Intrusion Inc. Form 10-K

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 UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, D.C. 20549

 FORM 10-K

 (Mark One)

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

 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2023

 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 001-39608

 INTRUSION INC.

 (Exact name of registrant as specified in its charter)

 delaware

 75-1911917

 (State or other jurisdiction of

incorporation or organization)

 (I.R.S. Employer

Identification No.)

 101 EAST PARK BLVD, SUITE 1200
 PLANO, texas

 75074

 (Address of principal executive offices)

 (Zip Code)

 Registrant's telephone number, including area
code: ( 972) 234-6400

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

 Title of each class

 Trading Symbol

 Name of each exchange on which registered

 Common Stock, par value $0.01 per share

 INTZ

 Nasdaq Capital Market

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

 Common Stock, $0.01 par value

 (Title of class)

 Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.

 Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

 Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.

 Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).

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

 Large, accelerated filer

 Accelerated filer

 Non-accelerated filer

 Smaller reporting company

 Emerging growth company

 If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.

 Indicate by check mark whether the registrant has
filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. Yes No

 If securities are registered pursuant to Section 12(b)
of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of
an error to previously issued financial statements.

 Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's
executive officers during the relevant recovery period pursuant to §240.10D-1(b).

 Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).

 State the aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of June 30, 2023: $ 24,958,545.

 As of March 25,
2024, 1,944,675 shares of the issuer's Common Stock were outstanding.

 DOCUMENTS INCORPORATED BY REFERENCE

 Portions of the Registrant's definitive Proxy
Statement filed in connection with the Registrant's 2023 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Annual Report on Form 10-K.

 INTRUSION INC.

 Item 1.

 Business

 Item 1A.

 Risk Factors

 Item 1B.

 Unresolved Staff Comments

 Item 1C.

 Cybersecurity

 Item 2.

 Properties

 Item 3.

 Legal Proceedings

 Item 5.

 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 Item 7.

 Management's Discussion and Analysis of Financial Condition and Results of Operations

 Item 8.

 Financial Statements

 Item 9A.

 Controls and Procedures

 Item 9B.

 Other Information

 Item 10.

 Directors, Executive Officers, and Corporate Governance

 Item 11.

 Executive Compensation

 Item 12.

 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 Item 13.

 Certain Relationships and Related Transactions, and Director Independence

 Item 14.

 Principal Accounting Fees and Services

 Item 15.

 Exhibits and Financial Statement Schedules

 Signatures

 i

 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements involve
substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form
10-K, including statements regarding our financial position; our ability to continue our business as a going concern; our business, sales,
and marketing strategies and plans; our ability to successfully market, sell, and deliver our INTRUSION Shield commercial
product and solutions to an expanding customer base; are forward-looking statements. In some cases, you can identify forward-looking statements
because they contain words such as "anticipate," "believe," "contemplate," "continue," "could,"
"estimate," "expect," "intend," "may," "plan," "potential," "predict,"
"project," "should," "target," "will," or "would" or the negative of these words or
other similar terms or expressions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited
to, such statements.

 You should not rely on forward-looking
statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K
primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial
condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties,
and other factors described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

 In addition, statements that "we
believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information
available to us as of the date of this Annual Report on Form 10-K. While we believe that such information provides a reasonable basis
for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted
an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned
not to unduly rely on these statements.

 The forward-looking statements
made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation
to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of
this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law.

 EXPLANATORY NOTE – REVERSE STOCK SPLIT

 Unless otherwise stated, all shares and per share amounts for all periods
presented in this Annual Report have been adjusted to reflect the 1-for-20 reverse stock split we effected on March 22, 2024.

 ii

 Item 1. Business.

 Our Corporate Information

 We were organized in Texas in
September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located at 101 East Park Boulevard,
Suite 1200, Plano, Texas 75074, and our telephone number is (972) 234-6400. Our website URL is www.intrusion.com. We post the following
filings in the "Investors" section of our website as soon as reasonably practicable after they are electronically filed with
or furnished to the Securities and Exchange Commission: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our current
reports on Form 8-K; and any amendments to those reports or statements filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act. All such filings on our website are available free of charge. Additionally, filings are available on the Securities and Exchange
Commission's website (www.sec.gov). In this report, references to the "Company," "we", "us,"
"our", "Intrusion" or "Intrusion Inc." refer to Intrusion Inc. and its subsidiaries. TraceCop
and Savant are registered trademarks of the Company. We have also applied for trademark protection for INTRUSION Shield.

 Our Business

 Intrusion, Inc. is a cybersecurity
company based in Plano, Texas. The company offers its customers access to its exclusive threat intelligence database containing the historical
data, known associations, and reputational behavior of over 8.5 billion Internet Protocol ("IP") addresses. After years of
gathering global internet intelligence and working exclusively with government entities, the company released its first commercial product
in 2021.

 For the fiscal years
ended December 31, 2023, and 2022, we generated revenues of approximately $5.6 million and $7.5 million, respectively, and reported
net loss of approximately $13.9 million and $16.2 million, respectively, and cash flow used in operating activities of approximately
$7.8 million and $13.2 million, respectively. As noted in our audited financial statements, as of December 31, 2023, we had
stockholders' deficit of $9.6 million and a working capital deficit of $13.1 million. As a result of our historical recurring
losses from operations, negative cash flows from operations, net working capital deficiency as well as our dependence on equity and
debt financings, there is a substantial doubt regarding our ability to continue as a going concern.

 Our Solutions

 INTRUSION Shield

 INTRUSION Shield,
our newest cybersecurity solution is a Zero Trust reputation-based Software as a Service ("SaaS") solution
that inspects and kills dangerous network (in and outbound) connections. What makes our approach unique is that INTRUSION Shield
evaluates every packet and analyzes the IP addresses (source and destination), as well as domain information and the ports utilized
and, when combined with other threat intelligence data reports, blocks malicious connections. Many breaches today are caused by
Zero-Day and malware free compromises that may not trigger alarms in a traditional firewall or endpoint solution. INTRUSION Shield ' s
capabilities are designed to continuously evolve as the threats and landscape change over time. Unlike traditional industry
approaches that rely heavily on signatures, complex rules, and human factors mitigation, which malicious actors and nation states
have learned to bypass, INTRUSION Shield 's proprietary architecture isolates and neutralizes malicious
traffic and network flows that existing solutions are ill equipped to handle.

 In September 2022, we expanded
the INTRUSION Shield product line to include the Shield Cloud and Shield End-Point solutions. The initial INTRUSION Shield
offering released in early 2021, the Shield On-Premise solution, utilizes hardware and is placed behind a firewall in a data center. Shield
Cloud extends the effectiveness of the Shield On-Premise solution to Infrastructure as a Service (IaaS), Platform as a Service (PaaS),
SaaS and serverless resources in the public cloud. This product serves as a protective gateway to the cloud, providing both Zero Trust
access to, and protecting outbound connections from, virtual hosts and serverless functions within the cloud. Shield Endpoint helps protect
the network outside of the corporate enclave and data center to include protection for remote workers, mobile, and cloud devices. This
product brings the network protection of the Shield On-Premise to these remote user devices establishing a Zero Trust network, both for
intra-organization connectivity and external internet connectivity.

 INTRUSION TraceCop

 INTRUSION TraceCop
is a big data tool with extensive IP intelligence canvassing the entire internet. It contains what we believe to be the largest existing
repository of reputation information on known good and known bad active IP addresses (both IPv4 and IPv6). TraceCop contains
an inventory of network selectors and enrichments useful to support forensic investigations. The data contains a history
of IPv4 and IPv6 block allocations and transfers, historical mappings of IP addresses to Autonomous Systems (ASNs) as observed through
BGP, and approximately one billion historically registered domain names and registration context. TraceCop contains tens
of billions of historic DNS resolutions of Fully Qualified Domain Names (FQDNs or hostnames) on each of these domains. Together, the resulting
data shows relationships, hosting, and attribution for internet resources. TraceCop also contains web server
surveys of content, such as natural language and topic of the content on hundreds of millions of websites and servers and OS fingerprints
of services showing applications running on a given IP address. TraceCop also contains a history of threat and reputation
for each hostname and IP address over time. All these features combine to create a very effective network forensics and cybersecurity
analysis tool.

 INTRUSION Savant

 INTRUSION Savant
is a network monitoring solution that leverages the rich data available in TraceCop to identify suspicious traffic in
real-time. Savant uses several original patents to uniquely characterize and record all network flows. Savant
is a network reconnaissance and attack analysis tool used by forensic analysts in United States ("U.S.") government agencies and
corporations with in-house threat research teams. For example, Savant users can create various automated rules to
inspect packets matching (or not) certain criteria such as creating a rule to ensure the Source MAC address field in the Ethernet
header and Source IP address from the IP header are always the same, failing which could indicate MAC or IP Spoofing in progress.
Similarly, threat investigators can create rules using regular expressions to analyze multiple fields in the packet headers.

 Our Intellectual Property and Licenses

 Our success and our ability to
compete are primarily dependent upon our proprietary technology. We principally rely on a combination of contractual rights, trade secrets
and copyright laws to establish and protect our proprietary rights in our solutions. In addition, we have received two patents, and we
have applied for patents for our INTRUSION Shield family of solutions. We have also entered into non-disclosure agreements
with our suppliers, resellers, and certain customers to limit access to and disclosure of our proprietary information. There can be no
assurance that the steps taken by us to protect our intellectual property will be adequate to prevent misappropriation of our technology
or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology, although
it would be extremely difficult to replicate the proprietary and comprehensive internet databases we have developed over the past 25+ years.

 We have entered into software
and solution license agreements with various suppliers. These license agreements provide us with additional software and hardware components
that add value to our cybersecurity solutions. These license agreements do not provide proprietary rights that are unique or exclusive
to us and are generally available to other parties on the same or similar terms and conditions, subject to payment of applicable license
fees and royalties. We do not consider any of the solution license, software, or supplier agreements to be material to our business, instead,
they are complementary to our business and offerings.

 Our Competition

 The market for network and data
protection security solutions is intensely competitive and subject to frequent introductions of new technologies, and potentially improved
price and performance characteristics. Industry suppliers compete in areas such as conformity to existing and emerging industry standards,
interoperability with networking and other cybersecurity solutions, management and security capabilities, performance, price, ease of
use, scalability, reliability, flexibility, features, and technical support. Our principal competitors in the data mining and advanced
persistent threat market include Darktrace, Trellix, and Recorded Futures.

 There are numerous companies competing
in various segments of the data security market. At this time, we have little or no competitors for TraceCop; however, we
believe competitors could emerge in the future. These competitors currently perform only a portion of the functions that we can perform
with TraceCop. We have been continuously collecting the TraceCop data for more than twenty years, and we believe
that none of our current or future competitors will have the ability to provide and reference this historical data. In our newest market
segment, data mining and advanced persistent threat detection, we compete directly and indirectly with companies and open-source technologies
in the firewall, intrusion detection and prevention, anti-virus, network analysis, endpoint protection, and insider threat prevention
areas of cybersecurity technology.

 We believe the INTRUSION Shield
product line is novel and unique in our industry because of our proprietary threat-enriched big data. We believe that our INTRUSION
 Shield family of solutions complement our customer's existing cybersecurity processes and third-party solutions. If the
 INTRUSION Shield receives widespread acceptance in the market, we anticipate that other businesses will seek to compete
with INTRUSION Shield; however, we believe our existing, mature, and proprietary database which is integral to the operation
of INTRUSION Shield will be difficult, if not impossible, for other companies in our industry to replicate and will be a
significant barrier to entry of competitors in the near- and long-term future of cyber security solutions.

 Our Customers: Government
Sales

 Sales to U.S. government customers
accounted for 46.2% of our revenues for the year ended December 31, 2023, compared to 65.8% of our revenue in 2022. We expect to continue
to derive a substantial portion of our revenues from sales to governmental entities in the future as we continue to market our products
and data mining products to the government, and we intend to market INTRUSION Shield not only to our long-standing governmental
customer base but to expand our efforts to include more traditionally administrative and civilian governmental entities. Sales to government
clients present risks in addition to those involved in sales to commercial customers that could adversely affect our revenues, including
potential disruption due to irregularities in or interruptions to appropriation and spending patterns, delays in approving a federal budget
and the government's reservation of the right to cancel contracts and purchase orders for its convenience.

 We make our sales under purchase
orders and contracts. Our customers, including government customers, may cancel their orders or contracts with little or no prior notice
and without penalty. Although we transact business with various government entities, we believe that the cancellation of any order in
itself could have a material adverse effect on our financial results. Because we derive and expect to continue to derive a substantial
portion of our revenue from sales to government entities, a large number of cancelled or renegotiated government orders or contracts could
have a material adverse effect on our financial results.

 Third-Party Products

 We currently utilize commercially
available computers and servers from various vendors which we integrate with our software products for implementation into our customer
networks. We do not consider any of these third party relationships to be material to the Company's business or results of operations.

 Customer Services

 Our solutions may include
installation, operation of our technology and threat data interpretation and reporting.

 Sales, Marketing and Customers

 Field Sales Force.
Our sales organization focuses on major account sales, channel partners including distributors, value added resellers ("VARs")
and integrators; promotes our solutions to current and potential customers; and monitors evolving customer requirements. The field sales
and technical support force provides training and technical support to our resellers and end users and assists our customers in designing
cyber secure data networking solutions. We currently conduct sales and marketing efforts from our principal office in Plano, Texas.

 Resellers. Resellers
such as domestic and international system integrators and VARs sell our solutions as stand-alone solutions to end users and integrate
our solutions with products sold by other vendors into network security systems that are sold to end users. Our field sales force and
technical support organization provide support to these resellers. Our agreements with resellers are non-exclusive, and our resellers
generally sell other products and solutions that may compete with our solutions. Resellers may place higher priority on products or solutions
of other suppliers who are larger and have more name recognition, and there can be no assurance that resellers will continue to sell and
support our solutions.

 Foreign Sales. Export
sales did not account for any revenue in 2023 and 2022.

 Marketing. We have
implemented several methods to market our solutions, including participation in trade shows and seminars, distribution of sales literature
and solution specifications and ongoing communication with our resellers and installed base of end-user customers.

 Customers. Our end-user
customers include U.S. federal government, state and local government entities, large and diversified conglomerates,
and manufacturing entities. Sales to certain customers and groups of customers can be impacted by seasonal capital expenditure approval
cycles, and sales to customers within certain geographic regions can be subject to seasonal fluctuations in demand.

 In 2023, 46.2% of our revenue
was derived from a variety of U.S. government entities through direct sales and indirectly through system integrators and resellers. These
sales are attributable to six U.S. Government customers through direct and indirect channels; two U.S. government customers individually
exceeded 10% of total revenue in 2023. A reduction in our sales to U.S. government entities could have a material adverse effect on our
business and operating results if not replaced.

 Backlog. We believe
that only a small portion of our order backlog is non-cancelable, and that the dollar amount associated with the non-cancelable portion
is immaterial. Commercial orders are generally fulfilled within two days to two weeks following receipt of an order. Certain orders may
be scheduled over several months, generally not exceeding one year.

 Customer Support, Service
and Warranty. We service, repair, and provide technical support for our solutions. Our field sales and technical support force
works closely with resellers and end-user customers on-site and by telephone to assist with pre- and post- sales support services such
as network security design, system installation and technical consulting. By working closely with our customers, our employees increase
their understanding of end-user requirements and are then able to provide specific input in our solution development process.

 We warrant all our solutions against
defects during the service period. Before and after expiration of the solution warranty period, we offer both on-site and factory-based
support, parts replacement, and repair services. Extended warranty services are separately invoiced on a time and materials basis or under
an annual maintenance contract.

 Employees

 As of December 31, 2023, we employed
a total of forty-nine persons, five of which are part time. None of our employees are represented by a labor organization, and we are
not a party to any collective bargaining agreement. Competition in the recruiting of personnel in the networking and data security industry
is intense. We believe that our future success will depend in part on our continued ability to hire, motivate and retain qualified management,
sales, marketing, and technical personnel.

 Our Code of Conduct

 The Company's directors
and employees are required to abide by the Company's Code of Business Conduct and Ethics, which the Company adopted on September
14, 2020, as amended on March 16, 2022 (the "Code") to ensure that the Company's business is conducted in a consistently
legal and ethical manner and to avoid instances of insider trading. The Code covers areas of professional conduct that include conflicts
of interest, fair dealing and the strict adherence to all laws and regulations applicable to the conduct of the Company's business.

 The full text of the amended Code
is published on the Company's website under the investor relations tab at www.intrusion.com. The Company intends to disclose future
amendments to, or waivers from, certain provisions of the Codes of Ethics on the Company's website within four business days following
the date of such amendment or waiver. Upon the written request of any stockholder, the Company will furnish, without charge, a copy of
the Code. This request should be directed to the Company's Secretary at 101 East Park Blvd., Suite 1200, Plano, TX 75074.

 Reverse Stock Split

 On March 22, 2024, we effected
a 1-for-20 reverse stock split of our common stock. All share and per share amounts set forth in the Consolidated Financial Statements
have been retroactively restated to reflect the split effected in March 2024 as if it had occurred as of the earliest period presented
and unless otherwise stated, all other share and per share amounts for all periods presented in this Annual Report have been adjusted
to reflect the reverse stock split effected in March 2024.

 Item 1A. Risk Factors.

