UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007

OR

¨ 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 and zip code)

(425) 278-1100

(Registrant’s telephone number, including area code)

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 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 Securities Exchange Act of 1934).    Yes  ¨    No  x

There were 137,127,822 shares of Saflink Corporation’s common stock outstanding as of May 7, 2007.

Saflink Corporation

FORM 10-Q

For the Quarter Ended March 31, 2007

INDEX

Part I. Financial Information			3
	Item 1.	Financial Statements (Unaudited)	3
	a.	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	3
	b.	Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006	4
	c.	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006	5
	d.	Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
	Item 4.	Controls and Procedures	18
Part II. Other Information			19
	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 5.	Other Information	27
	Item 6.	Exhibits	28
Signatures			29

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SAFLINK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

	March 31, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	820		$	1,407
Accounts receivable, net		157			390
Inventory		121			86
Prepaid expenses and other current assets		637			601
Total current assets		1,735			2,484
Furniture and equipment, net of accumulated depreciation of $1,395 and $1,640 as of March 31, 2007, and December 31, 2006, respectively		357			420
Debt issuance costs		327			550
Total assets	$	2,419		$	3,454
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	985		$	1,186
Accrued expenses		1,310			1,308
Current portion of convertible debt, net of discount		3,630			4,619
Current portion of notes payable to related party		1,350			1,250
Other current obligation		—			213
Deferred revenue		845			229
Total current liabilities		8,120			8,805
Long-term note payable to related party		300			—
Total liabilities		8,420			8,805
Stockholders’ deficit:
Common stock		1,230			975
Common stock subscribed		—			163
Additional paid-in capital		278,222			275,421
Accumulated deficit		(285,453	)		(281,910	)
Total stockholders’ deficit		(6,001	)		(5,351	)
Total liabilities and stockholders’ deficit	$	2,419		$	3,454

See accompanying notes to unaudited condensed consolidated financial statements.

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SAFLINK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three months ended March 31,
	2007			2006
Revenue:
Product	$	375		$	756
Service		129			101
Total revenue		504			857
Cost of revenue:
Product		127			327
Service		53			126
Amortization of intangible assets		—			671
Total cost of revenue		180			1,124
Gross profit (loss)		324			(267	)
Operating expenses:
Product development		186			2,419
Sales and marketing		418			1,878
General and administrative		1,242			2,057
Impairment loss on goodwill		—			29,700
Total operating expenses		1,846			36,054
Operating loss		(1,522	)		(36,321	)
Interest expense		(2,026	)		(39	)
Other income, net		5			112
Loss before income taxes		(3,543	)		(36,248	)
Income tax provision		—			13
Net loss		(3,543	)		(36,261	)
Modification of warrants		—			(509	)
Net loss attributable to common stockholders	$	(3,543	)	$	(36,770	)
Basic and diluted net loss per common share attributable to common stockholders	$	(0.03	)	$	(0.42	)
Weighted average number of common shares outstanding		112,253			88,095

See accompanying notes to unaudited condensed consolidated financial statements.

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SAFLINK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Three months ended March 31,
	2007			2006
Cash flows from operating activities:
Net loss	$	(3,543	)	$	(36,261	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense		1,987			—
Stock-based compensation		126			302
Depreciation and amortization		49			847
Impairment loss on goodwill		—			29,700
Loss on disposal of fixed assets		14			—
Deferred taxes		—			13
Changes in operating assets and liabilities:
Accounts receivable, net		233			254
Inventory		(35	)		(154	)
Prepaid expenses and other current assets		(35	)		(219	)
Accounts payable		(201	)		61
Accrued expenses		—			300
Deferred revenue		616			(65	)
Net cash used in operating activities		(789	)		(5,222	)
Cash flows from investing activities:
Purchases of property and equipment		—			(255	)
Net cash used in investing activities		—			(255	)
Cash flows from financing activities:
Proceeds from exercises of stock options		—			17
Proceeds from related party bridge loan		400			—
Warrant redemptions		(198	)		—
Net cash provided by financing activities		202			17
Net decrease in cash and cash equivalents		(587	)		(5,460	)
Cash and cash equivalents at beginning of period		1,407			15,217
Cash and cash equivalents at end of period	$	820		$	9,757
Supplemental disclosure of cash flow information:
Issuance of common stock in lieu of cash for convertible debenture redemption payments	$	2,037		$	—
Reclass of common stock subscribed to common stock issued and additional paid-in capital		163			—
Modification of warrants		—			509

See accompanying notes to unaudited condensed consolidated financial statements.

