to Saflink a deferred purchase payment on each copy of object or source code based on or including the Works or any portion thereof, including any enhancements thereof, distributed to third parties (including, without limitation, distribution via sale, license or demonstration or evaluation, where there are more than a reasonable number of demonstration and evaluation copies distributed), as follows:

OEM Sales	Non-OEM Sales
20% of gross margin (i.e., gross revenue less amounts paid in respect thereof to partners and resellers)	15% of gross margin (i.e., gross revenue less amounts paid in respect thereof to partners and resellers)

(b) For the SAFmodule product(s), in addition to the payments as set out in Section 4 hereof, for a period of three (3) years from the Effective Date, IdentiPHI agrees to pay to Saflink a deferred purchase payment on each copy of object or source code based on or including the SAFmodule code or any portion thereof, including any enhancements thereof, distributed to third parties (including, without limitation, distribution via sale, license or demonstration or evaluation, where there are more than a reasonable number of demonstration and evaluation copies distributed), 30% of gross margin (i.e., gross revenues less amounts paid in respect thereof to partners and resellers).

(c) For purposes hereof, gross revenue shall include all revenue received by or on behalf of IdentiPHI with respect to any products, or product bundles, which include or are based upon, in whole or in part, the Works.

(d) For demonstration and evaluation copies distributed in excess of a reasonable number, it shall be assumed that IdentiPHI received gross revenue therefor in an amount equal to the amount IdentiPHI would have received in an arms lengths transaction to sell or license same in accordance with IdentiPHI’s then-applicable pricing.

(e) Deferred purchase payments shall be due and payable each calendar quarter, in arrears, within fifteen (15) calendar days of the end of each such calendar quarter. Each such deferred purchase payment shall be accompanied by a report summarizing the number of seat licenses distributed (with associated revenue), cost of sales and resulting gross margin.

6. [Reserved]

7. Confidential Information.

“Confidential Information” of a party shall mean (i) any financial terms and conditions of this Agreement; and (ii) any information that may be made known to the receiving party and which the disclosing party has received from others that the disclosing party is obligated to treat as confidential or

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proprietary, in each case, which information shall be marked as confidential. Neither party will use, disseminate or in any way disclose any Confidential Information of the other party to any person, firm or business. Each party shall treat all Confidential Information with the same degree of care as such party accords to its own confidential information but not less than reasonable care. Except as (i) authorized or required by any applicable law, order, rule or regulation of any court, agency or governmental authority, (ii) necessary to enforce or perform under this Agreement, or (iii) necessary to disclose to a prospective acquirer of any rights in the Works or all or substantially all of the business or assets of that party and then only pursuant to an express, written non-disclosure agreement between the party and that potential acquirer, each party shall disclose Confidential Information only to its employees or representatives who have a need to know such information. Each party certifies that each such employee or representative will have agreed, either as a condition of employment or in order to obtain the Confidential Information, to be bound by terms and conditions substantially similar to those terms and conditions applicable to such party under this Agreement. Each party shall immediately give notice to the other party of any unauthorized use or disclosure of the other party’s Confidential Information. Each party shall assist the other party in remedying any such unauthorized use or disclosure of the other party’s Confidential Information. Confidential Information shall not include any information that (i) was in the public domain at or subsequent to the time such information was communicated to the receiving party by the disclosing party through no fault of the receiving party; (ii) was rightfully in the receiving party’s possession free of any obligation of confidence at or subsequent to the time such information was communicated to the receiving party by the disclosing party; or (iii) is or was developed by the receiving party’s employees, contractors or agents independently of and without reference to any Confidential Information of the disclosing party. Notwithstanding the foregoing, a disclosure of any Confidential Information by the receiving party (a) in response to a valid order by a court or other governmental body or (b) as otherwise required by law shall not be considered to be a breach of this Agreement or a waiver of confidentiality for other purposes; provided, however, that the receiving party shall provide prompt prior written notice thereof to the disclosing party to enable the disclosing party to seek a protective order or otherwise prevent such disclosure. All Confidential Information shall be the property of the disclosing party and no license or other rights to Confidential Information is granted or implied hereby. Within five (5) days after any request by the disclosing party, the receiving party shall destroy or deliver to the disclosing party, at the disclosing party’s option, all Confidential Information of the disclosing party in the possession of the receiving party. The receiving party will provide the disclosing party, upon request, a written certification of such party’s compliance with the obligations under this Section. The code of the Works and proprietary information exclusively related thereto (expressly excluding the Saflink Patents and any information in the public domain as of the Effective Date or subsequently publicly disclosed by IdentiPHI) shall be deemed to be Confidential Information owned by IdentiPHI and shall be protected by Saflink as provide by this Section 7.