 The following are the significant
factors that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the
value of an investment in our common stock. The risks described below are not the only risks facing our Company. Risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition,
and operating results.

 Risks Related to our Financial Position and Liquidity

 The Company's ability to
implement its current business plan is dependent on our ability to raise additional funds through additional public or private financings,
which raises substantial doubt that the Company may not be able to continue as a going concern.

 As of December 31, 2023, we had
cash and cash equivalents of $139 thousand and negative working capital of $13.1 million. Our primary source of cash for funding operations
in 2023 has come from net proceeds received from a private offering of our common stock and warrants and net proceeds received from our
at-the-market ("ATM") program in an aggregate amount of approximately $7.0 million. To finance our operations and to continue
as a going concern, we believe it will be necessary for us to raise additional funds through public or private financings, including the
utilization of our ATM program. We can provide no assurances that we will be able to raise additional funds through any future equity
or debt financings, and the terms of those financings, if available at all, may be on terms, which are not favorable to us and, in the
case of equity financings, will result in dilution to our stockholders.

 We are subject to certain contractual and regulatory
limitations on our ability to consummate future financings.

 Pursuant to that certain securities
purchase agreements we entered into in March 2022 with Streeterville Capital, LLC and related issuance of two promissory notes, we agreed
to be subject to certain restrictions on our ability to issue securities during the term of the notes issued under the agreement. Specifically,
we agreed to obtain Streeterville Capital's consent prior to issuing any debt securities or certain equity securities where the
pricing of such equity securities is tied to the public trading price of our common stock. Furthermore, we also must offer Streeterville
the right to purchase up to 10% of future equity and debt securities offerings, subject to certain exceptions and limitations, in each
case during the term of any note issued to Streeterville.

 Furthermore, unless our public
float exceeds $75 million, we will be subject to the restrictions set forth in General Instruction I.B.6 to Form S-3 that limit our ability
to conduct primary offerings under a Form S-3 registration statement. Under such limitations, we may not sell, during any 12-month period,
securities on Form S-3 having an aggregate market value of more than one-third of our public float. As of March 25, 2024, our public float
calculated in accordance with General Instruction I.B.6 of Form S-3 was $6.8 million. These restrictions may delay or prevent us from
entering into funding arrangements or being able to access the capital markets on favorable terms or at all.

 If we fail to comply with the restrictions and
covenants in our March 2022 securities purchase agreement, there could be an event of default under the notes issued thereunder, which
could result in an acceleration of payments due under those notes and other consequences.

 Failure to meet the restrictions,
obligations, and limitations under the March 2022 securities purchase agreement may result in an event of default in accordance with the
terms of the notes issued thereunder. An event of default would, among other things, provide the noteholder with the right to increase
the outstanding balance by 15% for certain major events of default and 5% for others. Additionally, upon an event of default, the noteholder
may consider the note immediately due and payable. Furthermore, upon an event of default, the interest rate may also be increased to the
lesser of 18% per annum or the maximum rate permitted under applicable law.

 We must increase revenue levels in order to
finance our current operations and to implement our business strategies.

 For the year ended December 31,
2023, we had a net loss of $13.9 million and had an accumulated deficit of approximately $110.2 million as of December 31, 2023. We need
to increase current revenue levels from the sales of our solutions if we are to regain profitability, and our new INTRUSION Shield
 suite of products may take time to achieve market penetration which could negatively impact future revenues and results of operations.
If we are unable to increase revenue levels, losses could continue for the near term and possibly longer, and we may not regain profitability
or be able to implement our business plan, fund our liquidity needs, or continue our operations.

 Business and Operational Risks

 Most of our current revenues are generated from
one family of solutions with a limited number of customers, and the decrease of revenue from sales of this family of solutions could materially
harm our business and prospects.

 Approximately 66.4% of our existing
revenues result from sales of TraceCop a cybersecurity solution. TraceCop revenues were $3.7 million for the
year ended December 31, 2023, compared to $6.1 million for the year ended December 31, 2022. We can offer no assurances that our new INTRUSION
 Shield solution will reduce our dependence on this single solution and in the absence of a shift in solution mix, we may continue
to face risks if sales of this key solution to these limited customers were to decrease.

 We may not be successful in our efforts to broaden
the marketing and sale of the INTRUSION Shield.

 We believe that we must expand
our sales and marketing efforts for INTRUSION Shield to achieve marketplace acceptance and to generate revenue for the Company.
However, these efforts depend, in large part, on the success of our channel partners as they market and sell INTRUSION Shield,
which may not be successful. If we are unsuccessful in our efforts to leverage channel and strategic partners, we may not be able to generate
sufficient revenue from INTRUSION Shield to improve the Company's financial position, results of operations, and cash
flow position.

 The current geo-political climate may add uncertainty
in the dealings of our customers and could cause them to delay indefinitely certain cybersecurity initiatives or to determine not to introduce
or implement any new or innovative cyber-solution products into their information networks.

 Continuing events in many
regions around the world have introduced a significant level of uncertainty in the dealings of our current and potential customers that
could cause them to be hesitant to implement new cybersecurity initiatives regardless of the efficacy of our INTRUSION Shield
product. Further, these entities may also determine not to deploy their cash reserves in the face of such uncertainty. These uncertainties
could depress the interest or the ability of companies and governmental entities to test, evaluate, and deploy our INTRUSION Shield
in their network environments.

 A large percentage of our current revenues are
received from U.S. government entities, and the loss of these customers or our failure to widen the scope of our customer base to include
general commercial enterprises could negatively affect our revenues.

 A substantial percentage
of our current revenues result from sales to U.S. government entities. If we were to lose one or more of these customers, our revenues
could decline, and our business and prospects may be materially harmed. Further, sales to the government present risks in addition to
those involved in sales to commercial customers, including potential disruption due to appropriation and spending patterns, delays in
approving a federal budget and the government's right to cancel contracts and purchase orders for its convenience. The factors that
could cause us to lose these U.S. government customers or otherwise materially harm our business, prospects, financial condition, or results
of operations include:

 budget constraints affecting government spending generally, or specific departments or agencies, and changes in fiscal policies or a reduction of available funding;

 re-allocation of government resources;

 disruptions in our customers' ability to access funding from capital markets;

 curtailment of governments' use of outsourced service providers and governments' in-sourcing of certain services;

 the adoption of new laws or regulations pertaining to government procurement;

 government appropriations delays or blanket reductions in departmental budgets;

 suspension or prohibition from contracting with the government or any significant agency with which we conduct business;

 increased use of shorter duration awards, which increases the frequency we may need to recompete for work;

 impairment of our reputation or relationships with any significant government agency with which we conduct business;

 decreased use of small business set asides or changes to the definition of small business by government agencies;

 increased use of lowest-priced, technically acceptable contract award criteria by government agencies;

 increased aggressiveness by the government in seeking rights in technical data, computer software, and computer software documentation that we deliver under a contract, which may result in "leveling the playing field" for competitors on follow-on procurements;

 delays in the payment of our invoices by government payment offices; and

 national or international health emergencies, such as the COVID-19 public health pandemic.

 While we expect that developing
relationships with non-governmental customers will mitigate or eliminate this dependence on, and risk from, serving governmental entities,
we can offer no assurances that we will be able to sufficiently diversify our customer portfolio in a time and manner to adequately mitigate
this risk.

 A decline in federal,
state, or local government spending would likely negatively affect our product revenues and earnings.

 The success of the cybersecurity
solutions we sell depends substantially on the amount of funds budgeted by federal, state, and local government agencies that make up
our current and potential customers. Global credit and financial markets have experienced extreme disruptions in the recent past, including
severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur in the future. Deterioration
in general economic conditions may result in lower tax revenues that could lead to reductions in government spending. Poor economic conditions
could in turn lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial position,
and cash flows.

 We are highly dependent on sales of our current
solutions through indirect channels, the loss of which would materially adversely affect our operations.

 For the years ended December
31, 2023, and 2022, we derived 2.6% and 31.5% of our revenues from sales through indirect sales channels, such as distributors, value-added
resellers, system integrators, original equipment manufacturers and managed service providers. We must expand sales of our current solutions
as well as any new solutions through these indirect channels in order to increase our revenues. We cannot assure you that our current
solutions or future solutions will gain market acceptance in these indirect sales channels or that sales through these indirect sales
channels will increase our revenues. Further, many of our competitors are also trying to sell their products and solutions through these
indirect sales channels, which could result in lower prices and reduced profit margins for the sales of our solutions.

 Our business depends on the continued service
of our key management and technical personnel.

 Our success depends upon the continued
contributions of our key management, sales, marketing, research and development and operational personnel, including Anthony Scott, our
President, and Chief Executive Officer; T. Joe Head, our Chief Technology Officer; Kimberly Pinson, our Chief Financial Officer; and other
key technical personnel. The loss of the services of one or more of our key employees in the future could have a material adverse effect
on our operating results. We also believe our future success will depend upon our ability to attract and retain additional highly skilled
management, technical, marketing, research and development, and operational personnel with experience in managing large and rapidly changing
companies, as well as training, motivating and supervising employees. The market for hiring and retaining certain technical personnel,
including software engineers, has become more competitive and intense in recent years. Failure to attract and retain a sufficient number
of qualified technical personnel, including software engineers, or retain our key personnel could have a material adverse effect on our
operating results.

 We could experience damage to our reputation
in the cybersecurity industry in the event that our INTRUSION Shield solution fails to meet our customers' needs or to achieve
market acceptance.

 Our reputation in the industry
may be harmed if we experience delivery delays, or if our customers do not perceive the benefits of purchasing and using INTRUSION
 Shield as part of their comprehensive cybersecurity solution, our position as a leader in this technology space may be damaged
and could affect the willingness of our customers, as well as potential customers, to purchase our other solutions that function separately
from INTRUSION Shield. Any reputational damage could result in a decrease in orders for all our solutions, the loss of current
customers, and a decrease in our overall revenues which could in turn have a material adverse effect on our results of operations.

 If we fail to respond to rapid technological
changes in the network security industry, we may lose customers, or our solutions may become obsolete.

 The network security industry
is characterized by frequent product and service introductions, rapidly changing technology, and continued evolution of new industry standards.
We have and must continue to introduce upgrades to our current solutions rapidly in response to changing circumstances and customer needs
such as the creation and introduction of new computer viruses or other novel external attacks on computer networks. Further, our new INTRUSION
 Shield solution represents our efforts to continue to provide state-of-the art first-in-time innovation for our customer's
cybersecurity solutions. As a result, our success depends upon our ability to develop and introduce timely upgrades, enhancements, and
new solutions to meet evolving customer requirements and industry standards. The development of technologically advanced network security
products and solutions is a complex and uncertain process requiring high levels of innovation, rapid response, and accurate anticipation
of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new
or enhanced solutions successfully in a timely manner. Further, we or our competitors may introduce new solutions or enhancements that
shorten the life cycle of our existing solutions or cause our existing solutions to become obsolete.

 We must expend time and resources addressing
potential cybersecurity risk, and any breach of our information security safeguards could have a material adverse effect on the Company.

 The threat of cyber-attacks requires
additional time and money to be expended in efforts to prevent any breaches of our information security protocols. However, we can provide
no assurances that we can prevent all such attempts from being successful, which could result in expenses to address and remediate such
breaches as well as potentially losing the confidence of our customers who depend upon our services to prevent and mitigate such attacks
on their respective business. Should a material breach of our information security systems occur, it would likely have a material adverse
impact on our business operations, our customer relations, and our current and future sales prospects, resulting in a significant loss
of revenue.

 A breach of network security could harm public
perception of our cybersecurity solutions, which could cause us to lose revenues.

 If an actual or perceived breach
of network security occurs in the network of a customer of our cybersecurity solutions, regardless of whether the breach is attributable
to our solutions, the market perception of the effectiveness of our solutions could be harmed. This could cause us to lose current and
potential end customers or cause us to lose current and potential value-added resellers and distributors. 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.

 If our solutions do not interoperate with our
customers' networks, installations will be delayed or cancelled and could harm our business.

 Our solutions are designed
to interface with our customers' existing networks, each of which has different specifications and utilize multiple protocol standards
and products or solutions from other vendors. Many of our customers' networks contain multiple generations of products that have
been added over time as these networks have grown and evolved. Our solutions will be required to interoperate with many products and solutions
within these networks as well as future products or solutions to meet our customers' requirements. If we find errors in the existing
software or defects in the hardware used in our customers' networks, we may have to modify our software or hardware to fix or overcome
these errors so that our solutions will interoperate and scale with the existing software and hardware, which could be costly and negatively
impact our operating results. In addition, if our solutions do not interoperate with those of our customers' networks, demand for
our solutions could be adversely affected, orders for our solutions could be cancelled, or our solutions could be returned. This could
hurt our operating results, damage our reputation, and seriously harm our business and prospects.

 We face intense competition from both start-up
and established companies that may have significant advantages over us and our solutions.

 The market for our solutions is
intensely competitive. There are numerous companies competing with us in various segments of the data security markets, and their products
or solutions may have advantages over our solutions in areas such as conformity to existing and emerging industry standards, interoperability
with networking and other cybersecurity products, management and security capabilities, performance, price, ease of use, scalability,
reliability, flexibility, features, and technical support.

 Our principal competitors in the
data mining and advanced persistent threat market include Darktrace, Trellix, and Recorded Futures. Our current and potential competitors
may have one or more of the following significant advantages over us:

 greater financial, technical, and marketing resources;

 better name recognition;

 more comprehensive security solutions;

 better or more extensive cooperative relationships; and

 larger customer base.

 We cannot assure you that we
will be able to compete successfully with our existing or new competitors. Some of our competitors may have, in relation to us, one or
more of the following:

 longer operating histories;

 longer-standing relationships with OEM and end-user customers; and

 greater customer service, public relations, and other resources.

 As a result, these competitors
may be able to more quickly develop or adapt to new or emerging technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of their products or solutions. Additionally, it is likely that new competitors or alliances among
existing competitors could emerge and rapidly acquire significant market share.

 If we are unable to implement and maintain effective
internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock may decline.

 As a public company, we are required
to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further, we are
required to report any changes in internal controls on a quarterly basis. In addition, we are required to furnish a report by management
on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended
(the "Sarbanes-Oxley Act").

 If we identify material weaknesses
in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner,
or if we assert that our internal control over financial reporting is ineffective, investors may lose confidence in the accuracy and completeness
of our financial reports and the market price of the common stock could be negatively affected. We also could become subject to investigations
by the stock exchange on which our securities are listed, the Securities Exchange Commission ("SEC"), or other regulatory
authorities, which could require additional financial and management resources, and could have a material adverse effect on the market
price of our common stock.

 Scarcity of products and materials in the supply
chain could hinder or prevent the deployment of our INTRUSION Shield for our customers who elect to use the wired version of our solution.

 Should any of the component
parts required for the hardware interface our customers use to access and to utilize the INTRUSION Shield product become
scarce, we may have to delay or cancel our fulfillment of orders that could defer potential revenues or even result in customer cancellations,
which would have a negative effect on our financial position and results of operations.

 We incur significantly increased costs because
of operating as a public company, and our management is required to devote substantial time to compliance matters and initiatives.

 As a public company with an obligation
to file reports with the SEC under the Exchange Act, we incur significant legal, accounting, and other expenses that we would not incur
as a private company. In addition, the Sarbanes-Oxley Act imposes various requirements on public companies, including requiring establishment
and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial amount of time
to these compliance initiatives. We cannot predict or estimate the amount of additional costs we will incur to meet our additional disclosure
obligations under the Exchange Act or the timing of such costs.

 The Sarbanes-Oxley Act requires,
among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We report
on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition,
in the first Annual Report on Form 10-K following the date on which we no longer qualify as a smaller reporting company, we will be required
to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting.
Our compliance with Section 404 of the Sarbanes-Oxley Act could require that we incur substantial accounting expense and expend significant
management efforts including the potential of hiring additional accounting and financial staff with appropriate public company experience
and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or
our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed
to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC
or other regulatory authorities, which would require additional financial and management resources.

 Investment Risks

 We experience volatility in the market for our
common stock, particularly with respect to swings in the market price as well as volatility in the trading of our common stock.

 We experience significant
shifts in the market value of our common stock as it trades on the Nasdaq Capital Market ("Nasdaq") as well as volatility in
the trading volume of our shares on that market. For example, the market price of our common stock fluctuated between $78.00 and $4.40
during the year ended December 31, 2023. These fluctuations may result in a hesitancy for investors to purchase and hold shares of our
common stock, continued depression of the market value of our stock, and ultimately negatively affect our ability to raise capital through
the issuance and sale of our common stock, particularly through our At the Market ("ATM") program or otherwise.

 Nasdaq may delist our common stock from
trading on its exchange, which could limit stockholders' ability to trade our common stock.

 Our common stock is listed
for trading on the Nasdaq Capital Market, which requires us to meet certain financial, public float, bid price and liquidity standards
on an ongoing basis to continue the listing of our common stock. If we fail to meet these continued listing requirements, our common stock
may be subject to delisting.

 On September 26, 2023, the
Company received the Notification Letter from Nasdaq notifying the Company that the closing bid price of the Company's common stock
over the thirty consecutive trading days from August 14, 2023, through September 25, 2023, had fallen below $1.00 per share and therefore,
was not in compliance with the Minimum Bid Requirement.