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SAFLINK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

Condensed Consolidated Financial Statements

The accompanying condensed consolidated financial statements present unaudited interim financial information and therefore do not contain certain information included in the annual consolidated financial statements of Saflink Corporation and its wholly-owned subsidiaries, Saflink International, Inc., Litronic, Inc. and FLO Corporation (together, the “Company” or “Saflink”). The balance sheet at December 31, 2006, has been derived from the Saflink audited financial statements as of that date. In the opinion of management, all adjustments (consisting only of normally recurring items) it considers necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Saflink Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2007.

2. Liquidity and Capital Resources

These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As further discussed below, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. These condensed 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 $285.5 million from its inception through March 31, 2007, and has continued to accumulate net losses since March 31, 2007. The Company has historically been financed through issuances of common and preferred stock and convertible debt. The Company financed operations during the first quarter of 2007 primarily from existing working capital at December 31, 2006, from proceeds from the issuance of a $400,000 promissory note to a related party, and $778,000 in proceeds from the sale of its SAFsolution and SAFmodule source code. As of March 31, 2007, the Company’s principal source of liquidity consisted of $820,000 of cash and cash equivalents, while it had a working capital deficit of $6.4 million.

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 based on a percentage of IdentiPHI’s gross margin over the next three years. The $778,000 in proceeds is being deferred and recognized as revenue on a pro rata basis over the three year period where the Company gave the buyer certain patent protection rights under its patent portfolio. As of March 31, 2007, the Company had deferred revenue of $756,000 related to this sale and recognized $22,000 as revenue during the first quarter of 2007. The deferred payments are due quarterly over a period of three years and the amount of the deferred payments will be equal to a percentage of the IdentiPHI’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.

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On March 9, 2007, the Company created FLO Corporation, a wholly-owned subsidiary, to focus on the Company’s Registered Traveler (RT) business. On April 16, 2007, FLO Corporation issued approximately $3.5 million of convertible promissory notes (the “Notes”) in a private placement. The Notes bear interest at 8% per year and are due April 1, 2008. The aggregate consideration for the Notes consisted of approximately $1.8 million in cash, the assignment to FLO of approximately $1.6 million of outstanding 8% convertible debentures issued by the Company, and a $140,000 promissory note.

As a result of the capital raised from the promissory note issued in January 2007, the proceeds from the sale of SAFsolution and SAFmodule, the proceeds from the convertible promissory notes issued by FLO, and the Company’s on-going efforts to reduce its operating expenses, the Company believes it has sufficient funds to continue operations at current levels through September 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 September 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

• a downturn in 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

Basis of Financial Statement Presentation and Principles of Consolidation

The capital structure presented in these condensed consolidated financial statements is that of Saflink. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods. Actual results could differ from those estimates.

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 Practice Aids, which provides specific guidance and stipulates that revenue recognized from software arrangements is to be allocated to each element of the

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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 the undelivered 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 reflect its 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 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.

Stock-Based Compensation

The Company uses the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, “Share Based Payment” (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

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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.

Recently Issued Accounting Standards

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109” (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no liability for unrecognized income tax benefits at March 31, 2007.

As a result of the net operating loss carryforwards, substantially all tax years are open for federal and state income tax matters. Foreign tax filings are open for years 2001 forward.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. At March 31, 2007, the Company had no accrued interest related to uncertain tax positions and no accrued penalties.

4. Stock-Based Compensation

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 March 31, 2007, there were 3,263,669 shares available for issuance under the 2000 Plan.

Determining Fair Value

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.

The Company did not grant any stock options during the three months ended March 31, 2007.

The following table summarizes stock-based compensation expense for the three months ended March 31, 2007 and 2006, which was incurred as follows (in thousands):

	Three months ended March 31,
	2007		2006
Product development	$	2	$	28
Sales and marketing		9		19
General and administrative		115		255
Total stock-based compensation:	$	126	$	302

No compensation cost was capitalized as part of an asset during the three months ended March 31, 2007 and 2006.

At March 31, 2007, the Company had 948,453 non-vested stock options that had a weighted average grant date fair value of $0.32 which excludes a performance option grant to the Company’s interim chief executive officer to purchase 700,000 shares of the Company’s common stock. These shares are excluded because none of the performance criteria was probable of being met as of March 31, 2007. In addition, as of March 31, 2007, the Company had $351,000 of total unrecognized compensation cost related to non-vested stock-based awards granted under the 2000 Plan. The Company expects to recognize this cost over a weighted average period of 10 months.

Non-vested Restricted Stock Awards

The Company has one outstanding non-vested, restricted grant as of March 31, 2007. Glenn Argenbright, FLO Corporation’s President, holds 301,928 non-vested, restricted shares of the Company’s common stock. Mr. Argenbright’s shares are scheduled to vest in total on June 23, 2007. The remaining compensation expense of $58,000 at March 31, 2007, is being recorded equally over the remaining vesting period.