8. Audit Rights.

IdentiPHI shall keep and maintain, for a period of the longer of four (4) years from the Effective Date or two (2) years after reporting thereon to Saflink pursuant to Section 5.e, accurate books of account and records covering all transactions relating to this Agreement. Upon notice from Saflink, IdentiPHI shall provide Saflink, its auditors (including internal audit staff and external auditors), inspectors, regulators and other reasonably designated representatives as Saflink may from time to time designate in writing (collectively, the “Saflink Auditors”) with access to, at reasonable times, to data and records relating to the royalty payments described in Section 4 hereof for purposes of verifying compliance with this Agreement. IdentiPHI will provide any assistance that the Saflink Auditors may reasonably require with respect to such audits. Saflink and IdentiPHI shall meet to review each audit report promptly and to agree upon an appropriate and effective manner in which to respond to the deficiencies identified and changes recommended by such audit report.

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9. Warranties.

(a) Authority. Each party hereto represents and warrants that it has full power and authority to make and enter into this Agreement.

(b) Non-Infringement. Saflink represents and warrants that as of the Effective Date, to its knowledge (a) none of the Works infringes, or is currently asserted to infringe, the Intellectual Property Rights of any third party, and (b) there are no claims, pending or threatened, against Saflink with respect to Saflink’s ownership and ability to transfer Rights in the Works. For purposes of this Section 9.b, knowledge of Saflink shall mean, and be limited to, the personal knowledge of Jeffrey Dick, Steven Rishel, or Steven Oyer as of the Effective Date. Except and only as expressly stated above, Saflink makes no representation or warranty that use or distribution of the Works does not infringe the patent rights of any third party, nor that the SAFsolution or SAFmodule marks do not infringe the trademark or similar rights of any third party.

10. Patent Protection Rights.

(a) Enforcement of the ‘806 Patents.

1. Definitions:

a. “Focus Entity” shall mean any entity identified in Exhibit B to this Agreement.

b. “Enforcement Package” shall mean a written agreement between Saflink and IdentiPHI which sets out the terms and conditions under which Saflink may (a) seek to license a Focus Entity under any of the ‘806 Patents, and/or (b) proceed against a Focus Entity for alleged infringement of any of the ‘806 Patents. Such written agreement shall set forth, in addition to any other terms upon which Saflink and IdentiPHI might mutually agree, the following:

i. a Division of expenses, including but not limited to costs and attorneys fees, as between Saflink and IdentiPHI, provided that (a) if the Enforcement Package is to proceed against a Focus Entity at the request of IdentiPHI, and Saflink does not agree to pay any of the expenses, IdentiPHI shall pay all expenses and, (b) if the Enforcement Package is to proceed against a Focus Entity at the request of Saflink, and IdentiPHI does not agree to pay any of the expenses, Saflink shall pay all expenses;

ii. a Division of monetary recoveries, whether by license fees, royalties, damages, or otherwise, as between Saflink and IdentiPHI, provided however that any recovery shall first be applied as against the expenses in respective proportions to the division thereof, and further provided that (a) if the Enforcement Package is to proceed against a Focus Entity at the request of IdentiPHI, and Saflink does not agree to pay any of the expenses, Saflink shall be entitled to 25% of the monetary recoveries after recovery of expenses, and (b) if the Enforcement Package is to proceed against a Focus Entity at the request of Saflink, and

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IdentiPHI does not agree to pay any of the expenses, IdentiPHI shall be entitled to 25% of the monetary recoveries after recovery of expenses;

iii. and in the event the written agreement includes proceeding against a Focus Entity for alleged infringement of any of the ‘806 Patent Rights, the authority of Saflink to grant a license thereunder as part of settlement.

c. “Division” may, except as otherwise provided herein, be in any ratio to which the parties agree from 0/100 to 100/0 or anywhere in between.

d. “Control Period” shall mean the three year period extending between the Effective Date of this Agreement and the third anniversary thereof.

e. “Negotiation Period “ shall mean a period of thirty (30) days after Notice of Intent is received, or such longer period as the parties may mutually agree at the time.

f. “Notice of Intent” shall mean a written notice given by one party to the other of the desire to enter into an Enforcement Agreement as to a Focus Entity.

g. “Proceed against” may include but shall not be limited to litigation.

h. “Opinion of counsel” shall mean a written opinion of a registered patent attorney who has at least fifteen years experience in the practice of patent law and is a partner at a law firm including at least 15 registered patent attorneys regularly engaged in the practice of patent law.