 On October 26, 2023, we received
a letter from Nasdaq's Listing Qualifications Staff (the "Staff Determination") notifying us that, based on the Company's
non-compliance with the $35 million minimum value listing standard for continued listing on the Nasdaq, as set forth in Nasdaq Marketplace
Rule 5550(b)(2), the Company's securities are subject to delisting from Nasdaq.

 The Company requested a hearing
before the Hearings Panel. This hearing was held on February 1, 2024, at which time the Company presented a plan to regain and sustain
compliance with all the applicable requirements for continued listing on The Nasdaq Capital Market. The Hearings Panel granted the Company
an extension until April 23, 2024, in which to regain compliance and cure the deficiencies for continued listing.

 The Company is executing
a plan to gain compliance with an alternative Nasdaq listing criteria, Nasdaq Listing Rule 5550(b)(1) (the equity standard) which requires
a minimum of $2.5 million in net equity. Pursuant to this multi-step plan, the Company: 1) is continuing to utilize its ATM program,
2) closed on a private offering in November 2023 and is anticipating closing on an additional private offering of common stock in the
near term, 3) sent warrant inducement letters to warrant holders from the Company's 2022 registered direct offering and the November
2023 private offering temporarily reducing the exercise price of the outstanding warrants and 4) through a series of three transactions
in the fourth quarter 2023 and two transactions in March 2024 exchanged $10.0 million in senior debt for $750 thousand in common stock
and $9.3 million new preferred Series A stock.

 In order to increase the share
price of our common stock above the $1.00 Minimum Bid Requirement, we completed a reverse stock split of one share for twenty which was
effective on March 22, 2024.

 All of these steps combined provide
a path for regaining compliance, however, there can be no assurance that the Company will be able to regain or maintain compliance with
either Nasdaq listing criteria.

 If our common stock is delisted
and we are not able to list our common stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter
market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of
market quotations for our common stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased
ability to issue additional securities and obtain additional financing in the future.

 Shares eligible for future sale may adversely
affect the market.

 Our equity incentive plans allow us to issue stock
options and award shares of our common stock. We may in the future create additional equity incentive plans, which may at that time require
us to file a registration statement under the Securities Act to cover the issuance of shares upon the exercise or vesting of awards granted
or otherwise purchased under those plans. As a result, any shares issued or granted under the plans may be freely tradable in the public
market. If equity securities are issued under the plans, if implemented, and it is perceived that they will be sold in the public market,
then the price of our common stock could decline substantially.

 We have never paid dividends on our common stock
and have no plans to do so in the future.

 Holders of shares of our common stock are entitled
to receive such dividends as may be declared by our Board. To date, we have paid no cash dividends on our shares of common stock, and
we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to
provide funds for the operations of our business. Therefore, any return investors in our common stock may have will be in the form of
appreciation, if any, in the market value of their shares of common stock.

 Risks Related to our Intellectual Property

 We must adequately protect our intellectual
property to prevent loss of valuable proprietary information.

 We rely primarily on a combination
of patent, copyright, trademark and trade secret laws, confidentiality procedures, and non-disclosure agreements to protect our proprietary
technology. However, unauthorized parties may attempt to copy or reverse engineer aspects of our solutions or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our solutions is difficult, and we cannot be certain that the steps we have
taken will prevent misappropriation of our intellectual property. This is particularly true in foreign countries whose laws may not protect
proprietary rights to the same extent as the laws of the U.S. and may not provide us with an effective remedy against unauthorized use.
If protection of our intellectual property proves to be inadequate or unenforceable, others may be able to use our proprietary developments
without compensation to us, resulting in potential cost advantages to our competitors.

 We may incur substantial expenses defending
ourselves against claims of infringement.

 There are numerous patents held
by many companies relating to the design and manufacture of network security systems. Third parties may claim that our solutions infringe
on their intellectual property rights. Any claim, with or without merit, could consume our management's time, result in costly litigation,
cause delays in sales or implementations of our solutions or require us to enter into royalty or licensing agreements. Royalty and licensing
agreements, if required and available, may be on terms unacceptable to us or detrimental to our business. Moreover, a successful claim
of product infringement against us or our failure or inability to license the infringed or similar technology on commercially reasonable
terms could seriously harm our business.

 Our solutions are highly technical and if they
contain undetected errors, our business could be adversely affected, and we might have to defend lawsuits or pay damages in connection
with any alleged or actual failure of our solutions and services.

 Our solutions are highly technical
and complex, are critical to the operation of many networks and, in the case of ours, provide and monitor network security and may protect
valuable information. Our solutions have contained and may contain one or more undetected errors, defects, or security vulnerabilities.
Some errors in our solutions may only be discovered after a solution has been installed and used by end customers. Any errors or security
vulnerabilities discovered in our solutions after commercial release could result in loss of revenues or delay in revenue recognition,
loss of customers and increased service and warranty cost, any of which could adversely affect our business and results of operations.
In addition, we could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is
costly and may divert management's attention. In addition, if our business liability insurance coverage is inadequate or future
coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.

 Item 1B. Unresolved Staff Comments.

 None.

 Item 1C. Cybersecurity.

 We recognize the importance of securing our data and information systems
and have a process for assessing, mitigating and managing cybersecurity and related risks.

 Our VP of Engineering, who
reports to the CEO, leads our cybersecurity function and is responsible for managing our cybersecurity risk and the protection of our
networks, systems, and data. The VP of Engineering uses both internal and external resources to execute this process including our own
 INTRUSION Shield technology, to help prevent, identify, escalate, investigate, and resolve security incidents in a timely
manner. The Company, with the oversight of the CTO, also requires all employees to complete an annual cybersecurity training course.

 Our Board of Directors is responsible
for overseeing our enterprise risk management activities. The Board of Directors receives an update on the Company's risk management
process and the risk trends related to cybersecurity at least annually.

 Item 2. Properties.

 Our corporate headquarters
are currently located in 10,705 square feet of space at 101 East Park Blvd, Suite 1200, Plano Texas. This facility houses our corporate
administration, engineering, sales, and marketing operations. The lease for this facility extends until March 2035. We also have engineers
and other employees working remotely in Texas as well as several other states.

 We believe that the existing facility
will be adequate to meet our operational requirements through the expiration of the lease. We believe that our property insurance provides
adequate coverage for our leased facilities. See Note 5 – Right-of-use Asset and Leasing Liabilities to our Consolidated
Financial Statements for additional information regarding our obligations under leases.

 Item 3. Legal Proceedings.

 Class Action Litigation

 On April 16, 2021, a class
action lawsuit was filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Celeste v. Intrusion
Inc. et al., Case No. 4:21-cv-00307 (E.D. Tex.) against us, our now-former chief financial officer, and now-former chief executive officer
alleging, among other things, that the defendants made false and/or misleading statements or omissions about our business, operations,
and prospects in violation of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the
Exchange Act. The Celeste lawsuit claimed compensatory damages and legal fees.

 On May 14, 2021, a related class
action lawsuit was filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Neely v. Intrusion
Inc., et al., Case No. 4:12-cv-00374 (E.D. Tex.) against us, our now-former chief financial officer, and now-former chief executive officer.
The Neely lawsuit alleged the same violations under the federal securities laws as those alleged in the Celeste lawsuit. The Neely lawsuit
also sought compensatory damages and legal fees.

 On November 23, 2021, the Court
consolidated the Celeste and Neely actions, and appointed a lead plaintiff and lead plaintiff's counsel. The lead plaintiff filed
his amended complaint on February 7, 2022.

 The parties to the consolidated
class action held a mediation on April 5, 2022, at the conclusion of which the parties executed a settlement term sheet setting forth
the material terms associated with the resolution of the action, subject to the preparation of formal documents and a plan of distribution
approved by the Court. The settlement agreement was subject to certain terms and conditions and received final approval by the Court on
December 16, 2022. At that time, a final judgement was entered dismissing the case, with the Court retaining jurisdiction over the action
for purposes of enforcing the terms of the class settlement agreement. The $3.3 million settlement was paid by our insurance provider
under our insurance policy as our retention had previously been exhausted.

 The lead plaintiff in the class
action filed a motion for distribution of settlement funds on February 21, 2023. The court approved the parties' class action settlement
and plan of allocation on March 22, 2023, and cancelled the previously-rescheduled March 31, 2023, hearing on the motion for distribution,
all remaining matters in the class action then-pending have been fully and finally adjudicated.

 Securities Investigation

 On August 8, 2021, we received
a notification from the SEC, Division of Enforcement, that it was conducting an investigation captioned In the Matter of Intrusion
Inc. and requesting we produce certain documents and information. On November 9, 2021, the SEC served a subpoena to us in connection with
this investigation which formally requested substantially similar information as in the prior request. On September 26, 2023, we consented
to the entry of final judgment, in the act styled Securities and Exchange Commission v Intrusion Inc, No. 4:23-CV-00859 (E.D. Tex.
Filed September 26, 2023). On October 5, 2023, the court approved the final judgment with no penalties assessed against the Company.

 Stockholder Derivative Claim

 On June 3, 2022, a stockholder
derivative complaint was filed in U.S. District Court, District of Delaware by plaintiff Nathan Prawitt (the "Plaintiff Stockholder")
on behalf of Intrusion against certain of our current and former officers and directors (collectively the "Defendants"). Plaintiff
alleges that Defendants through various actions breached their fiduciary duties, wasted corporate assets, and unjustly enriched Defendants
by (a) incurring costs and expenses in connection with the ongoing SEC investigation, (b) incurring costs and expenses to defend us with
respect to the consolidated class action, (c) settling class-wide liability with respect to the consolidated class action, as well as
ancillary claims regarding sales of our common stock by certain of the Defendants. On September 28, 2023, we agreed to settle the claim.
On October 2, 2023, public notice of the settlement agreement was given. The settlement agreement provides in part for (i) an amendment
to our Bylaws, committee Charters, and other applicable corporate policies to implement certain measures set forth more fully therein,
to remain in effect for no less than three years; (ii) attorneys' fees and expenses to plaintiff's counsel of $0.3 million;
and (iii) the dismissal of all claims against the Defendants, including the Company, in connection with the action. The $0.3 million settlement
payment was paid by our insurance provider under our insurance policy since our $0.5 million retention was previously exhausted. A hearing
is scheduled for April 3, 2024, to obtain court approval of the settlement, agreement for the court to rule upon any objections to the
proposed settlement, and for entry of final judgment in the matter.

 In addition to these legal
proceedings, we are subject to various other claims that may arise in the ordinary course of business. We do not believe that any claims
exist where the outcome of such matters would have a material adverse effect on our consolidated financial position, operating results,
or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on our future results.

 Item 5. Market for Common Equity and Related Stockholder Matters and
Business Issuer Purchases of Equity Securities.

 Our common stock trades on
the Nasdaq Capital Market, where it is currently listed under the symbol "INTZ." As of March 25, 2024, there were approximately
ninety-five registered holders of record of our common stock. The Company does not have a history of paying dividends on its common stock
and has no present intention to declare any dividends in the foreseeable future.

 All equity compensation plans
under which our common stock is reserved for issuance have previously been approved by our stockholders. The following table provides
summary information as of December 31, 2023, for all our equity compensation plans (in thousands, except per share data). See Note 10
– Stock-Based Compensation to our Consolidated Financial Statements for additional discussion.

 Number of shares of common stock to be issued upon exercise
 of outstanding
 options (1)

 Weighted average
 exercise price of
 outstanding options

 Number of shares unvested restricted stock

 Weighted average grant date fair value

 No. of shares of
 common stock
 remaining available
 for future issuance
 under equity
 compensation plans

 Equity compensation plans approved by security holders

 $
 62.40

 $
 26.20

 Equity compensation plans not approved by security holders

 –

 –

 –

 –

 –

 Total

 $
 62.40

 $
 26.20

 (1)

 Included in the outstanding options are 4 from the 2005 Stock Incentive Plan,
twenty from the 2015 Stock Option Plan and twenty-six from the 2021 Omnibus Incentive Plan.

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

 General

 The following discussion and
analysis include information management believes is relevant to understand and assess our consolidated financial condition and results
of operations. This section should be read in conjunction with our Consolidated Financial Statements, accompanying notes and the risk
factors contained in this report.

 Overview

 Intrusion Inc. offers businesses
of all sizes and industries products and services that leverage the Company's exclusive threat intelligence database of over 8.5
billion IP addresses and domain names. After many years of gathering intelligence and providing our INTRUSION TraceCop and
 Savant solutions exclusively to government entities, we released our first commercial product in 2021, the INTRUSION
 Shield. INTRUSION Shield was designed to allow businesses to incorporate a Zero Trust, reputation-based security
solution into their existing infrastructure to observe traffic flow and instantly block known malicious or unknown connections from both
entering or exiting a network, making it an ideal solution for protecting from Zero-Day and ransomware attacks.

 Much of 2022 was spent improving
the INTRUSION Shield On-Premise performance and developing the Shield Cloud and End-Point solutions, both
of which were released in September 2022. During 2023, our primary focus has been building out our sales reseller and channel platform
and working with those partners to 1) increase our sales pipeline and 2) progress customer prospects, leads and opportunities through
the sales lifecycle. Gaining traction with our Shield solutions has taken longer than initially anticipated. We feel that
the progress made with our reseller and channel community along with refining our product messaging will help to shorten the sales cycle
and grow revenues in future periods.

 As discussed in more detail below,
on December 31, 2023, we had $0.1 million in cash. If we are not able to obtain additional debt or equity financing on terms and conditions
acceptable to us, we may be unable to implement our business plan, fund our liquidity needs or even continue our operations.

 Results of Operations

 Comparison of the Years ended December 31, 2023, and December 31, 2022

 Year Ended December 31,

 Change

 (in thousands)

 2023

 2022

 $

 %

 Revenue

 $
 5,611

 $
 7,529

 (1,918
)

 -25.5%

 Cost of Revenue

 1,257

 3,354

 (2,097
)

 -62.5%

 Gross Profit

 4,354

 4,175

 4.3%

 Operating Expenses:

 Sales and marketing

 5,670

 6,510

 (840
)

 -12.9%

 Research and development

 5,556

 6,465

 (909
)

 -14.1%

 General and administrative

 5,174

 7,483

 (2,309
)

 -30.9%

 Operating Loss

 (12,046
)

 (16,283
)

 4,237

 26.0%

 Interest and Other Income

 2,028

 (1,985
)

 -97.9%

 Interest Expense

 (1,888
)

 (2,359
)

 20.0%

 Gain on Lease Termination

 –

 (385
)

 -100.0%

 Loss Before Income Taxes

 (13,891
)

 (16,229
)

 2,338

 14.4%

 Income Tax

 –

 –

 –

 –

 Net Loss

 $
 (13,891
)

 $
 (16,229
)

 2,338

 14.4%

 Revenues

 Total revenue decreased $1.9
million or 25.5% to $5.6 million in 2023 from $7.5 million in 2022. Consulting revenues decreased $2.3 million primarily resulting from
the loss of a contract in the fourth quarter 2022 in which Intrusion's prime sponsor chose not to renew the final option year of
a contract that had been in place since 2018. This contract represented annual revenue totaling $2.6 million. While the loss of this
contract significantly impacted Intrusion's top-line revenue, the gross margin on this contract was 14% and, as a result, had a
marginal impact on profitability. We are continuing to pursue new consulting opportunities and expect to see an increase in consulting
revenues in 2024. The decline in consulting revenues was partially offset by an increase of $0.4 million in Shield revenues
as a result of the expanded use of Shield from existing customers and new customers signed in 2023.

 We announced a $5 million
multi-year Shield award in October 2023. The rollout of the Shield services to this customer has been delayed
due to factors outside of our control, we expect this project to be back on track beginning in the second quarter 2024. Additionally,
we were informed by our largest Shield customer that they will not be renewing their contract. This customer was one of
the original users of the product and had a non-standard custom implementation of INTRUSION Shield that is no longer supported.
This non-renewal will impact revenues beginning in the second quarter 2024. We are beginning to see traction with our Shield
products with multiple Shield sales that, essentially, are paid proof of values which have the potential for significant
 Shield sales growth beyond the initial engagement. On December 31, 2023, our Shield opportunities comprised
a large percentage of our sales pipeline.

 Concentration of Revenues.

 Revenues from sales to various
U.S. government entities totaled $2.6 million, or 46.2% of revenues, for the year ended December 31, 2023, compared to $5.0 million, or
65.8% of revenues, for the same period in 2022. In 2023 we had two government entities that individually accounted for over 10% of our
revenues compared to three in 2022. Sales to commercial customers totaled $3.0 million or 53.8% of total revenue for year ended December
31, 2023, compared to $2.6 million or 34.2% of total revenue for the same period in 2022. Two commercial customers individually accounted
for over 10% of total revenues in both 2023 and 2022. We have increased our Shield sales and marketing efforts by expanding
our reseller channels. We anticipate our concentration of revenues will vary among customers in future periods depending upon the timing
of certain sales, we anticipate that sales to government customers, while comprising a significant portion of our revenues in future periods,
will represent a lower percentage of our revenue base as we gain traction selling our Shield products into commercial markets.