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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 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 non-vested, restricted stock awards was $63,000 and $132,000 for the three months ended March 31, 2007 and 2006, respectively.

5. Goodwill

As of March 31, 2006, the Company concluded that certain factors, such as the lack of significant revenue and the continued decline of the price of its common stock as reported on the Nasdaq Capital Market, constituted a triggering event under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). Accordingly, the Company performed impairment testing of its goodwill as of March 31, 2006, and as a result of that testing recorded a goodwill impairment charge of $29.7 million during the first quarter of 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, for the goodwill impairment test was the Company’s market capitalization. The Company has no goodwill balances as of March 31, 2007, and December 31, 2006.

6. Inventory

The following is a summary of inventory as of March 31, 2007, and December 31, 2006 (in thousands):

	March 31, 2007		December 31, 2006
Raw materials	$	86	$	47
Work-in-process		—		1
Finished goods		35		38
	$	121	$	86

7. 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, 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, 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.

The Company has paid all redemption amounts and interest due on the debentures in shares of common stock for all redemption and interest payment dates through May 1, 2007. During the first quarter of 2007, the Company issued an aggregate of 21,087,776 shares of its common stock for payment of the January, February and March 2007 principal redemption amounts. Also during the first quarter of 2007, the Company issued an aggregate of 1,202,604 shares of its common stock for payment of the January, February and March 2007 interest amounts due. 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 or the OTC Bulletin Board, and the calculated Redemption Conversion Price and Interest Conversion Price to interest expense in the Company’s statement of operations.

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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 provides 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. On March 5, 2007, the Company provided notice to the holders of the debentures of its election to pay the monthly redemption payment due in April 2007 in shares of common stock. Accordingly, on March 5, 2007, 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 April 2007. The Company calculated the fair market value of the Pre-redemption issuance using the price per common share as reported on the OTC Bulletin Board as of March 5, 2007, 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 March 31, 2007 (in thousands):

Original face value of convertible debentures	$	8,000
Redemption payments (paid in shares of common stock)		(2,667	)
April 1, 2007 pre-redemption share issuance of common stock		(170	)
Less: unamortized debt discounts		(1,533	)
Total carrying value, net of debt discount March 31, 2007	$	3,630
Current portion of debt, net of debt discount	$	3,630
Long term portion of debt, net of debt discount	$	—

The following table summarizes interest expense for the three months ended March 31, 2007, related to the Company’s convertible debentures issued in June 2006 (in thousands):

Nominal interest expense (8% stated rate and paid in shares of common stock)	$	120
Amortization of debt discount		1,048
Amortization of capitalized financing costs		223
Difference between fair market value of common shares issued for redemption and interest and the calculated Redemption Conversion Price and Interest Conversion Price		596
Total interest expense related to convertible debentures	$	1,987

Modification of Outstanding Warrants

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.

The fair value of the modification of these warrants was determined by using a Black-Scholes-Merton 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%, 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.

8. Concentration of Credit Risk and Significant Customers

Three customers accounted for 29%, 22% and 12% of the Company’s revenue for the three months ended March 31, 2007, while one customer accounted for 75% of accounts receivable as of March 31, 2007. For the three months ended March 31, 2006, one customer accounted for 22% of the Company’s revenue, while four customers accounted for 27%, 22%, 21% and 12% of the Company’s accounts receivable as of December 31, 2006.

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Sales to the U.S. government and state and local government agencies, either directly or indirectly, accounted for 35% of the Company’s revenue for the three months ended March 31, 2007, while these sales accounted for 47% of the Company’s revenue for the three months ended March 31, 2006. In addition, accounts receivable related to direct and indirect sales to the U.S. government and state and local government agencies accounted for 92% and 76% of the Company’s total accounts receivable balance as of March 31, 2007, and December 31, 2006, respectively.

9. Comprehensive Loss

For the three months ended March 31, 2007, and 2006, the Company had no components of other comprehensive loss; accordingly, total comprehensive loss equaled the net loss for the respective periods.

10. Net Loss Per Share

Basic net loss per common share is computed on the basis of the weighted average number of common shares outstanding for the period. 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. Securities that could potentially dilute basic income per share consist of outstanding stock options, warrants, and a convertible promissory note. As the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same. All potentially dilutive securities were excluded from the calculation of dilutive net loss per share as their effect was anti-dilutive.