2. During the Control Period, Saflink shall not grant a license to or proceed against a Focus Entity in respect of any of the ‘806 patents without first entering into an Enforcement Package with IdentiPHI. If Saflink desires to license and/or proceed against a Focus Entity under any of the ‘806 Patents during the Control Period, Saflink shall give a Notice of Intent to IdentiPHI setting forth the Focus Entity and the ‘806 Patents to be involved.

3. During the Control Period, IdentiPHI shall have the right to seek an Enforcement Package by which Saflink seeks to license and/or proceeds against a Focus Entity for alleged infringement of any of the ‘806 Patents by giving a Notice of Intent to Saflink setting forth the Focus Entity, the ‘806 Patents to be involved, and information which establishes a reasonable likelihood that the Focus Entity should take a license and/or is infringing (such information to include, by way of example and not limitation, an identification of any product which allegedly infringes, advertising literature therefor, documentation establishing how the product functions or is to be used, and, an opinion of counsel upon which Saflink may rely setting forth a reasoned analysis of the involved patent(s) and product(s) to support the conclusion that the Focus Entity is infringing and a conclusion that a Complaint may be signed and filed in the United States Federal District Courts in conformity with Rule 11 of the Federal Rules of Civil Procedure alleging the infringement noted). IdentiPHI shall not

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have the right to grant licenses under the ‘806 Patent (except and only as expressly permitted by part (c) of Section 2 of this Agreement) nor to proceed against any entity under any of the ‘806 Patents. Nor shall Saflink be required to proceed against any entity under any of the ‘806 Patents, except pursuant to an Enforcement Package. Nothing in this Agreement shall obligate Saflink to enter into an Enforcement Package to proceed against a Focus Entity under any of the ‘806 Patents at the instance of IdentiPHI unless (i) the aforesaid opinion of counsel is provided by IdentiPHI with the Notice of Intent and (ii) either Saflink agrees to proceed or if it does not, Saflink shall obtain an opinion of counsel as to whether Saflink may rely thereon and (a) if the opinion is affirmative, Saflink shall proceed and (b) if the opinion is not affirmative, Saflink shall advise IdentiPHI of the deficiencies and give IdentiPHI an opportunity to obtain an updated opinion to remedy same and Saflink shall either agree to proceed based thereon or obtain thereon a further opinion of counsel as to whether the updated opinion may be relied upon and shall proceed if that opinion is affirmative.

4. Upon receipt of the Notice of Intent, the parties shall negotiate, for a period not longer than the Negotiation Period, in a good faith attempt to come to mutual agreement on the terms of an Enforcement Package. Subject to Section 3, if the parties cannot mutually agree on the terms of an Enforcement Package within the Negotiation Period, either party has the right to submit the matter to arbitration in accordance with the following:

a. The party wishing to establish an Enforcement Package (“the Requesting Party”) shall, not more than fifteen (15) days after the Negotiation Period, give notice to the other party (“the Non-Requesting Party”) in writing of the intent to arbitrate (“Arbitration Notice”) and shall include in such Arbitration Notice:

i. an identification of each term or condition of a potential Enforcement Package which, in the requesting Party’s view, is in dispute or any other matter which in the Requesting Party’s view is an obstacle to the parties entering into an Enforcement Agreement (“Requesting Party Disputed Items”);

ii. for each Requesting Party Disputed Item, a final proposed term or condition or position, and a brief explanation in support thereof; and

iii. the identity of an arbitrator.

b. The Non-Requesting Party shall provide a written response (“Arbitration Response”) to the Requesting Party within fifteen (15) days after receipt of the Arbitration Notice and shall include in such Arbitration Response:

i. as to each Requesting Party Disputed Item, a final proposed term or condition or position and brief explanation in support thereof and a brief counter to the brief explanation provided by the Requesting Party;

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ii. an identification of any other term or condition of a potential Enforcement Package which, in the Non-Requesting Party’s view, is in dispute or any other matter which in the Non-Requesting Party’s views is an obstacle to the parties entering into an Enforcement Agreement (“Non-Requesting Party Disputed Items”);

iii. for each Non-Requesting Party Disputed Item, a final proposed term or condition or position, and a brief explanation in support thereof; and

iv. the identity of an arbitrator.