 Sales to the government present
risks in addition to those involved in sales to commercial customers which could adversely affect our revenues, including, without limitation,
potential disruption to appropriation and spending patterns and the government's reservation of the right to cancel contracts and
purchase orders for its convenience. Fourth quarter 2023 revenues declined 7% sequentially from third quarter 2023 primarily due to the
continuing resolution and the absence of an approved federal budget, which has resulted in many new spending decisions from government
customers being delayed. Specifically, a long-standing Department of Defense contract has not been funded for the 2024 government fiscal
year, this resulted in lower consulting revenues in the fourth quarter and has also impacted first quarter 2024 revenues. Currently, we
are not aware of any additional proposed cancellation or renegotiation of any of our existing arrangements with government entities and,
historically, cancellations or renegotiated orders by government entities have not resulted in a material adverse effect on our business.

 The Company's similar product
and service offerings are not viewed as individual segments, as its management analyzes the business as a whole and expenses are not allocated
to each product offering.

 Gross Profit

 Gross profit for the 12-months
ended December 31, 2023, and 2022 totaled $4.4 million or 77.6% compared to $4.2 million or 55.5%. The significantly improved gross margin
in 2023 is mostly due to the loss of the low margin contract discussed above and Shield revenues representing a larger percentage
of revenues, 28.4% compared to 15.6% in 2022. To the extent Shield revenues become a larger percentage of revenues, we anticipate
we will continue to see favorable growth in gross profit margins.

 Operating Expenses

 Operating expenses for the
year ended December 31, 2023, totaled $16.4 million, a decrease of 19.8% when compared to $20.5 million for the year ended December 31,
2022. The year over year change was most notably due to the reduced legal expense associated with the various litigation matters that
arose in 2021 that for the most part are fully settled, and reduced contractor labor and employee costs. Employee headcount on December
31, 2023, totaled forty-nine compared to sixty-seven on December 31, 2022.

 Sales and
Marketing

 Sales and marketing expenses
decreased to $5.7 million in 2023, compared to $6.5 million in 2022. Certain discretionary marketing spends inclusive of participation
in trade shows, utilization of third-party contractors for content and product messaging and travel, are likely to vary over time based
on savings initiatives that may be necessary.

 Research and Development

 Research and development expenses
decreased to $5.6 million in 2023 compared to $6.5 million in 2022. Many of the cost reduction measures taken in 2023 related to research
and development costs. Research and development costs may vary over time as we determine the frequency of new releases, improved functionality
and enhancements needed to be competitive with our product offering.

 General and
Administrative

 General and administrative
expenses totaled $5.2 million in 2023 compared to $7.5 million in 2022. The decrease in general and administrative expenses is primarily
due to a reduction in legal costs of $1.4 million associated with various litigation matters that arose in 2021 and continued through
2023. The majority of all matters have since settled as described in more detail in Item 3. Legal Proceedings of this report. In late
2022 we hired an in-house General Counsel which also contributed to the reduced outside legal costs in 2023. Other factors contributing
to the decreased spend include (i) reduced use of consultants and contractors in 2023, (ii) recruiting fees incurred in the 2022 period,
and (iii) voluntary temporary reductions in director and officer compensation. Insurance expense for our Directors' and Officers'
insurance policy increased in 2023 when compared to 2022 as a result of the class action lawsuits and related claims activity and, increasing
coverage limits for our new policy year.

 Interest Expense

 Our interest expense consists
primarily of interest related to the Streeterville notes entered into in March and June of 2022 and related debt issuance cost amortization
as well as interest expense from finance leases. Interest expense for 2023 totaled $1.9 million, a decrease of $0.5 million. The decrease
primarily relates to the reversal of interest recorded to accrete the value of the Streeterville notes to the stock-settled value for
potential redemptions paid in stock as no redemption payments in cash or stock were made in 2023.

 Interest and Other Income

 Interest and other income were
negligible in 2023. 2022 included $2.0 million related to the Cares Act Employee Retention Credit ("ERC").

 Gain on Lease Termination

 In 2022 we recorded a gain of
$0.4 million relating to the settlement of our lease abandonment lawsuit.

 Income Taxes

 Our effective income tax rate
was 0% in 2023 and 2022 as valuation allowances have been recorded for the entire amount of the net deferred tax assets due to uncertainty
of realization.

 Consolidated Statements of Cash Flows

 Our cash flows for the years ended
December 31, 2023, and 2022 (in thousands) were:

 Year Ended

 2023

 2022

 Net cash used in operating activities

 $
 (7,767
)

 $
 (13,190
)

 Net cash used in investing activities

 (1,448
)

 (1,479
)

 Net cash provided by financing activities

 6,339

 13,584

 Change in cash and cash equivalents

 $
 (2,876
)

 $
 (1,085
)

 Operating Activities

 Net cash used in operations
for the year ended December 31, 2023, was ($7.8) million due to a net loss of ($13.9) million, offset by 1) adjustments for non-cash items
of $4.7 million which are mostly comprised of depreciation, stock-based compensation, and interest related to Streeterville notes and
2) $1.4 million provided from working capital principally relating to the cash receipt of amounts due relating to ERC.

 Net cash used in operations for
the year ended December 31, 2022, was ($13.2) million due to a net loss of ($16.2) million offset by adjustments for non-cash items of
$5.0 million which are mostly comprised of depreciation, stock-based compensation and interest related to Streeterville notes, and changes
in working capital consisting primarily of a reduction in trade receivables of $0.5 million; an increase in other receivables relating
principally to the remaining ERC refund outstanding ($1.5) million; an increase in accounts payable and accrued expenses $0.2 million;
and a decrease in operating lease liabilities ($1.0) million.

 Investing Activities

 For the year ended December 31,
2023, net cash used in investing activities was ($1.4) million, which was principally the capitalization of internally developed software.

 Net cash used in investing
activities for the year ended December 31, 2022, totaled ($1.5) million and was primarily related to capitalized internal use software
of ($1.2) million for the new Shield Cloud and End Point solutions as well as enhancements to the Shield On-Premise
solution and, the purchase of equipment for use with the Shield On-Premise solution, in the data center and by employees
of ($0.3) million.

 Financing Activities

 For year ended December 31,
2023, net cash provided by financing activities was $6.3 million which consisted principally of proceeds from sales of common stock using
our ATM program of $4.7 million and a private placement in November 2023 of $2.3 million offset partially by a $0.4 million paydown on
the Streeterville notes.

 Net cash provided by financing
activities was $13.6 million for the year ended December 31, 2022. Primary sources of cash from financing activities included proceeds
from the issuance of the two Streeterville notes payable, net of issuance costs, equal to $9.3 million (see Note 6 Notes Payable
to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K), net proceeds received from our registered direct offering
of $4.3 million, net proceeds from issuance of shares from our ATM program of $2.0 million, and proceeds received from a private placement
sale of common stock equal to $0.1 million. Funds used in financing activities included ($1.5) million in principal repayments on the
Streeterville notes payable and ($0.6) million payments on equipment financing leases.

 Liquidity and Capital Resources

 As of December 31, 2023, we had
cash and cash equivalents of $0.1 million and a working capital deficit of ($13.1) million. We need to raise additional funds to continue
operations and comply with our financial obligations.

 We are executing a plan to
regain compliance with the Nasdaq listing standards as described more fully in Item 1A Risk Factors. This multi-step plan includes: 1)
continued utilization of our ATM program, 2) private offerings of common stock, 3) a warrant inducement offer for the sale of common stock
at a reduced exercise price to warrant holders from the Company's 2022 registered direct offering and November 2023 private offerings,
and 4) a series of three transactions in the fourth quarter 2023 and two transactions in March 2024 exchanging $10.0 million in senior
debt for $750 thousand in common stock and $9.3 million new preferred Series A stock. While the debt for equity exchanges does not provide
funding for operations, it substantially deleverages the company and reduces the working capital deficit. We can provide no assurances
that we will be able to close on or obtain such financing on acceptable terms or at all and, in the case of equity or equity-linked financings,
such financings will result in additional dilution to our stockholders.

 Our principal sources of cash
for funding operations in 2023 has been net proceeds received from sales of common stock using our ATM program of $4.7 million, a private
placement offering completed in November 2023 of $2.3 million, and net funds through changes in working capital which includes receipt
of the remaining ERC refund in the March quarter of $1.4 million. Our principal source of cash for funding operations and growth in 2022
was issuance of the two Streeterville notes which contributed $9.3 million, net of issuance costs, and $6.4 million from the sale and
issuance of common stock and warrants.

 ATM Program

 B. Riley Securities, Inc. acts
as sales agent under our ATM program, which allows us to potentially sell up to $50.0 million of our common stock using the shelf-registration
statement on Form S-3 filed on August 5, 2021. On April 11, 2023, as a result of limitations under General Instruction I.B.6 of Form S-3,
and in agreement with the terms of the sales agreement, the Company revised the aggregate offering price of shares of common stock that
we can sell pursuant to the ATM program to $15.0 million. For the year ended December 31, 2023, we received $4.7 million, net of fees
for sales of common stock pursuant to the program.

 For as long as our public
float is less than $75 million, we will be subject to the limitations set forth in General Instruction I.B.6 of Form S-3, which limit
our ability to conduct primary offerings. Under such limitations, we may not sell, during any 12-month period, securities on Form S-3
having an aggregate market value of more than one-third of our public float. As of March 25, 2024, our public float calculated in accordance
with General Instruction I.B.6 of Form S-3 was $6.8 million.

 Notes Payable

 We entered into a securities
purchase agreement ("SPA") with Streeterville on March 10, 2022, pursuant to which Streeterville purchased two promissory
notes with substantively identical terms. Streeterville purchased the first note on March 10, 2022, and the second note on June 29, 2022,
each note with an aggregate principal amount of $5.4 million in exchange for $5.0 million less certain expenses. We received an aggregate
of approximately $9.3 million, net of transaction expenses, in connection with these issuances.

 In 2023 and 2022 we made $0.4
million and $1.5 million in principal payments, respectively. In the fourth quarter 2023 through 3 separate transactions, we exchanged
$0.6 million in aggregate principal on the First Note for 93.6 thousand shares of our common stock. In March 2024, we exchanged $0.2 million
in principal for 52.2 thousand shares of common stock. Also in March 2024, we exchanged $9.3 million in principle for 9,275 shares of
our newly created Series A preferred stock. The issuance of both common and preferred shares was made pursuant to the exemption from the
registration requirements afforded by Section 3(a)(9) of the Securities Act. The Series A preferred stock has a stated value of $1,100
per share and is subject to the preferences and designations as more fully described in our Amended and Restated Articles of Incorporation
filed on March 15, 2024. Following the exchanges noted herein, the remaining balance on the First Note was $0.5 million. The maturity
date for the First Note is September 2024.

 There can be no assurance that
we will improve our liquidity position or our ability to make redemption or principal payments.

 Critical Accounting Policies and Estimates

 Management's discussion
and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared
in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to credit losses, income taxes, warranty
obligations, maintenance contracts and contingencies. We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

 We believe the following critical
accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

 Capitalized Software Development

 We capitalize internally developed
software using the Agile software development methodology which allows us to accurately track, and record costs associated with new software
development and enhancements.

 Pursuant to ASC Topic 250-40 Internal
Use Software Accounting Capitalization, certain development costs related to our products during the application development stage are
capitalized as part of property and equipment. Costs incurred in the preliminary stages of development are expensed as incurred. The preliminary
stage includes such activities as conceptual formulation of alternatives, evaluation of alternatives, determination of existence of needed
technology, and the final selection of alternatives. Once the application development stage is reached, internal and external costs are
capitalized until the software is complete and ready for its intended use. Capitalized internal use software is amortized on a straight-line
basis over its estimated useful life, which is generally three years.

 Revenue Recognition

 We recognize product revenue upon
shipment or after meeting certain performance obligations. These products can include hardware, software subscriptions and consulting
services. Most of our sales are from consulting services. We also offer software on a subscription basis subject to SaaS. Warranty costs
have not been material.

 We recognize sales of its consulting
services in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Topic 606 whereby revenue from contracts with customers are recognized once the criteria under the five steps below are met:

 i)

 identification of the contract with a customer;

 ii)

 identification of the performance obligations in the contract;

 iii)

 determination of the transaction price;

 iv)

 allocation of the transaction price to the separate performance obligations; and

 v)

 recognition of revenue upon satisfaction of a performance obligation.

 Consulting services including
reporting are typically done monthly, and revenue is matched accordingly. Product sales may include maintenance and customer support allocated
revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy using
the relative selling price method. All product offering and service offering market values are readily determined based on current and
prior stand-alone sales. We defer and recognize maintenance, updates, and support revenue over the term of the contract period, which
is generally one year.

 Normal payment terms offered
to customers, distributors and resellers are net 30 days domestically. We do not offer payment terms that extend beyond one year and
rarely extend payment terms beyond our normal terms. If certain customers do not meet our credit standards, we require payment in advance
to limit our credit exposure.

 With our newest product, INTRUSION
 Shield, we began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement subject
to SaaS guidance under ASC Topic 606. SaaS arrangements are accounted for as subscription services not arrangements that transfer a license
of intellectual property.

 We utilize the five-step process,
mentioned above, per ASC Topic 606 to recognize sales and will follow that directive, also, to define revenue items as individual and
distinct. INTRUSION Shield services provided to our customers for a fixed monthly subscription fee include:

 access to Intrusion's proprietary software and database to detect and prevent unauthorized access to our clients' information networks;

 use of all software, associated media, printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the INTRUSION Shield; and

 tech support, post contract customer support ("PCS") including daily program releases or corrections provided by Intrusion without additional charge.

 Our contract provides for no other
services, and our customers have no rebates or return rights, nor are any such rights anticipated to be offered as part of this service.

 We satisfy our performance obligation
when our INTRUSION Shield solution is available to detect and prevent unauthorized access to a client's information
networks. Revenue is recognized monthly over the term of the contract. The Company's standard initial contract terms automatically
renew unless notice is given 30 days before renewal. Upfront payment of fees is deferred and amortized into income over the period covered
by the contract.

 Allowances for
Credit Losses

 We maintain allowances for
credit losses for estimated losses resulting from the inability of our customers to make required payments. Our receivables are uncollateralized,
and we expect to continue this policy in the future. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, increased allowances may be required. Historically, our estimate for sales returns and credit
losses have not differed materially from actual results.

 Fair Value of Financial
Instruments

 We calculate the fair value of
our assets and liabilities which qualify as financial instruments and include additional information in the Notes to Consolidated Financial
Statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts
receivable, accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these instruments.
Notes payable and financing and operating leases approximate fair value as they bear market rates of interest. None of these instruments
are held for trading purposes.

 Recent Accounting
Pronouncements

 See Note 2 to the Consolidated
Financial Statements (Part II, Item 8 of this Form 10-K).

 Item 8. Financial Statements.

 The information required by this
Item 8 begins on page F-1 of this Annual Report on Form 10-K.

 Item 9A. Controls and Procedures.

 Evaluation of Effectiveness of Disclosure Controls
and Procedures

 The Company's management,
under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation
of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission,
and is accumulated and communicated to management, including the Company's principal executive officer and principal financial officer,
as appropriate, to allow timely decisions regarding required disclosure.

 Management Report on Internal Control over Financial Reporting

 The Company's management
is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of the Company's financial reporting
and the preparation of Consolidated Financial Statements for external purposes in accordance with U.S. generally accepted accounting principles.

 The Company's management,
under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation
of the effectiveness of the Company's internal control over financial reporting based on criteria established in 2013 Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's
evaluation included an assessment of elements such as the design and operating effectiveness of key financial reporting controls, process
documentation, accounting policies, and the Company's overall control environment. Based on its evaluation, management concluded
that the Company's internal control over financial reporting was effective as of the year ended December 31, 2023, to provide
reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of Consolidated Financial
Statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company reviewed the
results of management's assessment with the Audit Committee of the Board of Directors.

 This Annual Report does not include
an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's
report was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management's report in this Annual Report. This report shall not
be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section and
is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.

 Inherent Limitations on Effectiveness of Controls

 The Company's management,
including our Chief Executive Officer and our Chief Financial Officer, does not expect that the Company's disclosure controls or
internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design
of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation
of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or procedures.

 Changes in Internal Control over Financial Reporting

 During the quarter ended December 31,
2023, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 Item
 9B. Other Information.

 During the quarter ended December 31, 2023, no director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule
10b5-1 trading arrangement, as each term is defined in Item 408(a) of Regulation S-K.

 Certain information required by
Part III is omitted from this Form 10-K because we will file a definitive Proxy Statement for our 2024 annual meeting of
stockholders pursuant to Regulation 14A (the "Proxy Statement") no later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.

 Item 10. Directors, Executive Officers, and Corporate
Governance.

 Item 11. Executive Compensation.

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

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

 Item 14. Principal Accounting Fees and Services.

 Item 15. Exhibits and Financial Statement Schedules.

 (a) 1.