Potential common shares outstanding consisted of options, warrants, and convertible debt to purchase or acquire 36,269,919 and 18,594,182 shares of common stock at March 31, 2007, and 2006, respectively. In addition, there were 301,928 and 801,928 unvested shares of restricted common stock outstanding as of March 31, 2007, and 2006, respectively.

11. Segment Information

In accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information,” 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 makers review financial information on a consolidated basis and, therefore, the Company operated as single segment for all periods presented.

12. Contingencies

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 Saflink’s wholly-owned subsidiary. The complaints alleged that Pulsar breached a contract by failing to make payments of approximately $500,000 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. In April 2007, G2 filed a motion seeking the Court's permission to add Saflink as a defendant. The Company has opposed the motion to amend. The Company intends to vigorously defend against G2's claims; however, an adverse judgment against Litronic or Saflink could materially impact our financial condition.

13. Subsequent Events

On April 13, 2007, the Company entered into and consummated agreements with Mantis Technology Group, Inc. (“MTGI”) to (i) assign to MTGI the Company’s rights and obligations as tenant under a lease of approximately 19,465 rentable square feet of space in a building in Kirkland, Washington, and (ii) sublease back from MTGI approximately 4,973 rentable square feet of such premises for the Company’s principal offices.

On April 16, 2007, the Company’s wholly-owned subsidiary, FLO Corporation, issued approximately $3.5 million of convertible promissory notes (the “Notes”) in a private placement. The Notes bear interest at 8% per year and are due April 1, 2008. The aggregate consideration for the Notes consisted of approximately $1.8 million in cash, the assignment to FLO of approximately $1.6 million of outstanding 8% convertible debentures issued by the Company on June 12, 2006, and a $140,000 promissory note.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this document and our 2006 audited consolidated financial statements and notes thereto included in our annual report on Form 10-K, which was filed with the Securities and Exchange Commission on March 30, 2007.

This quarterly report on Form 10-Q contains statements and information about management’s view of our future expectations, plans and prospects that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated, including the factors described in the section of this quarterly report on Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and identified in Item 1A of Part II entitled “Risk Factors.” We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our annual report on Form 10-K for the year ended December 31, 2006.

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

Overview

As we entered the last half of 2006, we began to take a series of steps to reduce expense and attempt to maximize our 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— our Registered Traveler Solutions Group is designed 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 (RT) program.

• Core Technologies Group— our Core Technologies Group is focused on seeking 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.

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 of $100,000 and an additional $25,000 upon BAI’s acceptance of the middleware. We also agreed to provide engineering services for $30,000 over a three month period and the agreement includes 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 source code 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.

On March 9, 2007, we created FLO Corporation, a wholly-owned subsidiary, to focus on our Registered Traveler business. On April 16, 2007, FLO Corporation issued approximately $3.5 million of convertible promissory notes in a private placement. The notes bear interest at 8% per year and are due April 1, 2008. The aggregate consideration for the notes consisted of approximately $1.8 million in cash, the assignment to FLO of approximately $1.6 million of our outstanding 8% convertible debentures, and the assignment to FLO of a $140,000 promissory note.

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 (i) royalties based on IdentiPHI’s sales of products

containing the SAFsolution and SAFmodule source code, (ii) royalties under the BAI license agreement, and (iii) our portion of subscription fees related to the Registered Traveler program.

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With many restructuring activities completed, we have new risks and challenges facing us, including our working capital position. We believe we have sufficient funds to continue operations at current levels through September 2007. We currently do not have a credit line or other borrowing facility to fund our operations. To continue our current level of operations beyond September 30, 2007, we will need to seek additional funds through the issuance of additional equity or debt securities or other sources of financing.

Our ability to secure additional financing may be significantly impaired by our issuance of common stock to pay the principal and interest payments on our outstanding 8% convertible debentures. To date, we have issued an aggregate of 50,769,473 shares of our common stock in payment of monthly redemption amounts and interest due on the debentures. If we continue to pay the monthly redemption amounts and interest due on the debentures in shares of common stock, existing stockholders will suffer substantial dilution and it will be more difficult for us to raise additional funds through the issuance of equity or debt securities.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our condensed 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 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. We believe our most critical accounting policies and estimates include revenue recognition and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

We believe that period-to-period comparisons of our operating results may not be a meaningful basis to predict our future performance. Consideration should be given to our prospects in light of the risks and difficulties described in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2006. We may not be able to successfully address these risks and difficulties.

We incurred a net loss attributable to common stockholders of $3.5 million for the three months ended March 31, 2007. This net loss included $2.0 million in non-cash interest expense related to the June 2006 convertible debenture issuance. This is compared to a net loss attributable to common stockholders of $36.8 million for the three months ended March 31, 2006, which included a $29.7 million impairment loss on goodwill.