c. The Requesting Party shall provide a written reply (“Arbitration Reply”) to the Non-Requesting Party within ten (10) days after receipt of the Arbitration Response and shall include in such Arbitration Reply only:

i. as to each Non-Requesting Party Disputed Item, a final proposed term or condition or position and brief explanation in support thereof and a brief counter to the brief explanation provided by the Requesting Party.

d. Each party shall contact their identified arbitrator and engage same to work with the other to select a third arbitrator who shall decide the arbitration, by selecting from the competing Disputed Items of the parties based solely on the Arbitration Notice, Arbitration Response, and Arbitration Reply, provided however, that the third arbitrator shall have no authority to determine whether a Focus Entity is or might likely be infringing, which determination is reserved to the procedure set out in Section 10.a.3 above. The third arbitrator is to be selected within ten (10) days after the deadline for providing the Arbitration Reply, and the third arbitrator shall promptly be provided by the Requesting Party copies of the Arbitration Notice and Arbitration Reply (if any) and by the Non-Requesting Party a copy of the Arbitration Response. The decision of the Arbitrator shall be made within fifteen (15) days of receipt of the foregoing, and shall finally resolve all Disputed Items so that the parties may conclude an Enforcement Package.

e. Each party shall pay the costs and fees, if any, of its arbitrator, and the parties shall split the costs and fees of the third arbitrator, unless the third arbitrator rules otherwise in the decision as in the third arbitrator’s discretion equity so requires.

(b) Third Party Infringements. After the Control Period, if IdentiPHI wishes to have Saflink assert any of the ‘806 patents against a third party, IdentiPHI may approach Saflink to discuss same and a possible Enforcement Package related thereto, but Saflink shall not be obligated to enter into any such Enforcement Package.

(c) Third Party Rights. In the event that either party becomes aware of any claim that the practice of a Saflink Patent by or through IdentiPHI infringes upon the Intellectual Property Rights of any

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third party, it shall notify the other party in writing of such claim, giving such facts as are known. Nothing in this part (c) of this Section 10 shall be deemed to make either party a warrantor, or create any other obligation, to the other in respect of the Patent Rights.

11. Non-Assertion.

IdentiPHI hereby irrevocably covenants and agrees on behalf of itself and its successors and assigns not to Assert against Saflink any claim that (a) any use of any mark or term containing or limited to SAF, or any confusingly similar variant thereof, other than SAFsolution or SAFmodule (or stylized variations thereof), infringes or otherwise violates any rights of IdentiPHI or any of its Affiliates, including as conveyed by this Agreement, or (b) any products or services developed or distributed by Saflink prior to the Effective Date including or based on the Works and any products or services developed or distributed by Saflink including or based on the Excluded Works, infringes or misappropriates any Intellectual Property Rights of IdentiPHI, any of its Affiliates or any third party. “Assert” means to (i) threaten, file, initiate, maintain or pursue an action, claim, lawsuit, arbitration, inquiry or investigation (an “Action”) before any legal, judicial, arbitration, administrative, executive or other type of body or tribunal that has or claims to have authority to adjudicate such action in whole or part, (ii) maintain a financial interest in any Action; or (iii) prompt, cooperate with or impose an obligation on a third party to threaten, file, initiate, maintain or prosecute an Action.

12. Disclaimer of Warranties and Limitation of Liability.

(a) Disclaimer of Warranties. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 9, SAFLINK MAKES NO, AND HEREBY DISCLAIMS, ALL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE WORKS, RIGHTS IN THE WORKS, AND THE SAFLINK PATENTS, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT OF THE RIGHTS OF THIRD PARTIES.

(b) Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTIES IN ANY EVENT, FOR ANY CONSEQUENTIAL, SPECIAL, EXEMPLARY, INCIDENTAL OR PUNITIVE DAMAGES, WHETHER DIRECTLY OR INDIRECTLY INCURRED, OR FOR ANY OTHER LOSSES INCURRED OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION LOSS OF PROFITS, LOSS OF REVENUES, BUSINESS INTERRUPTION OR OTHER PECUNIARY LOSS, EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSS. IN ANY EVENT, SAFLINK’S MAXIMUM LIABILITY UNDER THIS AGREEMENT, SHALL BE LIMITED TO THE AMOUNT PAID BY IDENTIPHI UNDER THIS AGREEMENT.