 The following Consolidated Financial
Statements of Intrusion Inc. and subsidiaries, are submitted as a separate section of this report (See F-pages):

 Report of Independent Registered Public Accounting Firm (PCAOB ID 726)

 Consolidated Balance Sheets on December 31, 2023, and 2022

 Consolidated Statements of Operations for the years ended December 31, 2023, and 2022

 Consolidated
 Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2023, and
 2022

 Consolidated Statements of Cash Flows for the years ended December 31, 2023, and 2022

 Notes to Consolidated Financial Statements

 Exhibit Number

 Description of Exhibit

 3.1(3)

 Restated Certificate of Incorporation of the Registrant

 3.2(30)

 Certificate of Amendment to Certificate of Incorporation of Registrant

 3.3(19)

 Amended and Restated Bylaws of the Company

 4.1(5)

 Specimen Common Stock Certificate

 4.2(17)

 Description of the Registrant's Capital Stock

 4.3(13)

 Form of Convertible Promissory Note #1 Issued Under the Securities Purchase Agreement dated March 10, 2022, by and between the Registrant and Streeterville Capital, LLC

 4.4(13)

 Form of Convertible Promissory Note #2 Issued Under the Securities Purchase Agreement dated March 10, 2022, by and between the Registrant and Streeterville Capital, LLC

 4.5(14)

 Form of Warrant Issued under that Securities Purchase Agreement between the Registrant and the Purchaser identified on the signature pages thereto, dated September 12, 2022

 4.6(20)

 Form of Warrant

 4.7(20)

 Form of Placement Agent Warrant

 4.8(26)

 Promissory Note dated January 2, 2024, by and between Registrant and Anthony Scott, President and Chief Executive Officer of Intrusion, Inc.

 10.1(13)

 Securities Purchase Agreement dated March 10, 2022, by and between the Registrant and Streeterville Capital, LLC

 10.2(15)

 Amendment dated January 11, 2023, to the Securities Purchase Agreement dated March 10, 2022, by and between the Registrant and Streeterville Capital, LLC

 10.3(14)

 Securities Purchase Agreement between the Registrant and the Purchasers identified on the signature pages thereto, dated September 12, 2022

 10.4(16)

 Note Purchase Agreement dated February 23, 2023, by and Between Registrant and Streeterville Capital, LLC

 10.5(2)+

 Amended and Restated 401(k) Savings Plan of the Registrant

 10.6(4)+

 Intrusion Inc. 401(k) Savings Plan Summary of Material Modifications

 10.7(6)+

 Amended 2005 Stock Incentive Plan of the Registrant

 10.8(7)+

 2015 Stock Incentive Plan of the Registrant

 10.9(8)+

 Form of Notice of Grant of Stock Option

 10.10(8)+

 Form of Stock Option Agreement

 10.11(8)+

 Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Initial Grant)

 10.12(8)+

 Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Annual Grant)

 10.13(8)+

 Form of Automatic Stock Option Agreement

 10.14(9)+

 Intrusion Inc. 2021 Omnibus Incentive Plan

 10.15(10)+

 Form of Incentive Stock Option Award Agreement to the Intrusion Inc. 2021 Omnibus Incentive Plan

 10.16(18)+

 Form of Restricted Stock Award Agreement to the Intrusion Inc. 2021 Omnibus Incentive Plan

 10.17(18)+

 Form of Non-Qualified Stock Option Agreement to the Intrusion Inc. 2021 Omnibus Incentive Plan

 10.18(11)

 Sales Agreement, dated August 5, 2021, between the Registrant and B. Riley Securities, Inc.

 10.19(12)+

 Executive Employment Agreement between Intrusion Inc. and Anthony Scott, dated November 11, 2021

 10.20(21)

 Forbearance and Standstill Agreement dated August 2, 2023, by and between Registrant and Streeterville Capital, LLC

 10.21(21)

 Amendment to Forbearance Agreement dated August 7, 2023, by and between Registrant and Streeterville Capital, LLC

 10.22(22)

 Stipulation of Compromise and Settlement September 28, 2023 (Prawatt V Blount, et al)

 10.23(23)

 Exchange Agreement dated October 11, 2023, by and between Registrant and Streeterville Capital, LLC

 10.24(23)

 Exchange Agreement dated October 17, 2023, by and between Registrant and Streeterville Capital, LLC

 10.25(24)

 Form of Securities Purchase Agreement by and between the Registrant and the Purchasers dated November 8, 2023

 10.26(24)

 Form of Placement Agent Agreement by and between the Registrant and Wellington Shields & Company LLC dated November 8, 2023

 10.27(24)

 Form of Lock-up Agent Agreement

 10.28 (25)

 Exchange Agreement dated December 19, 2023, by and between Registrant and Streeterville Capital, LLC

 10.29(26)

 Form of Invoice Financing Agreement dated January 2, 2024, by and between Registrant and Anthony Scott, President and Chief Executive Officer of Intrusion, Inc.

 10.30(26)

 Security Agreement dated January 2, 2024, by and between Registrant and Anthony Scott, President and Chief Executive Officer of Intrusion, Inc.

 10.31(27)

 Notice of Pendency and Proposed Settlement of Action dated December 21, 2023.

 10.32(28)

 Exchange Agreement dated March 7, 2024, by and between Registrant and Streeterville Capital, LLC

 10.33(29)

 Exchange Agreement dated March 15, 2024, by and between Registrant and Streeterville Capital, LLC

 10.34(29)

 Form of Partitioned Promissory Note, Note #1 dated March 15, 2024, by and between Registrant and Streeterville Capital, LLC

 10.35(1)

 Lease between dated September 29, 2023 by and between Registrant and JBA Portfolio, LLC

 14.1(17)

 Code Of Conduct

 21(18)

 List of Subsidiaries of Registrant

 23.1(1)

 Consent of Whitley Penn LLP, Independent Registered Public Accounting Firm

 31.1(1)

 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act

 31.2(1)

 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act

 32.1(1)

 Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 32.2(1)

 Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 97(1)

 Compensation Recovery Policy

 101.INS(1)

Instance Document

 101.SCH(1)

Taxonomy Extension Schema Document

 101.CAL(1)

 101.DEF(1)

Taxonomy Extension Definition Linkbase Document

 101.LAB(1)

Taxonomy Extension Label Linkbase Document

 101.PRE(1)

 + Indicates management contract or compensatory plan.

 (1)

 Filed herewith.

 (2)

 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2000, which Exhibit is incorporated herein by reference.

 (3)

 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated June 15, 2010, which Exhibit is incorporated herein by reference.

 (4)

 Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, which Exhibit is incorporated herein by reference.

 (5)

 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (as amended), which Exhibit is incorporated herein by reference.

 (6)

 Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated June 15, 2005, which Exhibit is incorporated herein by reference.

 (7)

 Filed as an Exhibit to the Registrant's Definitive Proxy Statement on Schedule 14A in connection with the solicitation of proxies for its Annual Meeting of Stockholders held May 14, 2015, which Exhibit is incorporated herein by reference.

 (8)

 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (as amended), which Exhibit is incorporated herein by reference.

 (9)

 Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed on May 24, 2021, which Exhibit is incorporated by reference herein.

 (10)

 Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q filed on November 12, 2021, which Exhibit is incorporated by reference herein.

 (11)

 Filed as an Exhibit to the Registrant's Registration Statement on Form S-3 filed on August 5, 2021, which Exhibit is incorporated by reference herein.

 (12)

 Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed on November 17, 2021, which Exhibit is incorporated by reference herein.

 (13)

 Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed on March 10, 2022, which Exhibit is incorporated by reference herein.

 (14)

 Filed as an Exhibit to the Registrant's Current Report on Form 8-K filed on September 12, 2022, which Exhibit is incorporated by reference herein.

 (15)

 Filed as an Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on January 17, 2023, which Exhibit is incorporated by reference herein.

 (16)

 Filed as an Exhibit 10.1 to Registrant's Current Report on Form 8-K on March 1, 2023, which Exhibit is incorporated by reference herein.

 (17)

 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2021, which Exhibit is incorporated herein by reference.

 (18)

 Filed as an Exhibit to the Registrant's Annual Report on Form 10-K, for the fiscal year ended December 31, 2022, which Exhibit is incorporated herein by reference.

 (19)

 Filed as an Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on December 21. 2023, which Exhibit is incorporated herein by reference.

 (20)

 Filed as Exhibits 4.1 and 4.2 to the Registrant's Current Report on Form 8-K filed on November 9, 2023, which Exhibits are incorporated herein by reference.

 (21)

 Filed as Exhibits 10.1 and 10.2 to the Registrant's Current Report on Form 8-K filed on August 7, 2023, which Exhibits are incorporated herein by reference.

 (22)

 Filed as an Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on October 2, 2023, which Exhibit is incorporated herein by reference.

 (23)

 Filed as Exhibits 99.1 and 99.2 of the Registrant's Current Report on Form 8-K filed on October 17, 2023, which Exhibits are incorporated herein by reference.

 (24)

 Filed as Exhibits 10.1, 10.2 and 10.3 to Registrant's Current Report on Form 8-K filed on November 9, 2023, which Exhibits are incorporated herein by reference.

 (25)

 Filed as an Exhibits 10.1 to Registrant's Current Report on Form 8-K filed on December 22, 2023, which Exhibit is incorporated herein by reference.

 (26)

 Filed as Exhibits 4.1, 10.1 and 10.2 to Registrant's Current Report on Form 8-K filed on January 3, 2024, which Exhibit is incorporated herein by reference.

 (27)

 Filed as Exhibit 10.1 of Registrant's Current Report on Form 8-K filed on January 9, 2024, which Exhibit is incorporated herein by reference.

 (28)

 Filed as Exhibit 99.1 of the Registrant's Current Report on Form 8-K filed March 13, 2024, which Exhibit is incorporated herein by reference.

 (29)

 Filed as Exhibits 10.1 and 10.2 of the Registrant's Current Report on Form 8-K filed on March 18, 2024, which Exhibits are incorporated herein by reference.

 (30)

 Filed as Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on March 27, 2024, which Exhibit is incorporated herein by reference.

 SIGNATURES

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

 Dated: April 1,
 2024

 INTRUSION INC.

 (Registrant)

 By:

 /s/ Anthony Scott

 Anthony Scott

 President & Chief Executive Officer

 (Principal Executive Officer)

 By:

 /s/ Kimberly Pinson

 Kimberly Pinson

 Chief Financial Officer

 (Principal Financial and Accounting Officer)

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

 Signature

 Title

 Date

 /s/ Anthony Scott

 Chief Executive Officer, Director

 2024

 Anthony Scott

 (Principal Executive Officer)

 /s/ Kimberly Pinson

 Chief Financial Officer

 2024

 Kimberly Pinson

 Principal Financial and Accounting Officer

 /s/ Anthony J. LeVecchio

 Executive Chairman, Director

 2024

 Anthony J. LeVecchio

 /s/ James F. Gero

 Director

 2024

 James F. Gero

 /S/ Katrinka B. McCallum

 Director

 April 1, 2024

 Katrinka B. McCallum

 /S/ Gregory K. Wilson

 Director

 2024

 Gregory K. Wilson

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

 To the Board of Directors and Stockholders of

 Intrusion Inc.

 Opinion on the Financial Statements

 We have audited the accompanying consolidated
balance sheets of Intrusion Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for the years then ended, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2023, and 2022, and the results of their operations and their cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 Going Concern

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

 Basis for Opinion

 These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.

 We conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control
over financial reporting. Accordingly, we express no such opinion.

 Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 Critical Audit Matters

 Critical audit matters are matters arising from the current period
audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. We determined that there are no critical audit matters.

 /s/ Whitley Penn LLP

 We have served as the Company's auditor since 2009.

 Dallas,
Texas

 April 1, 2024

 F- 1

 CONSOLIDATED BALANCE SHEETS

 (In thousands, except par value amounts)

 December 31

 2023

 2022

 ASSETS

 Current Assets:

 Cash and cash equivalents

 $

 $
 3,015

 Accounts receivable, net

 Prepaid expenses and other assets

 1,877

 Total current assets

 1,138

 5,422

 Noncurrent Assets:

 Property and equipment:

 Equipment

 2,069

 2,865

 Capitalized software development

 2,791

 1,380

 Furniture and fixtures

 –

 Leasehold improvements

 Property and equipment, gross

 4,875

 4,366

 Accumulated depreciation and amortization

 ( 1,955
)

 ( 2,208
)

 Property and equipment, net

 2,920

 2,158

 Finance leases, right-of-use assets, net

 1,048

 Operating leases, right-of-use assets, net

 1,637

 Other assets

 Total noncurrent assets

 5,110

 3,853

 TOTAL ASSETS

 $
 6,248

 $
 9,275

 LIABILITIES AND STOCKHOLDERS' DEFICIT

 Current Liabilities:

 Accounts payable, trade

 $
 2,215

 $
 1,273

 Accrued expenses

 Finance lease liabilities, current portion

 Operating lease liabilities, current portion

 Notes payable

 10,823

 10,114

 Deferred revenue

 Total current liabilities

 14,261

 13,249

 Noncurrent Liabilities:

 Finance lease liabilities, noncurrent portion

 Operating lease liabilities, noncurrent portion

 1,539

 Total noncurrent liabilities

 1,542

 Commitments and Contingencies – (See Note 7)

 –

 –

 Stockholders' Deficit:

 Preferred stock, $ 0.01 par value: Authorized shares – 5,000; Issued shares – 0 in 2023 and 2022

 –

 –

 Common stock, $ 0.01 par value: Authorized shares – 80,000; Issued shares – 1,791 in 2023 and 1,060 in 2022; Outstanding shares – 1,790 in 2023 and 1,059 in 2022

 Common stock held in treasury, at cost – 1 shares

 ( 362
)

 ( 362
)

 Additional paid-in capital

 101,049

 92,505

 Accumulated deficit

 ( 110,217
)

 ( 96,326
)

 Accumulated other comprehensive loss

 ( 43
)

 ( 43
)

 Total stockholders' deficit

 ( 9,555
)

 ( 4,215
)

 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

 $
 6,248

 $
 9,275

 The accompanying notes are an integral part of these

 F- 2

 CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 Year Ended December 31,

 2023

 2022

 Revenue

 $
 5,611

 $
 7,529

 Cost of Revenue

 1,257

 3,354

 Gross Profit

 4,354

 4,175

 Operating Expenses:

 Sales and marketing

 5,670

 6,510

 Research and development

 5,556

 6,465

 General and administrative

 5,174

 7,483

 Operating Loss

 ( 12,046
)

 ( 16,283
)

 Interest and Other Income

 2,028

 Interest Expense

 ( 1,888
)

 ( 2,359
)

 Gain on Lease Termination

 –

 Loss Before Income Taxes

)

)

 Income Tax

 –

 –

 Net Loss

 $
)

 $
)

 Net Loss Per Share:

 Basic

 $
 ( 11.46
)

 $
 ( 16.39
)

 Diluted

 $
 ( 11.46
)

 $
 ( 16.39
)

 Weighted Average Common Shares Outstanding:

 Basic

 1,212

 Diluted

 1,212

 The accompanying notes are an integral part of these

 F- 3

 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)

 (In thousands)

 Common Stock

 Treasury Stock

 Accumulated Other Comprehensive Loss

 Additional Paid-In-Capital

 Accumulated Deficit

 Total

 Shares

 Shares

 Balance, December 31, 2021

 $

 $
 ( 362
)

 $
 ( 43
)

 $
 84,411

 $
 ( 80,097
)

 $
 3,919

 Registered direct offering proceeds, net of fees

 –

 –

 –

 4,295

 –

 4,296

 Restricted stock awards

 –

 –

 –

 –

 –

 –

 –

 Public stock offering, net of fees

 –

 –

 –

 –

 1,985

 –

 1,985

 Issuance of common stock to terminate operating lease

 –

 –

 –

 –

 –

 Nonregistered private placement

 –

 –

 –

 –

 –

 Stock-based compensation expense

 –

 –

 –

 –

 –

 1,456

 –

 1,456

 Exercise of stock options

 –

 –

 –

 –

 –

 Tax withholdings related to stock-based compensation awards

 –

 –

 –

 –

 –

 ( 9
)

 –

 ( 9
)

 Net loss

 –

 –

 –

 –

 –

 –

)

)

 Balance, December 31, 2022

 1,060

 ( 362
)

 ( 43
)

 92,505

 ( 96,326
)

 ( 4,215
)

 Stock-based compensation expense

 –

 –

 –

 –

 –

 –

 Exercise of stock options

 –

 –

 –

 –

 –

 Public stock offering, net of fees

 –

 –

 –

 4,674

 –

 4,678

 Restricted stock awards

 –

 –

 –

 –

 –

 –

 –

 Withholdings related to stock-based compensation awards

 –

 –

 –

 –

 –

 ( 5
)

 –

 ( 5
)

 Private offering proceeds, net of fees

 –

 –

 –

 2,344

 –

 2,346

 Issuance of common stock to reduce notes payable

 –

 –

 –

 –

 Purchase of common stock through employee stock purchase plan

 –

 –

 –

 –

 –

 Net loss

 –

 –

 –

 –

 –

 –

)

)

 Balance, December 31, 2023

 $

 1,791

 $
 ( 362
)

 $
 ( 43
)

 $
 101,049

 $
 ( 110,217
)

 $
 ( 9,555
)

 The accompanying notes are an integral part of these

 F- 4

 CONSOLIDATED STATEMENTS OF CASH FLOWS

 (In thousands)

 Year Ended December 31,

 2023

 2022

 Operating Activities:

 Net Loss

 $
)

 $
)

 Adjustments to reconcile net loss to net cash used in operating activities:

 Depreciation and amortization

 1,659

 1,308

 Provision for credit losses

 –

 Stock-based compensation

 1,456

 Non-cash lease costs

 Amortization of debt issuance costs

 Non-cash interest on notes payable

 1,163

 1,463

 Gain on lease termination

 –

 ( 385
)

 Changes in operating assets and liabilities:

 Accounts receivable

 Prepaid expenses and other assets

 1,214

 ( 1,533
)

 Accounts payable and accrued expenses

 Operating lease liabilities

 ( 269
)

 ( 1,040
)

 Deferred revenue

 ( 16
)

 ( 105
)

 Net cash used in operating activities

 ( 7,767
)

 ( 13,190
)

 Investing Activities:

 Purchases of property and equipment

 ( 157
)

 ( 307
)

 Capitalized software development

 ( 1,291
)

 ( 1,172
)

 Net cash used in investing activities

 ( 1,448
)

 ( 1,479
)

 Financing Activities:

 Proceeds from notes payable

 –

 10,000

 Payments of notes payable issuance costs

 –

 ( 710
)

 Principal payments on notes payable

 ( 400
)

 ( 1,500
)

 Reduction of finance lease liabilities

 ( 290
)

 ( 645
)

 Proceeds from public stock offering, net of fees

 4,678

 1,985

 Proceeds from sale of common stock and warrants, net of fees

 2,346

 –

 Proceeds from registered direct offering, net of fees

 –

 4,296

 Proceeds from non-registered private placement

 –

 Proceeds from stock options exercised

 Proceeds related to the issuance of common stock under stock purchase plan

 –

 Withholdings related to stock-based compensation awards

 ( 5
)

 ( 9
)

 Net cash provided by financing activities

 6,339

 13,584

 Net decrease in cash and cash equivalents

 ( 2,876
)

 ( 1,085
)

 Cash and cash equivalents at beginning of year

 3,015

 4,100

 Cash and cash equivalents at end of year

 $

 $
 3,015

 SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:

 Cash paid for interest

 $

 $

 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 Capitalized assets and capitalized software included in accounts payable

 $

 $

 Common stock issued for lease termination

 $
 –

 $

 Common stock issued to reduce notes payable

 $

 $
 –

 Assets acquired under a right of use ("ROU") operating lease

 $
 1,461

 $
 –

 Assets acquired under a ROU finance lease

 $
 –

 $

 The accompanying notes are an integral part of these

 F- 5

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. Description of Business

 Intrusion, Inc. (together with its consolidated subsidiaries,
the "Company," Intrusion," "Intrusion Inc.", "we", "us", "our", or similar
terms) was organized in Texas in September 1983 and reincorporated in Delaware in October 1995. Our principal executive offices are located
at 101 East Park Boulevard, Suite 1200, Plano, Texas 75074, and our telephone number is (972) 234-6400. Our website URL is www.intrusion.com.