The following discussion presents certain changes in our revenue and expenses that have occurred during the three months ended March 31, 2007, as compared to the three months ended March 31, 2006.

Revenue and Cost of Revenue

We recorded revenue primarily from four sources during the three months ended March 31, 2007, and 2006: software licenses, manufactured hardware, third party hardware and software, and services. In addition, during 2007, we recorded revenue related to the sale of the rights to our SAFsolution and SAFmodule source code to a third party. Product revenue consisted of license fees for our software products, the sale of our source code, sales of our manufactured hardware and the reselling of third party hardware and software products and applications. Service revenue consisted of maintenance and support contracts, as well as labor fees related to government and commercial projects and programs. During the three months ended March 31, 2007, software license sales were $165,000; sales of manufactured hardware were $158,000; and sales of third party software and hardware were $52,000, while service revenue was $129,000, which is comprised of $31,000 related to fees for consulting, integration and project labor and $98,000 related to customer support and product maintenance. The $778,000 in proceeds from the sale of our SAFsolution and SAFmodule software source code is being deferred and recognized as revenue on a pro rata basis over the three year period where we gave the buyer certain patent protection rights under our patent portfolio. As of March 31, 2007, we had deferred revenue of $756,000 related to this sale and recognized $22,000 as revenue during the first quarter of 2007. During the same period in 2006, software license sales were $179,000; sales of manufactured hardware were $343,000; and sales of third party software and hardware were $234,000, while service revenue was $101,000, which was comprised of $40,000 related to fees for consulting, integration and project labor and $61,000 related to customer support and product maintenance.

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Total revenue of $504,000 for the three months ended March 31, 2007, decreased $353,000, or 41%, from revenue of $857,000 for the three months ended March 31, 2006. The decrease in total revenue can primarily be attributed to the significant decrease in revenue from the sale of third party and manufactured hardware during the three months ended March 31, 2007. As a result of the source code sale, we don’t expect significant revenue from the sale of third party hardware or software as the majority of that revenue was derived from complementary products to our SAFsolution and SAFmodule software products. However, we do expect to receive deferred payments based on a percentage of the buyer’s gross margin over the next three years that includes the SAFsolution or SAFmodule source code. The amount of the deferred payments will be equal to a percentage of the buyer’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. In addition, we expect to receive royalties under our agreement with BAI for the use of our NetSign for mobile middleware product over the next four years. The BAI license agreement included an initial $100,000 payment plus a $25,000 fee in connection with the acceptance of the software, which were both received and recognized as revenue during the first quarter of 2007.

Total cost of revenue included product cost of revenue and service cost of revenue. Product cost of revenue consisted of raw materials, packaging and production costs for our software and manufactured hardware sales, and cost of hardware and software applications purchased from third parties. Service cost of revenue consisted of labor and expenses for post-contract customer support, consulting and integration services, and training. During the three months ended March 31, 2007, cost of revenue from software and manufactured hardware was $0 and $71,000, respectively. Cost of third party software and hardware was $56,000, while the cost of service revenue was $53,000 during the first quarter of 2007. During the same period in 2006, cost of revenue from software and manufactured hardware was $0 and $156,000, respectively, while cost of revenue from third party software and hardware, and services were $171,000 and $126,000, respectively. There also was $671,000 in amortization of intangible assets included in cost of revenue for the three months ended March 31, 2006, primarily related to intangible assets acquired in the acquisition of SSP-Litronic in August 2004. Total cost of revenue of $180,000 for the three months ended March 31, 2007, decreased $944,000, or 84%, from cost of revenue of $1.1 million for the same period in 2006. This decrease is primarily related to no amortization of intangible assets during the first quarter of 2007, as well as reduced hardware and third party hardware sales. As of December 31, 2006, there are no remaining intangible assets and, as a result, there will be no more amortization related to intangible assets derived from previous business combinations.

Our gross profit for the three months ended March 31, 2007, was $324,000, or 64%, compared to a gross loss of $267,000, or negative 31%, for the same period in 2006.

Operating Expenses

Total operating expenses for the three months ended March 31, 2007, decreased approximately $34.2 million, or 95%, to $1.8 million from $36.1 million for the same period in 2006. The overall decrease was primarily due to the goodwill impairment loss of $29.7 million included in the results for the three months ended March 31, 2006, as well as the effect of headcount reductions, facility consolidations and general reductions in all operating expense categories. From a functional operating expense perspective, the operating expense decrease was primarily due to a $3.2 million decrease in compensation and related benefits when compared to the results for the three months ended March 31, 2006.