13. Bankruptcy.

This Agreement is intended to constitute a present and executed sale of the Works and a fully-paid non-exclusive license(s) under the Saflink Patents. However, to the extent that all or any part of this Agreement may be found to be executory within the meaning of the United States Bankruptcy Code (“the Bankruptcy Code”), then, to that extent, this Agreement is intended to be a license of “intellectual property” within the meaning of the Bankruptcy Code, including but not limited to Section 365(n) of the Bankruptcy Code. To the extent that IdentiPHI is found to be a licensee of such rights under this Agreement, IdentiPHI shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. Upon the event of the commencement of bankruptcy proceedings by or against Saflink under the Bankruptcy Code, IdentiPHI shall be entitled to retain all of its rights under this Agreement.

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14. General.

(a) Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes all prior or simultaneous representations, negotiations, and agreements, whether written or oral, and all industry customs or trade practices. Neither party has executed this Agreement by reason of or in reliance on any representations which are not fully stated in this Agreement.

(b) Amendments. This Agreement shall not be amended or otherwise modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of Saflink and IdentiPHI by their respective duly authorized representatives.

(c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. The parties consent to the exclusive jurisdiction and venue in the federal courts sitting in King County, Washington unless no federal subject matter jurisdiction exists, in which case each party consents to the exclusive jurisdiction and venue in the Superior Court of King County, Washington. In any action to enforce any right or remedy under this Agreement, or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys’ fees, costs and other expenses.

(d) Assignment. Either party may assign its rights and obligations, in whole or in part and in any manner, under this Agreement in its discretion. This Agreement shall inure to the benefit of and be binding upon each party and its successors and assigns.

(e) Notices. All notices in connection with this Agreement shall be deemed given as of the day they are sent by electronic transmission, sent by facsimile or deposited with a commercial courier for delivery to other party at the following addresses:

Saflink:	Saflink Corporation 12413 Willows Road NE, Suite 300 Kirkland, WA 98034-8766 Attention: Jeff Dick, CFO
	With a copy to:
	Kurt L. Grossman, Esq. Wood, Herron & Evans, L.L.P. 2700 Carew Tower Cincinnati, OH 45202-2917
IdentiPHI:	IdentiPHI LLC 13809 Research Blvd., Suite 275 Austin, TX 78750 Attention: Peter Gilbert, CEO

or to such other address and/or telex and facsimile number as the party to receive the notice or request so designates by written notice to the other.

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(f) No Waiver. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. No failure by either party to exercise a right under this Agreement or under law shall operate as a waiver thereof. No waiver of any breach of this Agreement shall constitute a waiver of any other breach.

(g) Savings Clause. If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

SAFLINK CORPORATION	IDENTIPHI, LLC
By	By
Name (Print)	Name (Print)
Title	Title
Date	Date

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EX-21

Exhibit 21

SAFLINK CORPORATION

Subsidiary	State of Incorporation
Litronic, Inc.	Delaware
SAFLINK International, Inc.	Delaware
FLO Corporation	Delaware

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Saflink Corporation:

We consent to the incorporation by reference in the registration statements (Nos. 333-92072, 333-74253, 033-668832, 333-118249 and 333-133016) on Form S-8, registration statements (Nos. 033-62430, 333-75789, 333-23467, 333-01510, 333-58575, 333-54084, 333-112287, 333-119778, 333-114594, 333-126185, 333-135626 and 333-140723) on Form S-3, registration statement (No. 333-97221) on Form S-2 and registration statement (No. 333-68642) on Form S-1 of Saflink Corporation, of our report dated March 30, 2007, with respect to the consolidated balance sheets of Saflink Corporation and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2006, which report appears in the December 31, 2006 annual report on Form 10-K of Saflink Corporation.

Our report dated March 30, 2007 contains an explanatory paragraph that states Saflink Corporation has suffered recurring losses from operations and has a net capital deficiency, which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

Our report refers to Saflink Corporation’s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, effective January 1, 2006.

/s/ KPMG LLP

Seattle, Washington

March 30, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Steven M. Oyer, certify that:

1. I have reviewed this annual report on Form 10-K of Saflink Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2007

By:	/s/ STEVEN M. OYER
	Steven M. Oyer Interim Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey T. Dick, certify that:

1. I have reviewed this Annual Report on Form 10-K of Saflink Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2007

By:	/s/ JEFFREY T. DICK
	Jeffrey T. Dick Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Saflink Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn L. Argenbright, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 30, 2007

/s/ STEVEN M. OYER

Steven M. Oyer

Interim Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Saflink Corporation (the “Company”) on Form 10-K for the period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jon C. Engman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 30, 2007

/s/ JEFFREY T. DICK

Jeffrey T. Dick

Chief Financial Officer