 The Company develops, sells, and supports products
that protect any-sized company or government organization by fusing advanced threat intelligence with real-time mitigation to kill cyberattacks
as they occur – including Zero-Days. The Company markets and distributes the Company's solutions through value-added resellers,
managed service providers and a direct sales force. The Company's end-user customers include U.S. federal government entities, state
and local government entities, and companies ranging in size from mid-market to large enterprises.

 TraceCop ("TraceCop ")
and Savant ( "Savant ") are registered trademarks of Intrusion Inc. The Company has applied
for trademark protection for the Company's new INTRUSION Shield cybersecurity solution.

 2. Summary of Significant Accounting Policies

 Basis of Presentation

 The Company's Consolidated Financial Statements
include its accounts and those of its wholly owned subsidiary and are prepared in accordance with Generally Accepted Accounting Principles
in the United States of America ("GAAP"). All intercompany balances and transactions have been eliminated in consolidation.

 Going Concern

 The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As of December 31, 2023, the Company had cash and cash
equivalents of $ 0.1 million and a
working capital deficit of $ 13.1 million. In
addition, the Company has incurred net operating losses during the last four years. These conditions raise substantial doubt about
the Company's ability to continue as a going concern within one year after the date of these financial statements. The
Company's principal source of cash for funding operations in 2023 has been net proceeds received through the issuance of
common stock using the Company's ATM program which provided $ 4.7 million,
a private placement offering completed in November 2023 of $ 2.3 million,
and net funds through changes in working capital which includes receipt of the remaining ERC refund in the March quarter of $ 1.4
million. Subsequent to December 31, 2023, through the date of these financial statements, the Company has received $ 0.5
million in net proceeds from the sale of the ATM. Management plans to fund the operations of the Company through additional debt or
equity financing and the issuance of common stock. If the Company is not able to obtain additional debt or equity financing or raise
adequate funds under the Company's ATM program, the Company may be unable to implement the Company's business plan, fund
its liquidity needs or even continue its operations. The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that may be necessary if the Company is unable to continue as a going
concern.

 Reverse Stock Split

 The Company effected a reverse stock split of 1-for-20 on March
22, 2024. Unless otherwise stated, all share and per share amounts for all periods presented have been adjusted to reflect the reverse
stock split.

 F- 6

 Use of Estimates

 The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used for, but
not limited to, the accounting for credit losses, revenue recognition, warranty costs, depreciation, and stock-based compensation and
income taxes. Actual results could differ from these estimates.

 Cash and Cash Equivalents

 The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances that may at times exceed
federally insured limits. The Company's cash balances are maintained at a high-quality financial institution, and the Company believes
the credit risk related to these cash balances is minimal. As of December 31, 2023, and 2022, the Company had approximately $ 0.1 million
and $ 3.0 million, respectively, of cash and cash equivalents.

 Accounts
Receivable and Allowance for Credit Losses

 Trade accounts receivable is stated at the amount
the Company expects to collect. The Company maintains allowances for credit losses for estimated losses resulting from the inability of
its customers to make the required payments. Management considers the following factors when determining the collectability of specific
customer accounts: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes
in customer payment trends. If the financial condition of the Company's customers were to deteriorate, adversely affecting their
ability to make payments, additional allowances would be required. Based on management's assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and an increase to allowance for credit losses. Balances that remain outstanding after
the Company has made reasonable collection efforts are written off through a charge to the allowance credit losses.

 The Company's accounts receivable
represents unconditional contract billings for sales per contracts with customers and are classified as current. As of December 31,
2023, 2022, and January 1, 2022, the Company had accounts receivable balances of $ 0.4
million, $ 0.5
million, and $ 1.0
million, respectively. As of December 31, 2023, the Company had an allowance for credit losses of $ 0.1
million. The Company did no t
recognize an allowance for credit losses as of December 31, 2022.

 Risk Concentration

 Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist primarily of cash and cash equivalents, investments, and accounts receivable. Cash
and cash equivalent deposits are at risk to the extent that they exceed Federal Deposit Insurance Corporation insured amounts. To minimize
risk, the Company places its investments in U.S. government obligations, corporate securities, and money market funds. Substantially all
the Company's cash, cash equivalents and investments are maintained with one major U.S. financial institution. The Company does
not believe that it is subject to any unusual financial risk with the Company's banking arrangements. The Company has not experienced
any significant losses on its cash and cash equivalents.

 The Company sells its products to customers primarily in the U.S. The
Company has begun to sell the Company's products internationally. Fluctuations in currency exchange rates and adverse economic developments
in foreign countries could adversely affect the Company's operating results. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral. The Company maintains reserves for potential credit losses,
and such losses, in aggregate, have historically been minimal.

 F- 7

 The Company's operations are concentrated in
one area - security software/entity identification. Sales to the U.S. Government through direct and indirect channels totaled 46.2 %
of total revenues attributable to six government customers and 65.8 %
of total revenues attributable to seven government customers for the years ended December 31, 2023, and 2022, respectively. Two individual
government customers and two individual commercial customers during the year ended December 31, 2023, individually accounted for over
10% of total revenues and during the year ended December 31, 2022, three government customers and two commercial customers, individually
accounted for over 10% of total revenues. For 2023, four customers represent 86 %
of total revenue. For 2022, five customers represent 90 %
of total revenue. For Shield, one customer accounts for 79 %
and 68 %
of Shield revenue for 2023 and 2022, respectively. The Company's similar product and service offerings are not viewed
as individual segments, as the Company's management analyzes the business as a whole and expenses are not allocated to each product
offering.

 Prepaid Expenses and Other Assets

 The Company's prepaid expenses and other assets
balance is primarily related to prepaid insurance, prepaid software, and other services, which represents the unamortized balance of insurance
premiums, or other prepaid services and products. These payments are amortized on a straight-line basis over the policy or service term.

 Property and Equipment

 Equipment, furniture, and fixtures are stated at
cost less accumulated depreciation and depreciated on a straight-line basis over the estimated useful lives of the assets. Such
lives vary from one to five years. Capitalized software development is stated at cost less accumulated amortization on a straight
line basis over its estimated useful life, which is generally three years. Leasehold improvements are stated at cost less
accumulated amortization and are amortized on a straight-line basis over the shorter of estimated useful lives of the assets or the
remaining terms of the leases. Such lives vary from two to five years. Expenditures for major renewals and betterments that extend
the useful lives of property and equipment are capitalized. Repair and maintenance costs are expensed as incurred.

 The Company capitalizes internally developed software
using the Agile software development methodology which allows the Company to accurately track, and record costs associated with new software
development and enhancements. Pursuant to ASC Topic 350-40 Internal Use Software Accounting Capitalization, certain development costs
related to the Company's products during the application development stage are capitalized as part of property and equipment. Costs
incurred in the preliminary stages of development are expensed as incurred. The preliminary stage includes such activities as conceptual
formulation of alternatives, evaluation of alternatives, determination of existence of needed technology, and the final selection of alternatives.
Once the application development stage is reached, internal and external costs are capitalized until the software is complete and ready
for its intended use.

 Depreciation and amortization are recorded as operating
expenses in the Consolidated Statement of Operations. Depreciation and amortization related to the Company's property and equipment
balances totaled approximately $ 1.0 million and $ 0.6 million for the years ended December 31, 2023, and 2022, respectively.

 Long-Lived Assets

 The Company reviews long-lived assets, including
property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted cash flows to be generated by the asset. If the carrying value exceeds the future undiscounted cash flows,
the assets are written down to fair value. During the years ended December 31, 2023, and 2022, there was no
impairment of long-lived assets.

 F- 8

 Leases

 The Company accounts for leases using the
guidance in ASC Topic 842. The Company evaluates new contracts at inception to determine if the contract conveys the right to
control the use of an identified asset for a period in exchange for periodic payments. A lease exists if the Company obtains
substantially all the economic benefits of an asset, and the Company has the right to direct the use of that asset. When a lease
exists, the Company records a right-of-use asset that represents its right to use the asset over the lease term and a lease
liability that represents its obligation to make payments over the lease term. Lease liabilities are recorded at the sum of future
lease payments discounted by the collateralized rate the Company could obtain to lease a similar asset over a similar period, and
right-of-use assets are recorded equal to the corresponding lease liability, plus any prepaid or direct costs. The Company does not record a right-of-use asset for leases with initial
terms of twelve months or less.

 Commitments and Contingencies

 Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties, or other sources and are recorded when it is probable that a liability has been incurred
and the amount of the assessment can be reasonably estimated. The Company is involved in various lawsuits, claims and administrative proceedings
arising in the normal course of business. For additional information, see Note 7 – Commitments and Contingencies.

 Foreign Currency

 All assets and liabilities in the balance sheets
of foreign subsidiaries whose functional currency is other than the U.S. dollar is translated at year-end exchange rates. All revenues
and expenses in the statement of operations of these foreign subsidiaries are translated at average exchange rates for the year. Translation
gains and losses are not included in determining net income but are shown in accumulated other comprehensive loss in the stockholders'
deficit section of the Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in determining net loss
and were not significant.

 Fair Value of Financial Instruments

 The Company calculates the fair value of the assets
and liabilities which qualify as financial instruments and include additional information in the Notes to Consolidated Financial Statements
when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable,
accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these instruments. Notes
payable and financing and operating leases approximate fair value as they bear market rates of interest. None of these instruments are
held for trading purposes.

 Revenue Recognition

 The Company recognizes product revenue upon shipment
or after meeting certain performance obligations. These products can include hardware, software subscriptions and consulting services.
The Company also offers software on a subscription basis subject to SaaS. Warranty costs have not been material.

 The Company recognize sales of the Company's
data sets in accordance with ASC Topic 606 whereby revenue from contracts with customers are recognized once the criteria under the
five steps below are met:

 i)

 identification of the contract with a customer;

 ii)

 identification of the performance obligations in the contract;

 iii)

 determination of the transaction price;

 iv)

 allocation of the transaction price to the separate performance obligations; and

 v)

 recognition of revenue upon satisfaction of a performance obligation.

 F- 9

 Consulting services include reporting and are typically
done monthly, and revenue is matched accordingly. Product sales may include maintenance and customer support allocated revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a selling price hierarchy using the relative selling price
method. All product offering and service offering market values are readily determined based on current and prior stand-alone sales. The
Company defers and recognizes maintenance, updates, and support revenue over the term of the contract period, which is generally one year.

 Normal payment terms offered to customers, distributors
and resellers are net 30 days domestically. The Company does not offer payment terms that extend beyond one year and rarely does it extend
payment terms beyond normal terms. If certain customers do not meet credit standards, the Company requires payments in advance to limit
credit exposure.

 With the Company's newest product, INTRUSION
 Shield, the Company began offering software on a subscription basis. INTRUSION Shield is a hosted arrangement
subject to SaaS guidance under ASC Topic 606. SaaS arrangements are accounted for as subscription services, not arrangements that transfer
a license of intellectual property.

 The Company utilizes the five-step process, mentioned
above, per ASC Topic 606 to recognize sales and will follow that directive, also, to define revenue items as individual and distinct.
 INTRUSION Shield services are provided to customers for a fixed monthly subscription fee include:

 access to Intrusion's proprietary software and database to detect and prevent unauthorized access to clients' information networks;

 use of all software, associated media, printed materials, data, files, online documentation, and any equipment that Intrusion provides for customers to access the INTRUSION Shield; and

 tech support, PCS includes daily program releases or corrections provided by Intrusion without additional charge.

 INTRUSION Shield contracts provide for
no other services, and the Company's customers have no rebates or return rights, nor are any such rights anticipated to be offered
as part of this service.

 The Company satisfies performance obligations when
the INTRUSION Shield solution is available to detect and prevent unauthorized access to a client's information networks.
Revenue is recognized monthly over the term of the contract. The Company's standard initial contract terms automatically renew unless
notice is given 30 days before renewal. Upfront payment of fees is deferred and amortized into income over the period covered by the contract.

 The Company's accounts receivable
represents unconditional contract billings for sales per contracts with customers and are classified as current assets. As of
December 31, 2023, and 2022, the Company had accounts receivable balance of $ 0.4
million and $ 0.5
million, respectively. As of December 31, 2023, the Company had an allowance for credit losses of $ 0.1
million. The Company did no t
recognize an allowance for credit losses as of December 31, 2022.

 Contract liabilities consist of cash payments in advance
of the Company satisfying performance obligations and recognizing revenue. The Company classifies contract liabilities as deferred
revenue.

 The following table presents changes in the Company's
contract liabilities during the years ended December 31, 2023, and 2022 (in thousands):

 Schedule of contract liabilities

 December 31, 2023

 December 31, 2022

 Balance at beginning of year

 $

 $

 Additions

 4,727

 1,877

 Revenue recognized

 ( 4,743
)

 ( 1,982
)

 Balance at end of year

 $

 $

 F- 10

 Accounting for Stock-based Compensation Awards

 The Company accounts for stock-based compensation
awards using the guidance in ASC Topic 718, Compensation-Stock Compensation ("ASC 718"). The Company's stock-based
compensation awards are granted to directors, officers, and employees. ASC 718 requires all such stock-based compensation, including grants
of employee stock options, to be recognized in the financial statements based on their fair values. Stock-based compensation expense recognized
in the statements of operations for the years ended 2023 and 2022 is based on awards ultimately expected to vest.

 Research and Development Costs

 The Company's research and development of new
software products are expensed until the application development stage is obtained. Once the application development stage is reached,
internal and external costs are capitalized until the software is complete and ready for the intended use. The company incurs research
and development costs that relate primarily to the development of new security software, appliances and integrated solutions, and major
enhancements to existing services and products. Research and development costs are comprised primarily of sales and related benefit expenses,
contract labor and prototype and other expenses incurred during research and development efforts.

 Pursuant to ASC Topic 350-40, Internal Use
Software Accounting-Capitalization, software development costs related to the Company's products during the application development
stage are capitalized.

 Advertising Expenses

 The cost of advertising is expensed as incurred or
deferred until first use of advertising and expensed ratably over the applicable periods. Advertising expenses were $ 0.1 million and $ 0.5
million for 2023 and 2022, respectively.

 Income Taxes

 Deferred income taxes are determined using the
liability method in accordance with ASC Topic 740, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period enacted. In addition, a valuation allowance is established
to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset
will not be realized.

 ASC Topic 740 creates a single model to address
accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before
being recognized in the financial statements. ASC Topic 740 also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. There are no unrecognized tax benefits to disclose in the Notes
to the Consolidated Financial Statements.

 The Company files income tax returns in the U.S.
federal jurisdiction. On December 31, 2023, tax returns related to fiscal years ended December 31, 2020, through December 31,
2022, remain open to possible examination by most tax authorities while tax returns in a few states remain open related to fiscal years
ended December 31, 2019, through December 31, 2022. No tax returns are currently under examination by any tax authorities.