The following table provides a breakdown of the dollar and percentage changes in operating expenses for the three months ended March 31, 2007, as compared to the same period in 2006 (in thousands):

	$ Change			% Change
Product development	$	(2,233	)	(92	)%
Sales and marketing		(1,460	)	(78	)
General and administrative		(815	)	(40	)
Impairment loss on goodwill		(29,700	)	(100	)
	$	(34,208	)	(95	)%

Product Development—Product development expenses consisted primarily of salaries, benefits, supplies and equipment for software developers, hardware engineers, product architects and quality assurance personnel, fees paid for outsourced software development and hardware design. Product development expenses decreased $2.2 million, or 92%, during the three months ended March 31, 2007, compared to the same period in 2006. From a functional operating expense perspective, this decrease was primarily due to a $1.8 million decrease in compensation and related benefits and a $296,000 decrease in occupancy, telephone and internet expense. The decrease in compensation and related benefits was due to significant reductions in workforce when compared to the first quarter of 2006. The decrease in occupancy, telephone and internet expense for the first quarter of 2007 was also related to large reductions in workforce and facility consolidations, which resulted in less expense being allocated to product development.

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Sales and Marketing—Sales and marketing expenses consisted primarily of salaries and commissions earned by sales and marketing personnel, trade shows, advertising and promotional expenses, fees for consultants, and travel and entertainment costs. Sales and marketing expenses decreased $1.5 million, or 78%, during the three months ended March 31, 2007, compared to the same period in 2006. From a functional operating expense perspective, this decrease was primarily due to a $921,000 decrease in compensation and related benefits, a $171,000 decrease in legal and professional services and a $156,000 decrease in advertising and promotion. The decrease in compensation and related benefits was due to a significant reduction in headcount, while the decrease in legal and professional services and advertising and promotion was related to fewer outsourced consulting projects and lower overall marketing spend as we narrowed the focus of the business toward specific revenue opportunities.

General and Administrative—General and administrative expenses consisted primarily of salaries, benefits and related costs for our executive, finance, legal, human resource, information technology and administrative personnel, professional services fees, and allowances for bad debts. General and administrative expenses decreased $815,000, or 40%, during the three months ended March 31, 2007, compared to the same period in 2006. From a functional operating expense perspective, this decrease was primarily due to a $472,000 decrease in compensation and related benefits and a decrease of $258,000 in legal and professional services. The decrease in compensation and benefits was related to a significant decrease in headcount as of March 31, 2007, when compared to March 31, 2006. The decreases legal and professional services were primarily a result of reduced legal and board of directors’ fees.

Impairment Loss on Goodwill— As of March 31, 2006, we concluded that certain factors, such as the lack of significant revenue and the continued decline of the price of our common stock as reported on the Nasdaq Capital Market, constituted a triggering event under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). Accordingly, we performed impairment testing of our goodwill as of March 31, 2006, and as a result of that testing recorded a goodwill impairment charge of $29.7 million during the first quarter of 2006. Given the volatility in our historical revenue trends, the significant decline in the our market capitalization, and other indicators of fair value, we determined that the best estimate of fair value as of March 31, 2006, for the goodwill impairment test was our market capitalization. We no longer have goodwill balances as of March 31, 2007, and December 31, 2006.

Interest expense

Interest expense for the three months ended March 31, 2007, was $2.0 million, compared to $39,000 for the same period in 2006. Interest expense for the three months ended March 31, 2007 and 2006, consisted of interest expense from the financing of certain insurance policies over a three month period and interest related to a convertible note payable to a related party that we assumed in the SSP-Litronic acquisition. As of March 31, 2007 and 2006, 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 principal balance. Interest expense during the three months ended March 31, 2007 also included $2.0 million in non-cash expense related to our issuance of 8% convertible debentures and warrants in June 2006, as described below.

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, March 2007, April 2007, and May 2007 redemption amounts and interest due in shares of our common stock. We also notified the debenture holders of our election to pay the June 2007 redemption amount in shares of our common stock and issued 972,000 shares of our common stock as the pre-redemption amount per the terms of the debentures.

Other income

Other income for the three months ended March 31, 2007, was $5,000, compared to $112,000 for the same period in 2006. Other income primarily consisted of interest earned on cash, money market balances and short-term certificates of deposit. The decrease in interest income was due to lower cash balances during the first quarter of 2007 when compared to the same period in 2006.

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Income tax provision

There was no income tax expense for the three months ended March 31, 2007, while we recorded an income tax expense of $13,000 for the comparable period in 2006, which represents the income tax effect of goodwill and amortization created by our asset purchase from BSG 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%.

Modification of Warrants

There was no significant modification of warrants recorded for the three months ended March 31, 2007. On January 1, 2006, anti-dilution provisions were triggered in certain outstanding warrants issued by us as a result of the modification to our convertible note payable to a related party on December 31, 2005. Accordingly, we 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 our 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 our June 2005 financing was reduced from $2.50 to $0.71 per common share.

The fair value of the modification of these warrants was determined by using a Black-Scholes-Merton 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%, 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 during the three months ended March 31, 2006. This charge increased net loss attributable to common stockholders.

Liquidity and Capital Resources

We financed our operations during the three months ended March 31, 2007, primarily from our existing working capital at December 31, 2006, and from proceeds from the issuance of a $400,000 promissory note to a related party. As of March 31, 2007, our principal source of liquidity largely consisted of $820,000 of cash and cash equivalents and our working capital deficit was negative $6.4 million. This is compared to $1.4 million of cash equivalents and a working capital deficit of negative $6.3 million as of December 31, 2006.

We expended $789,000 in operating activities during the first three months of 2007, compared to $5.2 million for the same period in 2006. The net loss of $3.5 million for the three months ended March 31, 2007, included a $2.0 million charge related to non-cash interest expense. Other significant adjustments to the net loss was an increase in deferred revenue of $616,000, a decrease in accounts receivable of $233,000, a decrease in accounts payable of $201,000, and stock-based compensation of $126,000.

We did not expend any cash for investing activities during the three months ended March 31, 2007. This is compared to $255,000 for the same period in 2006.

Net cash provided from financing activities was $202,000 during the three months ended March 31, 2007, which included the proceeds from the issuance of a $400,000 promissory note to a related party. These proceeds were offset by $198,000 in payments related to redemption provisions contained in our Series A warrants. This is compared to net cash provided by financing activities of $17,000 during the same period in 2006.

As a result of the capital raised from the promissory note issued in January 2007, the proceeds from the sale of SAFsolution and SAFmodule, the proceeds from the convertible promissory notes issued by FLO and our on-going efforts to reduce our operating expenses, we believe we have sufficient funds to continue operations at current levels through September 2007. We currently do not have a credit line or other borrowing facility to fund our operations. To continue our current level of operations beyond September 30, 2007, we will need to seek additional funds through the issuance of additional equity or debt securities or other sources of financing.

Our ability to secure additional financing may be significantly impaired by our issuance of common stock to pay the principal and interest payments on our outstanding 8% convertible debentures. To date, we have issued an aggregate of 50,769,473 shares of our common stock in payment of monthly redemption amounts and interest due on the debentures. If we continue to pay the monthly redemption amounts and interest due on the debentures in shares of common stock, existing stockholders will suffer substantial dilution and it will be more difficult for us to raise additional funds through the issuance of equity or debt securities.

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We leased our current principal executive offices, consisting of approximately 19,456 square feet, in Kirkland, Washington, under a lease that was set to expire in August 2011. On April 13, 2007, we entered into an agreement to assign and sublease with another entity whereby we assigned the Kirkland facility lease to the other entity and we will sublease back from it 4,973 square feet in the same facility through March 31, 2008, which will continue to serve as our principal executive offices.

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 our original lease and the sublease are minimal and did not have a material effect on our financial statements.

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	4,973	3/31/2008
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

Our significant fixed commitments with respect to our convertible debentures, convertible note obligation, promissory note and our operating leases as of March 31, 2007, were as follows (in thousands):

	Payments For The Year Ended December 31,
	Total			Remainder 2007			2008 & 2009			2010 & 2011		2012 & After
Operating leases	$	1,773		$	392		$	896		$	485	$	—
Sublease rental receipts		(569	)		(202	)		(367	)		—		—
Convertible debentures		5,333			5,333			—			—		—
Convertible debenture interest		123			123			—			—		—
Promissory note to related party		400			—			400			—		—
Promissory note interest		40			—			40			—		—
Convertible note payable to related party		1,250			1,250			—			—		—
Convertible note interest		188			188			—			—		—
Total Contractual Cash Obligations	$	8,538		$	7,084		$	969		$	485	$	—

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 4. 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 quarterly report.

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PART II—OTHER INFORMATION

ITEM 1. 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 of approximately $500,000 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. In April 2007, G2 filed a motion to add Saflink as a defendant, which we have opposed. We intend to vigorously defend against G2's claims; however, an adverse judgment against Litronic or Saflink could materially impact our financial condition.

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.

If we do not secure additional financing by September 2007, we must reduce the scope of, or cease, our operations.