 F- 11

 Net Loss Per Share

 The Company reports two separate net loss per shares
numbers, basic and diluted. Basic net loss attributable to common stockholders per share is computed by dividing net loss attributable
to common stockholders for the year by the weighted average number of common shares outstanding for the year. Diluted net loss attributable
to common stockholders per share is computed by dividing the net loss attributable to common stockholders for the year by the weighted
average number of common shares and dilutive common stock equivalents outstanding for the year. The common stock equivalents include
all common stock issuable upon the exercise of outstanding warrants, options and vesting of restricted stock awards. The aggregate number
of common stock equivalents excluded from the diluted loss per share calculated for the year ended December 31, 2023, and 2022 totaled
 thousand and 66
 sixty-six thousand, respectively. Since the Company is in a net loss position for the year ended December 31, 2023, and 2022,
basic and dilutive net loss per share is the same.

 Recent Accounting Pronouncements

 In December 2023, FASB issued ASU 2023-09, Income
Taxes: Improvements to Income Tax Disclosures. The new standard requires annual disclosure of the specific categories in the rate reconciliation,
and additional information for reconciling items that meet a quantitative threshold. Additional information may be required on reconciling
items. The new guidance is effective after December 15, 2024, early adoption is permitted. The Company is evaluating the impact of the
new guidance on its Consolidated Financial Statements and related disclosures.

 3. Prepaid Expenses and Other Assets

 Prepaid expenses and other assets included the following
(dollars in thousands):

 Schedule of prepaid expenses

 2023

 2022

 Contract assets

 $

 $
 –

 Prepaid insurance

 Prepaid licenses

 Employee retention credit receivable

 –

 1,363

 Prepaid other

 Total prepaid expenses and other assets

 $

 $
 1,877

 The Company had no contract assets as of January 1, 2022.

 4. Accrued Expenses

 Accrued expenses consisted of the following (dollars in thousands):

 Schedule of accrued liabilities

 2023

 2022

 Accrued legal and professional fees

 $

 $

 Accrued payroll

 Employee benefits payable

 Other

 Total accrued expenses

 $

 $

 F- 12

 5. Right-of-use Assets and Leasing Liabilities

 The Company has operating, and finance leases
and records right-of-use assets and related lease liabilities as required under ASC Topic 842. The lease liabilities are determined by
the net present value of the total lease payments and amortized over the life of the lease. The Company leases are for the following types
of assets:

 Computer hardware and copy machines – The Company's finance lease right-of-use assets consist of computer hardware and copy machines. These leases have a three-year life and are in various stages of completion.

 Office space – The Company's operating lease right-of-use assets include rental agreements for offices in Plano, TX, and a data service center in Allen, TX. The Plano offices operating lease expired on September 30, 2023. In October 2023, the Company signed a new lease with a term of eleven years and one month that commences upon completion of tenant improvements. A temporary lease has been signed and is effective until tenant improvements are complete. The data service center operating lease liability has a life of one year nine months as of December 31, 2023.

 Lease balances are recorded on the Consolidated Balance Sheets as follows
(in thousands):

 Schedule of lease information

 2023

 2022

 Assets:

 Finance leases, right-of-use assets, net

 $

 $
 1,048

 Operating leases, right-of-use assets, net

 1,637

 Total lease assets

 $
 2,019

 $
 1,552

 Liabilities:

 Current:

 Finance leases liabilities, current portion

 $

 $

 Operating leases liabilities, current portion

 Noncurrent:

 Finance leases liabilities, noncurrent portion

 Operating leases liabilities, noncurrent portion

 1,539

 Total lease liabilities

 $
 2,104

 $
 1,202

 Weighted average remaining lease term – Finance leases

 0.58 years

 1.58 years

 Weighted average remaining lease term – Operating leases

 9.66 years

 2.20 years

 Weighted average discount rate – Finance leases

 3.32 %

 3.37 %

 Weighted average discount rate – Operating leases

 7.67 %

 3.42 %

 As the implicit rate is not readily determinable
for the Company's lease agreement, the Company uses an estimated incremental borrowing rate to determine the initial present value of
lease payments. This discount rate for the lease approximates the federal reserves' prime rate.

 F- 13

 Certain of the Company's lease agreements have
options to extend the lease after the expiration of the initial term. The Company recognizes the cost of a lease over the expected total
term of the lease, including optional renewal periods that the Company can reasonably expect to exercise. The Company does not have material
obligations whereby the Company guarantees a residual value on assets the Company leases, nor do the Company's lease agreements
impose restrictions or covenants that could affect the Company's ability to make distributions.

 Schedule of Items Appearing on the Statement of Operations (in thousands):

 Schedule of lease cost table

 Year Ended

 December 30, 2023

 December 31, 2022

 Operating expense:

 Amortization expense – Finance ROU

 $

 $

 Lease expense – Operating ROU

 Other expense:

 Interest expense – Finance ROU

 Total Lease Expense

 $
 1,008

 $
 1,004

 Other supplemental information related to the Company's leases
are as follows:

 Schedule of other supplemental information related to our lease

 Year Ended

 December 30, 2023

 December 31, 2022

 Cash paid for amounts included in the measurement of lease liabilities:

 Operating cash flows for operating leases

 $
 ( 261
)

 $
 ( 1,085
)

 Financing cash flows for finance leases

 ( 290
)

 ( 645
)

 Future minimum lease obligations consisted of the following as of December
31, 2023 (in thousands):

 Schedule of future minimum lease obligations

 Operating

 Finance

 Year ending December 31,

 ROU Leases

 ROU Leases

 Total

 2024

 $

 $

 $

 2025

 2026

 –

 2027

 –

 2028

 –

 Thereafter

 1,517

 –

 1,517

 $
 2,667

 $

 $
 3,054

 Less Interest*

 ( 950
)

 –

 $
 1,717

 $

 *

 Interest is imputed for operating ROU leases and classified as lease expense and is included in operating expenses in the accompanying Consolidated Statements of Operations.

 F- 14

 6.

 Notes Payable

 On March 10, 2022, Intrusion Inc. entered into a
SPA with Streeterville whereby the Company issued two separate promissory notes of $ 5.4
million each, with an initial interest rate of 7%, subject to some increases in the case of among other things, an event of default.
On March 10, 2022, the Company received $ 4.6
million in net funds from the first tranche (First Note) pursuant to a promissory note executed contemporaneously with the execution
of the loan agreement. On June 29, 2022, the Company received an additional $ 4.7
million in net funds from the second tranche (Second Note) pursuant to a promissory note. Each note had an 18-month maturity, may be
prepaid subject to varying prepayment premiums, and may be redeemed at any time after six months into the term of such note in
amounts up to $0.5 million per calendar month upon the noteholder's election. On January 11, 2023, the Company amended the
promissory notes issued pursuant to the unsecured loan agreement with Streeterville whereby the noteholder agreed to waive their
redemption rights through March 31, 2023, in exchange for a fee equal to 3.75% of the outstanding principal balance which increased
the outstanding indebtedness due at maturity with Streeterville and increased the associated debt issuance costs recorded on the
Consolidated Balance Sheets by $ 0.4
million. On August 2, 2023, the Company entered into a Forbearance Agreement with Streeterville which was subsequently amended on
August 7, 2023. The Forbearance Agreement and amendment extend the maturity dates for each Note by twelve months to September 2024 and
December 2024. In consideration of the extension of the maturity dates, the Company entered into a Security Agreement with
Streeterville, dated August 2, 2023 (the "Security Agreement"), under which Streeterville was granted a first-position
security interest in all assets of the Company.

 The Company has the option, in its sole discretion,
to satisfy any redemption demands in cash or shares of the Company's common stock that will be issued in an amount equal to the
dollar amount of the redemption demand divided by the number that represents 85% of the average of the two lowest daily volume weighted
average prices of common stock over a fifteen-day trailing period. This option to settle in shares at a 15% discount is deemed a beneficial
conversion feature ("BCF"). Any remaining indebtedness at maturity is payable in cash.

 The Company evaluated both the First and Second
Note in accordance with ASC Topic 480 " Distinguishing Liabilities from Equity " because the promissory note (1) embodies
an unconditional obligation, (2) may require the Company to settle the optional redemption obligation by issuing a variable number of
common shares, and (3) is based solely on a fixed monetary amount known at inception.

 The lender does not benefit if the fair value
of the Company's common stock increases and does not bear the risk that the fair value of the Company's common stock might
decrease. In accordance with ASC Topic 480, the promissory notes have been recorded as a liability and the company is recording interest
expense over the term of the promissory note, using the interest method from ASC Topic 835-30, to accrete the carrying amount of the
promissory note up to the redemption common stock settlement amount.

 In 2023 and 2022, the Company paid $ 0.4 million and
$ 1.5 million in cash principal payments on the notes, respectively. The Company has recorded debt issue costs totaling $ 1.8 million associated
with the issuance and amendment of the notes which are being amortized over their respective terms. As of December 31, 2023, the balance
of unamortized debt issuance costs for both notes were $ 0.4 million.

 On October 11, 2023, and October 17, 2023, the
Company agreed to exchange $ 0.4 million
in aggregate principal on the Streeterville First Note for 50.1
thousand shares of the Company's common stock. On December 19, 2023, the Company exchanged an additional $ 0.2 million
in principal for 43.5
thousand shares of common stock. The issuance of the shares was made pursuant to the exemption from the registration
requirements afforded by the Securities Act.

 For the years ended December 31, 2023, and 2022,
the Company recorded $ 1.7
million and $ 2.3
million of interest expense, respectively, in the accompanying Consolidated Statement of Operations. The interest recorded
associated with the promissory notes increases the associated notes payable on the accompanying Consolidated Balance Sheets. As a
result of the Forbearance Agreement and subsequent amendment discussed above, the balance of the notes payable matures in September
2024 and December 2024. The effective interest rate of the notes payable including amortization of the debt issuance costs and
accretion of BCF is 20.3 %
and 18.1 %
for the First and Second Note, respectively.

 F- 15

 On March 7, 2024, the Company exchanged an
additional $ 0.2 million
in principal on the Streeterville First Note for 52.2
thousand shares of common stock. Additionally, on March 15, 2024, the Company exchanged $ 9.3 million
in aggregate principal for 9,275 shares
of newly designated Series A preferred stock. The issuance of both the common and preferred shares was made pursuant to the
exemption from the registration requirements afforded by the Securities Act. This most recent exchange resulted in the Streeterville
Second Note being paid in full and $ 0.5 million
remaining outstanding on the Streeterville First Note.

 7.
 Commitments and Contingencies

 Change of Control and Severance Agreements

 Certain members of the Company's management
are parties to severance and change of control agreements with the Company. The severance and change in control agreements provide those
individuals with severance payments in certain circumstances and prohibit such individuals from, among other things, competing with the
Company during his or her employment. In addition, the severance and change of control agreements prohibit subject individuals from, among
other things, disclosing confidential information about the Company and its products or interfering with a client or customer of the Company,
in each case during his or her employment and for certain periods (including indefinite periods) following the termination of such person's
employment.

 Legal Proceedings

 The Company is periodically involved in various litigation
claims asserted in the normal course of business. The Company believes these actions are routine and incidental to the business. While
the outcome of these actions cannot be predicted with certainty, the Company does not believe that any will have a material adverse impact
on the Company's business.

 Class Action Litigation

 On April 16, 2021, a class action lawsuit was filed
in the United States District Court, Eastern District of Texas, Sherman Division, captioned Celeste v. Intrusion Inc. et al., Case No.
4:21-cv-00307 (E.D. Tex.) against the Company, the Company's now-former chief financial officer, and now-former chief executive
officer alleging, among other things, that the defendants made false and/or misleading statements or omissions about the Company's
business, operations, and prospects in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Rule 10b-5 promulgated thereunder, as well as Section 20(a) of the Exchange Act. The Celeste lawsuit claimed compensatory
damages and legal fees.

 On May 14, 2021, a related class action lawsuit was
filed in the United States District Court, Eastern District of Texas, Sherman Division, captioned Neely v. Intrusion Inc., et al., Case
No. 4:12-cv-00374 (E.D. Tex.) against the Company, the Company's now-former chief financial officer, and now-former chief executive
officer. The Neely lawsuit alleged the same violations under the federal securities laws as those alleged in the Celeste lawsuit. The
Neely lawsuit also sought compensatory damages and legal fees.

 On November 23, 2021, the Court consolidated the Celeste
and Neely actions, and appointed a lead plaintiff and lead plaintiff's counsel. The lead plaintiff filed his amended complaint on
February 7, 2022.

 The parties to the consolidated action held a mediation
on April 5, 2022, at the conclusion of which the parties executed a settlement term sheet setting forth the material terms associated
with the resolution of the action, subject to the preparation of formal documents and a plan of distribution approved by the Court. The
settlement agreement was subject to certain terms and conditions and received final approval by the Court on December 16, 2022. At that
time, a final judgment was entered dismissing the case, with the Court retaining jurisdiction over the action for purposes of enforcing
the terms of the class settlement agreement. The $ 3.3 million settlement was paid by the Company's insurance provider under its
insurance policy as the Company's retention had previously been exhausted.

 F- 16

 The lead plaintiff in the class action filed a motion
for distribution of settlement funds on February 21, 2023. The Court approved the parties' class action settlement and plan of allocation
on March 22, 2023, and cancelled the previously rescheduled March 31, 2023, hearing on the motion for distribution, all remaining matters
in the class action then-pending having been fully and finally adjudicated.

 Securities Investigation

 On August 8, 2021, the Company received a notification
from the Securities and Exchange Commission, Division of Enforcement, that it was investigating captioned In the Matter of Intrusion
Inc. and requesting the Company produce certain documents and information. On November 9, 2021, the Securities and Exchange Commission
served a subpoena to the Company in connection with this investigation which formally requested substantially similar information as in
the prior request. On September 26, 2023, the Company consented to the entry of final judgment, in the action styled Securities and
Exchange Commission v Intrusion Inc., No. 4:23-cv-00859 (E.D. Tex. filed September 26, 2023). On October 5, 2023, the court approved
the final judgment with no penalties assessed against the Company.

 Stockholder Derivative Claim

 On June 3, 2022, a verified stockholder derivative complaint was filed
in U.S. District Court, District of Delaware by the Plaintiff Stockholder on behalf of Intrusion against certain of the Company's
Defendants. Plaintiff alleges that Defendants through various actions breached their fiduciary duties, wasted corporate assets, and unjustly
enriched Defendants by (a) incurring costs and expenses in connection with the ongoing SEC investigation, (b) incurring costs and expenses to defend
the Company with respect to the consolidated class action, (c) settling class-wide liability with respect to the consolidated class action,
as well as ancillary claims regarding sales of the Company's common stock by certain of the Defendants. On September 28, 2023, the
Company agreed to settle the claim. On October 2, 2023, public notice of the settlement was given. The settlement agreement provides in
part for (i) an amendment to the Company's Bylaws, committee Charters, and other applicable corporate policies to implement certain
measures set forth more fully therein, to remain in effect for no less than three years; (ii) attorneys' fees and expenses to plaintiff's
counsel of $ 0.3 million; and (iii) the dismissal of all claims against the Defendants, including the Company, in connection with the action.
The $ 0.3 million settlement payment will be paid by the Company's insurance provider under its insurance policy since the Company's
$ 0.5 million retention was previously exhausted. A hearing is scheduled for April 3, 2024, to obtain court approval of the settlement,
agreement for the court to rule upon any objections to the proposed settlement, and for entry of final judgment in the matter.

 In addition to these legal proceedings, the Company
is subject to various other claims that may arise in the ordinary course of business. The Company does not believe that any claims exist
where the outcome of such matters would have a material adverse effect on the Company's consolidated financial position, operating
results, or cash flows. However, there can be no assurance such legal proceedings will not have a material impact on the Company's
future results.

 8. Common Stock

 ATM Offering

 B. Riley Securities, Inc. acts as sales agent for
the Company's ATM program, which allows the Company to potentially sell up to $50.0 million of the Company's common stock
using a shelf registration statement on Form S-3 filed on August 5, 2021. On March 31, 2023, the date the Company filed its Annual Report
on Form 10-K for the fiscal year ended December 31, 2022, the Company became subject to the offering limits in General Instruction I.B.6
of Form S-3. As a result, the Company filed a prospectus supplement to the prospectus relating to the registration of offerings under
the program that reduced the amount the Company may sell to aggregate proceeds of up to $15 million. For the year ended December 31, 2023,
the Company has received proceeds of approximately $4.7 million net of fees from the sale of common stock pursuant to the program. As
of December 31, 2023, the Company has received proceeds of approximately $ 12.2 million net of fees from the sales of 498 thousand shares
of common stock since the inception of the program.

 F- 17

 Registered Direct Offering

 On September 12, 2022, the Company entered in a
Securities Purchase Agreement (the "Purchase Agreement") with certain purchasers to issue and sell to the purchasers an
aggregate of 68,934 shares of the Company's common stock (the "Shares") each of which was coupled with a warrant
to purchase one share of common stock (the "Warrants") at an aggregate offering price of $85.80 per share and warrant,
such offering is hereinafter referred to as the "registered direct offering". Each warrant has an exercise price of
$104.40 per share of common stock, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar
transactions and is exercisable from the date of the issuance through September
14, 2027. The Company delivered 46,975 Shares and Warrants on or about September 14, 2022. After September 30, 2022, the
Company issued an additional 13,666 Shares and related Warrants as a result of delayed closings. On November 10, 2022, the Company
reached an agreement with the sole remaining delayed basis investor in the registered direct offering to reduce the
purchaser's subscription by $0.7 million and, accordingly, reduce the Company's obligation to issue securities.
Following the final closing, the Company had received from the registered direct offering total aggregate proceeds of $5.2 million
in exchange for the issuance of an aggregate of 60,641
Shares and Warrants to purchase 60,641
Shares.