We have accumulated net losses of approximately $285.5 million from our inception through March 31, 2007. We have continued to accumulate losses after March 31, 2007, 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. We believe we have sufficient funds to continue operations at current levels through September 2007. We do not have a credit line or other borrowing facility to fund our operations. To continue our current level of operations beyond September 30, 2007, 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 by September 30, 2007, we will be required to reduce the scope of, or cease, our operations.

If we continue to pay the monthly redemption amounts and interest due on the debentures we issued in June 2006 in shares of common stock, existing shareholders will suffer substantial dilution and it will be more difficult for us to raise capital.

As of May 7, 2007, 137,127,822 shares of our common stock were outstanding. In addition, there were a total of 29,536,490 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, none of which have exercise or conversion prices below the market price for our common stock of $0.05 as of May 7, 2007. Options to acquire 7,237,949 shares of our common stock were outstanding as of May 7, 2007, and our existing stock incentive plan had 4,082,879 shares available for future issuance as of that date.

We may, at 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 50,769,473 shares of our common stock for the December 2006, January 2007, February 2007, March 2007, April 2007 and May 2007 redemption and interest payments and the June 2007 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.

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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 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.

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 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.

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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;

• 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;

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• 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 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.

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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;

• 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 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.

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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.

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.

Three customers accounted for 29%, 22% and 12% of our revenue, for the three months ended March 31, 2007, while two customers accounted for 13% and 11% of our revenue for the twelve months ended December 31, 2006. 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.

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U.S. Government sales accounted for 73% of our total sales for the twelve months ended December 31, 2006, and 35% of our total sales for the three months ended March 31, 2007. 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.

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;

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• 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.

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

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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.

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 5. OTHER INFORMATION

On May 15, 2007, we issued a press release announcing our financial results for the first quarter ended March 31, 2007. The press release is attached as Exhibit 99.1 to this report and is incorporated herein by reference.

The attached press release presents certain financial measures that exclude certain non-cash charges such as amortization of intangible assets, impairments losses on goodwill and intangible assets, stock-based compensation expense and non-cash interest expense, which would otherwise be required by U.S. generally accepted accounting principles (GAAP). We believe that these non-GAAP financial measures facilitate evaluation by management and investors of our ongoing operating business and enhance overall understanding of our financial performance by reconciling more closely our actual cash expenses in operations as well as excluding expenses that in management’s view are unrelated to our core operations, the inclusion of which may make it more difficult for investors to compare our results from period to period.

You should not consider non-GAAP financial measures in isolation from, as a substitute for, or superior to, financial information presented in compliance with GAAP, and non-GAAP financial measures we report may not be comparable to similarly titled items reported by other companies. We have provided a reconciliation between our GAAP financial measures and our non-GAAP financial measures in the press release.

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ITEM 6. EXHIBITS

The following exhibits are filed as part of this quarterly report:

Exhibit No.	Description	Filed Herewith	Form	Incorporated by Reference
				Exhibit No.	File No.	Filing Date
10.1	Promissory Note, dated January 24, 2007, by and between Saflink Corporation and Richard P. Kiphart		10-K	4.13	000-20270	3/30/2007
10.2	Saflink Corporation Severance Plan and Summary Plan Description dated January 9, 2007		10-K	10.16	000-20270	3/30/2007
10.3	Agreement of Sublease dated February 5, 2007, between Saflink Corporation and Abraxas Corporation		10-K	10.17	000-20270	3/30/2007
10.4	Software Rights Agreement, dated as of February 27, 2007, by and between Saflink Corporation and IdentiPHI, LLC		10-K	10.18	000-20270	3/30/2007
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
99.1	Press release of Saflink Corporation dated May 15, 2007	X

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Saflink Corporation
DATE: May 15, 2007	By:	/s/ JEFFREY T. DICK
		Jeffrey T. Dick Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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Exhibit Index

Exhibit No.	Description	Filed Herewith	Form	Incorporated by Reference
				Exhibit No.	File No.	Filing Date
10.1	Promissory Note, dated January 24, 2007, by and between Saflink Corporation and Richard P. Kiphart		10-K	4.13	000-20270	3/30/2007
10.2	Saflink Corporation Severance Plan and Summary Plan Description dated January 9, 2007		10-K	10.16	000-20270	3/30/2007
10.3	Agreement of Sublease dated February 5, 2007, between Saflink Corporation and Abraxas Corporation		10-K	10.17	000-20270	3/30/2007
10.4	Software Rights Agreement, dated as of February 27, 2007, by and between Saflink Corporation and IdentiPHI, LLC		10-K	10.18	000-20270	3/30/2007
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
99.1	Press release of Saflink Corporation dated May 15, 2007	X

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