 Private Offering

 On November 8, 2023, the Company entered into a Securities
Purchase Agreement (the "2023 Purchase Agreement") pursuant to which, among other things, the Company sold to certain purchasers
an aggregate of 217,977 shares of our common stock, each of which was coupled with a warrant to purchase two shares of our common stock,
at an aggregate offering price of $ 12.00 per share and warrant and received $ 2.3 million in proceeds, net of fees.

 9. Common Stock Warrants

 On December 31, 2023, the Company had 60,641
 warrants to purchase one share of common stock at an exercise price of $ 104.40
 and warrants to purchase 435,926
 shares of common stock at an exercise price of $ 12.00.

 10. Stock-Based Compensation

 The Company accounts for equity-based compensation
in accordance with ASC 718 which requires that compensation related to all equity-based awards be recognized in the Consolidated Financial
Statements. Stock-based compensation is valued at fair value at the date of grant, and the grant date fair value is recognized as expense
over each award's requisite service period with a corresponding increase to equity or liability based on the terms of each award
and the appropriate accounting treatment under ASC 718.

 The Company had four stock-based compensation plans
on December 31, 2023, the 2023 Employee Stock Purchase Plan, the 2021 Omnibus Plan, the 2015 Stock Incentive Plan, and the 2005 Stock
Incentive Plan. The Company grants stock from both the 2021 Omnibus Incentive Plan and the 2015 Stock Incentive Plan. These plans provide
a means through which the Company may attract and retain key personnel and provide a means whereby directors, officers, employees, consultants
and advisors of the Company can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive
compensation measured by reference to the value of common stock, thereby strengthening their commitment to the welfare of the Company
and aligning their interests with those of the Company's stockholders. These plans are described below.

 2023 Employee Stock Purchase Plan (the "ESPP")

 During 2023, the Company adopted the ESPP. The
ESPP provides for the issuance of up to fifty
thousand shares of common stock to participating eligible employees and allows eligible employees to purchase shares of common stock
at a 15% discount from the fair market value of the stock as determined on specific dates at six-month intervals. The offering
periods under the ESPP commence on January 1 and July 1 of each year.

 F- 18

 The 2021 Omnibus Incentive Plan (the "2021
Plan")

 The 2021 Plan provides a means through which the
Company may attract and retain key personnel and provide a means whereby directors, officers, employees, consultants and advisors of the
Company can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation
measured by reference to the value of common stock, thereby strengthening their commitment to the welfare of the Company and aligning
their interests with those of the Company's stockholders.

 The 2021 Plan is administered by the Compensation
Committee of the Company's Board of Directors and permits the grant of cash and equity-based awards, which may be awarded in the
form of stock options, stock appreciation rights, restricted stock awards, performance awards, other stock-based awards, and other cash-based
awards.

 The aggregate number of shares of Common Stock that
may be issued or used for reference purposes or with respect to which awards may be granted under the 2021 Plan shall not exceed 125 thousand
shares and is subject to any increase or decrease, which shares may be either authorized and unissued common stock or common stock held
in or acquired for the treasury of the Company or both.

 The 2015 Stock Incentive Plan ("the "2015
Plan")

 The 2015 Plan provided for the issuance of up to thirty
thousand shares of common stock. The 2015 Plan consists of three separate equity incentive programs:
the Discretionary Option Grant Program; the Stock Issuance Program; and the Automatic Option Grant Program for non-employee Board members.
Officers and employees, non-employee. Board members and independent contractors are eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs. During the year ended December 31, 2021, the Board of Directors ("Board") approved a new
clause to the 2015 Plan, to accelerate the vesting of any unvested equity grants held by outside directors upon their retirement from
the Board.

 The 2005 Stock Incentive Plan (the "2005
Plan")

 Grants can no longer be made from the 2005 Plan. The
2005 Plan will remain active until all outstanding options have been exercised, forfeited, expired, or cancelled.

 Common shares reserved for future issuance, including options and restricted
stock under all the stock option plans are as follows:

 Schedule of common shares reserved for future issuance

 (In thousands)

 Common Shares
 Reserved for Future
 Issuance

 2021 Plan

 2015 Plan

 2005 Plan

 Total

 Total stock-based compensation expense is included
in operating expense on the statement of operations of $ 1.0 and $ 1.5 million for the years ended December 31, 2023, and 2022, respectively.

 F- 19

 Restricted Stock Awards

 During the year ended December 31, 2023, the
Company granted 10.7
thousand restricted stock awards ("RSAs") compared to 6.6
thousand similar awards in the same period in 2022. The Company recognized compensation expense related to RSAs of $ 0.4
million, for the year ended December 31, 2023, compared to $ 0.6
million for the year ended December 31, 2022. As of December 31, 2023, the total unrecognized compensation cost related to
non-vested RSAs not yet recognized in the Consolidated Statement of Operations totaled $ 0.1
million. This amount is expected to be recognized over a weighted-average period of 0.4
years.

 The following table summarizes the activities for the Company's unvested
RSAs in Intrusion Inc. stock for the year ended December 31, 2023:

 Schedule of unvested
RSAs

 Unvested Restricted Stock Awards

 Number of Shares (in thousands)

 Weighted-Average
 Grant-Date
 Fair Value

 Unvested as of December 31, 2022

 $
 57.60

 Granted

 26.20

 Vested

 ( 8
)

 56.60

 Forfeited/canceled

 –

 –

 Unvested as of December 31, 2023

 $
 28.20

 Stock Option Awards

 During the year ended December 31, 2023, the
Company granted 31.4
thousand stock options awards compared to 16.7
thousand similar awards in the same period in 2022. The Company recognized compensation expenses related to stock options of $ 0.6
million and $ 0.9
million, for the year ended December 31, 2023, and 2022, respectfully. As of December 31, 2023, the total unrecognized compensation
cost related to non-vested options not yet recognized in the Consolidated Statement of Operations totaled $ 0.3
million. This amount is expected to be recognized over the weighted average period of 0.9
years.

 A summary of the Company's stock option activity
and related information for the years ended December 31, 2023, and 2022 is as follows:

 Schedule of stock option activity

 2023

 2022

 Number of
 Options (in
 thousands)

 Exercise
 Price

 Number of
 Options (in
 thousands)

 Exercise
 Price

 Outstanding at beginning of year

 $
 104.40

 $
 129.40

 Granted

 24.80

 72.60

 Exercised

 ( 4
)

 9.60

 ( 5
)

 13.40

 Forfeited

 ( 8
)

 86.40

 ( 8
)

 163.20

 Expired

 ( 2
)

 156.00

 ( 2
)

 269.40

 Outstanding at end of year

 $
 62.40

 $
 104.40

 Options exercisable at end of year

 $
 85.60

 $
 82.60

 F- 20

 Information related to stock options outstanding on
December 31, 2023, is summarized below:

 Schedule of stock options by exercise price

 Options Outstanding

 Options Exercisable

 Range of Exercise Prices

 Outstanding at

12/31/23 (in

thousands)

Remaining

Contractual Life (years)

Exercise

Price

 Exercisable at

12/31/23 (in

thousands)

Exercise

Price

 $ 7.00 - $ 23.00

 3.87

 $

 12.60

 $

 13.20

 $ 24.20 - $ 36.40

 8.12

 $

 25.80

 $

 29.60

 $ 41.00 - $ 61.60

 0.99

 $

 41.20

 $

 41.20

 $ 63.80 - $ 95.80

 8.03

 $

 75.20

 $

 76.40

 $ 174.40 - $ 261.60

 9.96

 $

 240.60

 $

 235.80

 $ 470.40 - $ 715.60

 7.17

 $

 470.40

 $

 470.40

 $ 7.00 - $ 715.60 (all)

 7.81

 $

 62.40

 $

 85.60

 Summarized information about outstanding stock options
as of December 31, 2023, that are expected to vest in the future as well as stock options that are fully vested and currently exercisable,
are as follows:

 Schedule of outstanding stock options

 Outstanding Stock

Options (Expected to Vest)

 Options that are

Exercisable

 As of December 31, 2023

 Number of outstanding options (in thousands)

 Weighted average remaining contractual life

 7.81 years

 6.23 years

 Weighted average exercise price per share

 $

 62.40

 $

 85.60

 Intrinsic value (in thousands)

 $

 –

 $

 –

 The fair values of option awards were estimated
at the date of grant using a Black-Scholes option-pricing model with the following assumptions for fiscal years ended December 31,
2023, and 2022, respectively:

 Schedule of assumptions for stock based compensation

 2023

 2022

 Weighted average grant date fair value

 $
 21.60

 $
 66.40

 Weighted average assumptions used:

 Expected dividend yield

 0.00 %

 0.00 %

 Risk-free interest rate

 3.68 %

 2.17 %

 Expected volatility

 114.17 %

 129.54 %

 Expected life (in years)

 6.44

 6.76

 F- 21

 Expected volatility is based on historical volatility
and in part on implied volatility. The expected term considers the contractual term of the option as well as historical exercise and forfeiture
behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities
matching the relevant expected term of the award.

 11. Employee Benefit Plan

 Employee 401(k) Plan

 The Company has a plan known as the Intrusion Inc.
401(k) Savings Plan (the "Plan") to provide retirement and incidental benefits for the Company's employees. The Plan
covers substantially all employees who meet minimum age and service requirements. As allowed under Section 401(k) of the Internal Revenue
Code ("IRS"), the Plan provides tax deferred salary deductions for eligible employees.

 Employees may contribute the lesser of 1% to 90% of
their annual compensation to the Plan, limited to a maximum amount as set by the IRS. Participants who are over the age of 50 may contribute
an additional amount of their salary per year, as defined annually by the IRS. The Company matches employee contributions at the rate
of 0.25% per each 1% of contribution on the first 4% of compensation. Matching contributions to the Plan were approximately $ 0.1 million
each for the years ended December 31, 2023, and 2022.

 12. Related Party Transactions

 During 2023 and 2022, the Company retained legal services
of a third-party law firm for which the Company's Chief Executive Officer is a senior advisor. The Company recognized $ 0.1 and $ 0.3
million for the years ended December 31, 2023, and 2022 respectively in general and administrative expense on the Consolidated Statements
of Operations. On December 31, 2023, and 2022, $ 0.1 and $ 0.1 million payable to the third-party law firm was included in accounts payable,
trade on the Consolidated Balance Sheets. The rates paid for legal services to the third-party firm were comparable to rates paid to other
law firms providing legal services to the Company.

 On October 10, 2023, the Company entered into an
invoice financing arrangement pursuant to a note purchase agreement with James Gero, Director of the Company ("Gero"),
according to which, among other things, Gero purchased from the Company a promissory note (the "Note") in the aggregate
principal amount of $.5
million in exchange for $ 465
thousand to the Company. Under the Note, the Company made principal payments to Gero in the amount $ 10 thousand per week each week prior to its maturity on November
2, 2023. Interest accrued at a rate of 7.0 %
per annum, compounded daily. The note was repaid in full on November 2, 2023. The Company recorded $ 40 thousand
in interest expense related to this note.

 13. Income Taxes

 Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) as of December 31, 2023,
and 2022 are as follows (in thousands):

 Schedule of deferred tax assets (liabilities)

 December 31

 2023

 2022

 Net operating loss carryforwards

 $
 15,998

 $
 15,994

 Net operating loss carryforwards of foreign subsidiaries

 Depreciation expense

 ( 182
)

 ( 73
)

 Stock-based compensation expense

 Other

 Net deferred tax assets

 16,946

 17,156

 Valuation allowance for net deferred tax assets

 ( 16,946
)

 ( 17,156
)

 Net deferred tax assets, net of valuation allowance

 $
 –

 $
 –

 F- 22

 Deferred tax assets are required to be reduced by
a valuation allowance if it is more likely than not that some portion or all the deferred tax assets will not be realized. Realization
of the future benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate
taxable income within the near to medium term. Management has considered these factors in determining the valuation allowance for 2023
and 2022.

 The differences between the provision for income taxes
and income taxes computed using the federal statutory rate for the years ended December 31, 2023, and 2022 are as follows (in thousands):

 Schedule of effective income tax rate reconciliation

 2023

 2022

 Reconciliation of income tax benefit to statutory rate:

 Income benefit at statutory rate

 $
 ( 2,917
)

 $
 ( 3,409
)

 State income taxes (benefit), net of federal income tax benefit

 ( 109
)

 ( 107
)

 Permanent differences

 ( 427
)

 Change in valuation allowance

 ( 211
)

 ( 5,899
)

 Expiring federal net operating losses

 3,341

 9,745

 Other

 ( 419
)

 Income tax provision

 $
 –

 $
 –

 On December 31, 2023, the Company had federal
net operating loss carryforwards of approximately $ 76.1 million for income tax purposes
that begin to expire in 2024 and are subject to the ownership change limitations under Internal
Revenue Code Section 382.

 14. Cares Act Employee Retention Credit Receivable

 Interest and other income in 2022 include $ 2.0
million, net of fees resulting from ERC claimed on amended IRS quarterly federal tax returns ("941s"). The ERC was established by the Coronavirus Aid, Relief and Economic Security Act ("Cares Act"). The Cares
Act allows relief to business affected by the coronavirus pandemic, by providing payments to employers for qualified wages. The
Company amended 941s for the periods from April 1, 2020, to September 31, 2021. On December 31, 2022, the Company had $ 1.4
million in receivables remaining outstanding included in prepaid expenses and other assets. The remaining $ 1.4
million was received in March 2023.

 15. Subsequent Events

 On January 2, 2024, the Company entered into an
invoice financing arrangement pursuant to a note purchase agreement with Anthony Scott, President, and Chief Executive Officer of the
Company ("Scott"), according to which, among other things, Scott purchased from the Company a promissory note (the "Promissory
Note") in the aggregate principal amount of $1.1 million in exchange for $1.0 million to the Company. Under the Promissory Note,
the Company shall make principal payments to Scott in the amount $40 thousand per week each week prior to its maturity on June 15, 2024
("Weekly Payments"). Interest accrues on the balance of the Promissory Note prior to its maturity at a rate of 7.0% per annum,
compounded daily. In connection with the issuance of the Promissory Note, the Company and Scott also entered into a security agreement,
which provides, according to its terms, a security interest in all accounts receivable or other receivables now existing or subsequently
created prior to the payment of the Promissory Note, subject to prior permitted liens.

 F- 23

 On February 1, 2024, the Company presented to the
Nasdaq Hearings Panel its plan for regaining and sustaining compliance with all applicable requirements for continued listing on Nasdaq.
On February 8, 2024, the Company was notified that the Panel had granted the Company's request for continued listing, and on February
15, 2024, the Company received a revised written notice from Nasdaq (the "Nasdaq Letter") regarding the Panel's grant
of the Company's request for continued listing on the Nasdaq Capital Market until April 23, 2024.

 On March 4, 2024, and March 11, 2024, the Company's
Board of Directors approved entry into a warrant inducement (the "Inducement Letters") to lower the exercise price of the
warrants issued in connection with the September 2022 registered direct offering and November 2023 private offering to the current Nasdaq
minimum price. Pursuant to the terms of the Inducement Letters, the Company offered holders of the September 2022 and November 2023 warrants
the opportunity to exercise the warrants at a reduced exercise price of $3.80 and $4.00 per share, respectively during the period beginning
on March 4, 2024, and continuing through March 29, 2024.

 On March 7, 2024, the Company agreed to exchange
$0.2 million aggregate principal amount of that certain Promissory Note #1 dated March 10, 2022, in the original principal amount of $5.4
million, dated March 10, 2022, by and between Streeterville Capital, LLC, a Utah limited liability company, and the Company for an aggregate
of 52,247 shares of its common stock, par value $0.01 per share. The issuance of the 52,247 shares of its common stock is pursuant to
the exemption from the registration requirements afforded by Section 3(a)(9) of the Securities Act.

 On March 15, 2024, the Company filed the Amended
and Restated Certificate of Incorporation (the "A&R Certificate") to (i) eliminate the Series 1, Series 2, and Series
3 preferred shares and filed a Certificate of Designations creating a new Series A preferred stock, $0.01 par value per share (the "Series
A Stock"). Pursuant to the terms of the Series A Certificate, 20 thousand shares of Series A Stock are authorized, and each share
of Series A Stock has a stated value of $1,100 and accrues a rate of return on the Stated Value of 10% per year, shall be compounded annually
and is payable quarterly in cash or additional shares of Series A Stock. Commencing on the one-year anniversary of the issuance date of
each share of Series A Stock, each share of Series A Stock shall accrue an automatic quarterly dividend, calculated on the stated value
and shall be payable quarterly in cash or additional shares of Series A Stock. For the period from the one-year anniversary of the issuance
date to the two-year anniversary of the issuance date, the Quarterly Dividend shall be 2.5% per quarter, and for all periods following
the two-year anniversary of the issuance date, the Quarterly Dividend shall be 5% per quarter.

 Also on March 15, 2024, the Company agreed to
exchange $9.3 million aggregate principal of the Streeterville First and Second Note for 9,275 shares of Series A preferred stock. The
issuance of the Series A is pursuant to the exemption from the registration requirements afforded by Section 3(a)(9) of the Securities
Act.

 F- 24